<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
RHYTHMS NETCONNECTIONS INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 33-0747515
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
7337 SOUTH REVERE PARKWAY
ENGLEWOOD, COLORADO 80112-3931
(303) 476-4200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------
CATHERINE HAPKA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
RHYTHMS NETCONNECTIONS INC.
7337 SOUTH REVERE PARKWAY
ENGLEWOOD, COLORADO 80112-3931
(303) 476-4200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT FOR
SERVICE, SHOULD BE SENT TO:
JOHN A. DENNISTON
MARTIN C. NICHOLS
BROBECK, PHLEGER & HARRISON LLP
550 WEST "C" STREET, SUITE 1300
SAN DIEGO, CALIFORNIA 92101
(619) 234-1966
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED (2) PRICE PER UNIT (1) OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C> <C> <C>
13 1/2% Senior Discount Notes due 2008,
Series B......................................... $150,910,200 100% $150,910,200 $44,518.51
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Based on the initial offering price as accreted through the date of the
Exchange Offer, equal to $520.38 per $1,000 principal amount at maturity
(52.038% of the principal amount at maturity).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
<PAGE>
SUBJECT TO COMPLETION DATED JULY 17, 1998
PROSPECTUS CONFIDENTIAL
RHYTHMS NETCONNECTIONS INC.
OFFER TO EXCHANGE ITS
13 1/2% SENIOR DISCOUNT NOTES DUE 2008, SERIES B
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR ANY AND ALL OF ITS OUTSTANDING
13 1/2% SENIOR DISCOUNT NOTES DUE 2008, SERIES A
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME
ON , 1998, UNLESS EXTENDED.
------------------------
Rhythms NetConnections Inc. (the "Company") hereby offers, upon the terms
and subject to the conditions set forth in this Prospectus (as the same may be
amended or supplemented from time to time, the "Prospectus") and the
accompanying Letter of Transmittal (the "Letter of Transmittal" and together
with this Prospectus, the "Exchange Offer"), to exchange $1,000 principal amount
at maturity of its 13 1/2% Senior Discount Notes due 2008, Series B (the "New
Notes"), which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a Registration Statement (as defined) of
which this Prospectus is a part, for each $1,000 principal amount at maturity of
its outstanding 13 1/2% Senior Discount Notes due 2008, Series A (the "Old
Notes"), of which $290,000,000 principal amount at maturity is outstanding as of
the date hereof. The Old Notes and the New Notes are sometimes herein referred
to collectively as the "Notes."
The Company will accept for exchange any and all validly tendered Old Notes
prior to 5:00 P.M., New York City time, on , 1998, unless extended
(the "Expiration Date"). Old Notes may be tendered only in integral multiples of
$1,000 principal amount at maturity. Tenders of Old Notes may be withdrawn at
any time prior to 5:00 P.M., New York City time, on the Expiration Date. The
Exchange Offer is not conditioned upon any minimum amount of Old Notes being
tendered for exchange. However, the Exchange Offer is subject to certain
customary conditions. In the event the Company terminates the Exchange Offer and
does not accept for exchange any Old Notes, the Company will promptly return the
Old Notes to the Holders (as defined) thereof. The Company will not receive any
proceeds from the Exchange Offer. See "The Exchange Offer."
The terms of the New Notes will be identical in all material respects to
those of the Old Notes, except that the New Notes (i) shall accrue interest from
the last date on which interest was paid on the Old Notes, (ii) will have been
registered under the Securities Act and therefore will not be subject to certain
restrictions on transfer applicable to the Old Notes, and (iii) will not be
entitled to certain registration or other rights under the Registration Rights
Agreement (as defined), including the provision in the Registration Rights
Agreement for additional interest on the Old Notes upon failure by the Company
to consummate the Exchange Offer. See "Description of the Notes--Registration
Rights; Additional Interest." The New Notes will be entitled to the benefits of
the Indenture (as defined) governing the Old Notes. See "Description of the
Notes" and "The Exchange Offer."
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO
HOLDERS ON , 1998.
<PAGE>
SEE "RISK FACTORS" ON PAGE 14 FOR INFORMATION THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THIS OFFERING.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
NOTICE TO INVESTORS
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company under the Notes Registration Rights Agreement dated
as of May 5, 1998 (the "Registration Rights Agreement") by and among the Company
and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson, Lufkin &
Jenrette Securities Corporation (the "Initial Purchasers"), a copy of which has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part. The Exchange Offer is intended to satisfy the Company's obligations
under the Registration Rights Agreement to register the Old Notes under the
Securities Act.
The Old Notes were initially represented (i) in the case of Old Notes
initially purchased by "qualified institutional buyers" (as such term is defined
in Rule 144A under the Securities Act), by one global Old Note in fully
registered form, registered in the name of a nominee of The Depository Trust
Company ("DTC"), and (ii) in the case of Old Notes initially purchased by
persons other than U.S. persons in reliance upon Regulation S under the
Securities Act, by one global Regulation S Old Note in fully registered form,
registered in the name of a nominee of DTC for the accounts of Euroclear System
("Euroclear") and Cedel Bank, societe anonyme ("Cedel Bank"). The New Notes
exchanged for the Old Notes represented by the global Old Note and global
Regulation S Old Note will be represented (a) in the case of "qualified
institutional buyers", by one global New Note in fully registered form,
registered in the name of the nominee of DTC, and (ii) one global Regulation S
New Note in fully registered form registered in the name of the nominee of DTC
for the accounts of Euroclear and Cedel Bank. The global New Note and global
Regulation S New Note will be exchangeable for definitive New Notes in
registered form, in denominations of $1,000 principal amount at maturity and
integral multiples thereof. The New Notes in global form will trade in The
Depository Trust Company's Same-Day Funds Settlement System, and secondary
market trading activity in such New Notes will therefore settle in immediately
available funds. See "The Exchange Offer--Book-Entry Transfer; Delivery and
Form."
Cash interest on the New Notes will not accrue prior to May 15, 2003, from
which time cash interest on the New Notes will accrue at a rate of 13 1/2% per
annum and will be payable semiannually in arrears on May 15 and November 15 of
each year, commencing November 15, 2003. The New Notes will mature on May 15,
2008. The New Notes will be redeemable for cash at any time on or after May 15,
2003 at the option of the Company, in whole or in part, at the redemption prices
set forth herein, together with accrued and unpaid interest, if any, and
liquidated damages, if any, to the date of redemption. In addition, at any time
on or prior to May 15, 2001, the Company may redeem up to 35% of the
originally-issued aggregate principal amount at maturity of New Notes with the
net proceeds of one or more Public Equity Offerings (as defined herein) and/or
the sale of Capital Stock (as defined herein) (other than Disqualified Stock (as
defined herein)) in one or more transactions to Strategic Equity Investors (as
defined herein) resulting in gross cash proceeds to the Company of at least
$25.0 million in the aggregate at a redemption price equal to 113 1/2% of the
Accreted Value (as defined herein) thereof; provided that not less than 65% of
the originally-issued aggregate principal amount at maturity of New Notes remain
outstanding immediately after such redemption. Upon the occurrence of a Change
of Control, or following an Asset Sale (as defined herein) in certain
circumstances, the Company must offer to repurchase all or a portion of the
outstanding New Notes at a purchase price in cash equal to 101% (or, in the case
of an Asset Sale, 100%) of the Accreted Value thereof, together with accrued and
unpaid interest, if any, and liquidated damages, if any, to the date of
repurchase. See "Description of the Notes" and "Certain Federal Income Tax
Considerations."
The New Notes will be general unsecured obligations of the Company and, as
such, will rank PARI PASSU in right of payment with all existing and future
unsecured and unsubordinated Indebtedness (as defined herein) of the Company.
The New Notes will be effectively subordinated in right of payment to all
secured Indebtedness of the Company to the extent of the value of the assets
securing such Indebtedness and to all Indebtedness of any subsidiary of the
Company. As of June 15, 1998, the Company had outstanding Indebtedness of
approximately $154.6 million of which approximately $3.0 million was secured
ii
<PAGE>
Indebtedness, which effectively ranks senior in right of payment to the New
Notes. See "Description of the Notes."
The Company is making the Exchange Offer in reliance on the position of the
Staff of the Division of Corporation Finance of the Securities Exchange
Commission (the "SEC" or "Commission") as set forth in the Staff's Exxon Capital
Holdings Corp. SEC No-Action Letter (available April 13, 1989), Morgan Stanley &
Co., Inc. SEC No-Action Letter (available June 5, 1991), Shearman & Sterling SEC
No-Action Letter (available July 7, 1993), and other interpretive letters
addressed to third parties in other transactions. However, the Company has not
sought its own interpretive letter and there can be no assurance that the Staff
of the Division of Corporation Finance of the SEC would make a similar
determination with respect to the Exchange Offer as it has in such interpretive
letters to third parties. Based on these interpretations by the Staff of the
Division of Corporation Finance, and subject to the two immediately following
sentences, the Company believes that New Notes issued pursuant to this Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by a Holder thereof (other than a Holder who is a broker-dealer)
without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such Holder's business and that such Holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Notes. However, any Holder of Old Notes who is an "affiliate" of the
Company or who intends to participate in the Exchange Offer for the purpose of
distributing New Notes, or any broker-dealer who purchased Old Notes from the
Company to resell pursuant to Rule 144A under the Securities Act ("Rule 144A")
or any other available exemption under the Securities Act, (a) will not be able
to rely on the interpretations of the Staff of the Division of Corporation
Finance of the SEC set forth in the above-mentioned interpretive letters, (b)
will not be permitted or entitled to tender such Old Notes in the Exchange Offer
and (c) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or other transfer of such Old
Notes unless such sale is made pursuant to an exemption from such requirements.
See "Risk Factors--Consequences to Non-Tendering Holders of Old Notes. In
addition, as described below, any broker-dealer who holds Old Notes acquired for
its own account as a result of market-making activities or other trading
activities (a "Participating Broker-Dealer"), and who receives New Notes for Old
Notes pursuant to the Exchange Offer, may be a statutory underwriter and must
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes.
Each Holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" (as defined in Rule 405 of the Securities Act) of the Company, or,
if it is such an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable, (ii) any
New Notes to be received by it are being acquired in the ordinary course of its
business, (iii) it has no arrangement with any person to participate in a
distribution (within the meaning of the Securities Act) of such New Notes, and
(iv) if such Holder is not a broker-dealer, such Holder is not engaged in, and
does not intend to engage in, a distribution (within the meaning of the
Securities Act) of such New Notes. Each Participating Broker-Dealer that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Old Notes for its own account as a result of
market-making activities or other trading activities and must agree that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. Based on the position taken by the Staff of the
Division of Corporation Finance of the SEC in the interpretive letters referred
to above, the Company believes that Participating Broker-Dealers may fulfill
their prospectus delivery requirements with respect to the New Notes received
upon exchange of such Old Notes (other than Old Notes which represent an unsold
allotment from the original sale of the Old Notes) with a prospectus meeting the
requirements of the Securities Act, which may be the prospectus prepared for an
exchange offer so long as it contains a
iii
<PAGE>
description of the plan of distribution with respect to the resale of such New
Notes. Accordingly, this Prospectus may be used by a Participating Broker-Dealer
during the period referred to below in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
Participating Broker-Dealer for its own account as a result of market-making or
other trading activities. Subject to certain provisions set forth in the
Registration Rights Agreement, the Company has agreed that this Prospectus may
be used by a Participating Broker-Dealer in connection with resales of such New
Notes for a period ending 180 days after the effective date of the Registration
Statement (subject to extension under certain limited circumstances described
below) or, if earlier, when such Participating Broker-Dealer is no longer
required to deliver a prospectus in connection with market-making or other
trading activities. See "Plan of Distribution."
Any Participating Broker-Dealer who is an "affiliate" of the Company may not
rely on such interpretive letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any material
respect or which causes this Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
herein, in light of the circumstances under which they were made, not misleading
or of the occurrence of certain other events specified in the Registration
Rights Agreement, such Participating Broker-Dealer will suspend the sale of New
Notes pursuant to this Prospectus until the Company has amended or supplemented
this Prospectus to correct such misstatement or omission and has furnished
copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Company has given notice that the sale of the New Notes may
be resumed, as the case may be. If the Company gives such notice to suspend the
sale of the New Notes, it shall extend the 180-day period referred to above
during which Participating Broker-Dealers are entitled to use this Prospectus in
connection with the resale of New Notes by the number of days during the period
from and including the date of the giving of such notice to and including the
date when Participating Broker-Dealers shall have received copies of the amended
or supplemented Prospectus necessary to permit resales of the New Notes or to
and including the date on which the Company has given notice that the sale of
New Notes may be resumed, as the case may be.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the Indenture and the Registration
Rights Agreement (except for those rights which terminate upon consummation of
the Exchange Offer). Following consummation of the Exchange Offer, the Holders
of Old Notes will continue to be subject to the existing restrictions upon
transfer thereof and the Company will have fulfilled certain obligations under
the terms of the Old Notes and the Registration Rights Agreement and,
accordingly, the holders will have no further registration or other rights under
the Registration Rights Agreement, except under certain limited circumstances.
To the extent that Old Notes are tendered and accepted in the Exchange Offer, a
Holder's ability to sell untendered Old Notes could be adversely affected. See
"Summary--Certain Consequences of a Failure to Exchange Old Notes."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
Prior to this Exchange Offer, there has been no public market for the Old
Notes or New Notes. The Company does not intend to list the New Notes on a
national securities exchange or to seek approval for quotation through any
automated quotation system. As the Old Notes were issued and the New Notes are
iv
<PAGE>
being issued to a limited number of institutions who typically hold similar
securities for investments, the Company does not expect that an active public
market for the New Notes will develop. In addition, resales by certain Holders
of any outstanding Old Notes and the New Notes of a substantial percentage of
the aggregate principal amount at maturity of such New Notes could constrain the
ability of any market maker to develop or maintain a market for the New Notes.
To the extent that a market for the New Notes should develop, the market value
of the New Notes will depend on prevailing interest rates, the market for
similar securities and other factors, including the financial condition,
performance and prospects of the Company. Such factors might cause the New Notes
to trade at a discount from face value. See "Risk Factors-- Absence of Public
Market for the New Notes; Restrictions on Transfer." The Company has agreed to
pay the expenses of the Exchange Offer.
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. No dealer-manager is being used in connection with the
Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" (AS SUCH TERM IS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995), WHICH
GENERALLY CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS
"BELIEVES," "EXPECTS," "MAY," "WILL," "SHOULD" OR "ANTICIPATES" OR THE NEGATIVE
THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSION
OF STRATEGY THAT INVOLVES RISKS AND UNCERTAINTIES. MANAGEMENT WISHES TO CAUTION
THE READER THAT THESE FORWARD-LOOKING STATEMENTS, SUCH AS WITH RESPECT TO THE
COMPANY'S ROLL-OUT PLANS AND STRATEGIES, AND STATEMENTS REGARDING THE
DEVELOPMENT OF THE COMPANY'S BUSINESS, THE MARKETS FOR THE COMPANY'S SERVICES
AND PRODUCTS, THE COMPANY'S ANTICIPATED CAPITAL EXPENDITURES, POSSIBLE CHANGES
IN REGULATORY REQUIREMENTS AND OTHER STATEMENTS CONTAINED HEREIN REGARDING
MATTERS THAT ARE NOT HISTORICAL FACTS, ARE ONLY PREDICTIONS AND ESTIMATES
REGARDING FUTURE EVENTS AND CIRCUMSTANCES. ANY FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN ARE SUBJECT TO MATERIAL RISKS AND UNCERTAINTIES, MANY OF WHICH
ARE BEYOND THE CONTROL OF THE COMPANY. MARKET CONDITIONS AND THE COMPANY'S
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE MARKET CONDITIONS AND RESULTS
DISCUSSED IN THESE STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE
INCLUDE, WITHOUT LIMITATION, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
------------------------
Market data and certain industry forecasts used throughout this Prospectus
were obtained from internal surveys, market research, publicly available
information and industry publications. Industry publications generally state
that the information contained therein has been obtained from sources believed
to be reliable, but that the accuracy and completeness of such information is
not guaranteed. Similarly, internal surveys and market research, while believed
to be reliable, have not been independently verified, and none of the Company or
the Initial Purchasers makes any representation as to the accuracy of such
information.
ACI-TM-, ACCELERATED CONNECTIONS-TM-, HOME.RHYTHMS-TM-, LOOP.RHYTHMS-TM-,
NET.RHYTHMS-TM-, NETRHYTHMS-TM-, RHYTHM WORKS-TM-, RHYTHMS-TM-, RHYTHMS
COGNITIVE NETWORK-TM-, RHYTHMS NETCONNECTIONS-TM-, RING.RHYTHMS-TM- and
WORK.RHYTHMS-TM- are trademarks of the Company. The Company has filed
applications for federal
v
<PAGE>
registration of these trademarks. This Prospectus also makes reference to trade
names and trademarks of other companies which are the property of their
respective holders.
AVAILABLE INFORMATION
The Company is not currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Company has agreed that, whether or not it is required
to do so by the rules and regulations of the SEC, for so long as any of the Old
Notes and New Notes remain outstanding, it will furnish to the Holders of the
Old Notes and New Notes and file with the Trustee and file with the SEC audited
financial statements of the Company, including (if permitted by SEC practice and
applicable law and regulations) (i) all quarterly and annual financial
information that would be required to be contained in a filing with the SEC on
Forms 10-Q and 10-K if the Company were required to file such forms, including a
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and, with respect to the annual information only, a report thereon by
the Company's independent auditors and (ii) all reports that would be required
to be filed with the SEC on Form 8-K if the Company were required to file such
reports, in each case, within the time periods set forth in the rules and
regulations of the SEC. In addition, for so long as any of the Old Notes and New
Notes remain outstanding, the Company has agreed to make available to the
Holders of the Old Notes and New Notes, securities analysts, prospective
purchasers of the Old Notes and New Notes or beneficial owners of the Old Notes
and New Notes in connection with any sale thereof, the information required by
Rule 144A(d)(4) under the Securities Act.
ADDITIONAL INFORMATION
This Prospectus constitutes a part of a registration statement on Form S-4
(together with all amendments thereto, the "Registration Statement") filed by
the Company with the SEC under the Securities Act. This Prospectus, which forms
a part of the Registration Statement, does not contain all the information set
forth in the Registration Statement, certain parts of which have been omitted in
accordance with the rules and regulations of the SEC. Reference is hereby made
to the Registration Statement and related exhibits and schedules filed therewith
for further information with respect to the Company and the New Notes offered
hereby. Statements contained herein concerning the provisions of any document
are not necessarily complete and, in each instance, reference is made to the
copy of such document filed as an exhibit to the Registration Statement or
otherwise filed by the Company with the SEC and each such statement is qualified
in its entirety by such reference. The Registration Statement and the exhibits
and schedules thereto may be inspected and copied at the public reference
facilities maintained by the SEC: New York Regional Office, Seven World Trade
Center, New York, New York 10048, and Chicago Regional Office, 500 West Madison
Street, Chicago, Illinois 60661. The SEC maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. Copies of the Registration
Statement may be obtained from the SEC's Internet address at http://www.sec.gov.
vi
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING THE COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. REFERENCES HEREIN TO "RHYTHMS" OR THE
"COMPANY" ARE TO RHYTHMS NETCONNECTIONS INC. (A DELAWARE CORPORATION) AND ITS
WHOLLY OWNED SUBSIDIARIES, ACI CORP. (A DELAWARE CORPORATION) AND ACI CORP. -
VIRGINIA (A VIRGINIA PUBLIC SERVICE CORPORATION), EXCEPT AS OTHERWISE DESCRIBED
IN "DESCRIPTION OF THE NOTES" AND WHERE THE CONTEXT OTHERWISE REQUIRES.
CAPITALIZED TERMS USED IN THIS PROSPECTUS, WHICH ARE NOT OTHERWISE DEFINED
HEREIN, HAVE THE RESPECTIVE MEANINGS ASCRIBED TO THEM IN "GLOSSARY OF TERMS"
BEGINNING ON PAGE A-1.
THE COMPANY
Rhythms is a comprehensive networking solutions company that provides
high-speed data communications services on an end-to-end basis to Service
Providers (as defined herein) and end users. Rhythms combines high-speed local
access through the deployment of digital subscriber line ("DSL") technology with
capacity balanced local and wide area networks to provide low cost networking
solutions (the "Rhythms Network"). The Rhythms Network is intended to be
national in scope and to provide national and regional ISPs, IXCs, CLECs,
network and systems integrators, value-added resellers (collectively, "Service
Providers") and end users with a secure, reliable, high throughput solution to
the key shortcomings of today's networks. Rhythms will offer turnkey end-to-end
data communications solutions that can be integrated with Service Providers'
existing service offerings to provide a comprehensive package to end users. The
Company believes the Rhythms solution will be attractive due to the Company's
ability to provide a complete networking solutions platform including (i) low
cost, high-speed local access; (ii) local and wide area balanced capacity; and
(iii) end-to-end network management.
Rhythms is positioned to capitalize on the increasing importance and rapid
growth in data networking. Rhythms' initial target markets include private line
replacement, remote LAN connectivity and Internet access. According to industry
sources, the total U.S. private line market (low-speed analog and digital
private lines and frame relay DS-0 circuits) was approximately $11.3 billion in
1997 and is expected to grow to $22.7 billion by 2000. In addition, the remote
Internet and LAN access market was approximately $5.9 billion in 1997, and is
expected to grow to $11.7 billion by 2000, representing a projected compound
annual growth rate of 26%. Based on industry sources regarding the number of
LANs in the United States, the Company believes it will be able to address 28%
of all LANs in the United States with the buildout of its initial 11 markets,
expected to be completed by the first half of 1999.
Since its inception in February 1997, Rhythms has made substantial progress
in developing a scalable platform designed to be rapidly rolled out on a
nationwide basis. The Company has signed interconnection agreements with Pacific
Bell, Bell Atlantic and U S WEST, has obtained CLEC authority in California,
Illinois, Maryland, Massachusetts, New York and Virginia, is permitted to
operate as a CLEC in Pennsylvania, and is currently in negotiations to
interconnect with five other ILECs. The Company began service trials in the
greater San Diego metropolitan area in December 1997 and began offering
commercial services in San Diego on April 1, 1998 and in San Francisco on June
1, 1998. The Company believes that the net proceeds from the issuance of the Old
Notes ("Old Note Issuance"), together with its existing cash, lease line
proceeds and future revenue generated from operations, will be sufficient to
fund the Company's operating losses, capital expenditures and working capital
requirements for the next 24 months associated with the rollout and subsequent
operation of its initial 11 markets. The Company intends to subsequently build
out in other markets across the country.
The Company has assembled a management team with substantial experience in
the development, growth and operation of data networking businesses. The
Company's Chief Executive Officer and President, Catherine Hapka, previously
served as President and Chief Operating Officer of !NTERPRISE Networking
Services, U S WEST's data networking business. Under her leadership, !NTERPRISE
grew from a start-up to $500 million in annual contract sales. James Greenberg,
the Company's Chief Network
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Officer, directed the design, planning, operation and construction of Sprint's
data networks, during which time Sprint's data networking business grew from a
multi-million to a multi-billion dollar business. Rhythms' sponsors have
invested $30.4 million in equity to date, and include Kleiner Perkins Caufield &
Byers, a leading investor in technology and telecommunications companies, and
Enron Communications Group, Inc., a subsidiary of Enron Corporation, one of the
world's largest energy producers, distributors and marketers. Other investors
include Brentwood Venture Capital, The Sprout Group and Enterprise Partners.
MARKET OPPORTUNITY
Data communications is the fastest growing segment of the telecommunications
industry. Industry sources indicate that data traffic is growing seven times
faster than voice traffic, and that by the end of 2000 data communications will
represent nearly 77% of enterprise network traffic. Much of the growth in data
traffic will be driven by the widespread adoption of bandwidth intensive data
networking applications, such as intranets, collaborative workflow, e-commerce
and data warehousing. The growing use of such bandwidth-intensive applications
is creating a number of challenges for the existing Public Switched Telephone
Network ("PSTN"), public data networks and private networks. These challenges
affect the entire architecture of the existing telecommunications network and
limit the ability of business users to optimally leverage the benefits of new
information technologies. The Company believes that the key shortcomings of
today's networks include:
LOW-SPEED, UNRELIABLE LOCAL ACCESS. The current local access network
represents the greatest bottleneck to high performance data networking. In the
vast majority of cases, distributed workers and remote business locations must
rely on low-speed, unreliable dial-up modems or ISDN connections over the
traditional circuit-switched telephone network to gain access to their corporate
LAN or the public Internet. Industry sources predict that the number of
teleworkers-employees who spend some portion of their workday at other than
company locations will grow to approximately 66 million by 2002. Industry
sources also estimate that over 95% of teleworkers currently gain access to
their corporate LAN or the public Internet through dial-up modems, which
generally provide sub-optimal performance due to low speed, dropped connections
and busy signals. In addition, industry sources indicate that 88% of businesses
with intracompany networks currently use dial-up connections for site-to-site
connectivity.
INEFFICIENT NETWORK ARCHITECTURE. Current network architecture is a result
of regulatory restrictions and outdated network design. For example, prior to
deregulation brought about by the passage of the Telecommunications Act of 1996,
local and long distance networks remained separate and distinct. This
architecture results in a number of network inefficiencies, including local
traffic often traversing the long distance network to reach the same local
destination, wasting increasingly valuable wide area backbone bandwidth and
reducing overall network reliability and speed.
INCREASING NETWORK CONGESTION. Networks are becoming increasingly congested
due to the rapid growth in data traffic and the imbalance in capacity between
local and wide area networks. While high-speed local access technologies such as
DSL will be deployed to help solve the local access bottleneck, other
bottlenecks throughout the existing networks, including the PSTN, will likely
become exposed, making it necessary to redesign the existing networks.
LIMITED DISTRIBUTED STORAGE CAPACITY. Little if any distributed storage
capacity currently exists in either private or public networks. As a result,
when user volume exceeds network capacity, data transmission is either slowed or
information is lost. Today, each time a user accesses a high usage company
database or web site, the data must traverse the entire local and wide area
network, wasting capacity and decreasing user performance.
LACK OF AN INTEGRATED SOLUTION. Today, Service Providers and end users are
forced to integrate telecommunications services with offerings from multiple
vendors to create a complete network solution. This
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requires frequent interactions with many representatives within the ILECs and
other suppliers resulting in a complex, time-consuming process and limited
ability to proactively monitor and manage the overall performance of customer
networks.
THE RHYTHMS NETWORK SOLUTION
The Rhythms Network has been designed to meet the requirements of broadband,
highly reliable end-to-end data communications and solve the performance
problems of today's networks. The Company's solution offers business customers
an affordable network with the performance, reliability and security of high
performance private networks. The Rhythms Network solution consists of:
HIGH-SPEED, DEDICATED LOCAL ACCESS. Rhythms has constructed a high-speed,
"always on" (i.e., dedicated) local access network in the greater San Diego
metropolitan area using DSL technology over standard copper telephone lines to
give users access speeds of up to 7.0 Mbps downstream and 1.0 Mbps
upstream--substantially greater speeds than a standard 56 Kbps (0.056 Mbps)
modem. The Company believes this technology will offer substantially greater
price performance as compared to conventional network alternatives.
OPTIMIZED LOCAL AND WIDE AREA TRAFFIC MANAGEMENT. Rhythms' network
architecture is designed to switch and route traffic within each metropolitan
area, keeping local traffic local and sending only remote traffic over the wide
area network, thereby increasing overall network capacity and reliability.
END-TO-END BALANCED CAPACITY. In order to provide balanced local and wide
area networks, Rhythms plans to connect its high-speed local access networks to
leased backbone facilities at equivalent or greater speeds to provide uniform
throughput.
PACKAGED NETWORKING SOLUTIONS. Rhythms believes that its solutions can
offer its Channel Partners and end users national, fully integrated, local and
wide area business networking and proactive network management and monitoring.
DISTRIBUTED STORAGE. The Company plans to build storage capacity in the
network to improve network performance. This distributed storage capacity is
designed to (i) increase overall network performance by placing dense content,
software and applications close to the end user; (ii) reduce network volume by
sending high usage content over the wide area network only once, thereby
reducing the number of times that data is transmitted; and (iii) increase
overall throughput by reducing traffic levels across the wide area network.
SECURITY. The Rhythms Network is designed to provide secure communications
on an end-to-end basis by implementing both IP virtual private networks and ATM
permanent virtual circuits (PVCs) to ensure a single, secure path among customer
endpoints.
BUSINESS STRATEGY
The key elements of the Company's business strategy are as follows:
LEVERAGE EXPERIENCED MANAGEMENT TEAM. The Company believes that its ability
to combine and draw upon the diverse and extensive talent of its senior
management gives it a competitive advantage in providing data networking
solutions. The senior management team has come from industry leaders such as
Sprint, U S WEST and CompuServe. On average, each member of the senior
management team has over 15 years of experience in the data networking and
telecommunications industries.
LEAD WITH DSL LOCAL ACCESS NETWORKS. Rhythms intends to capitalize on the
attractive economic, performance and deployment characteristics of DSL to offer
users local access at speeds many times faster than conventional dial-up modems
and with a favorable performance to price ratio relative to existing
alternatives. High-speed local access bandwidth will improve the ability of
customers to better utilize
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bandwidth intensive applications. Over time, Rhythms plans to offer a portfolio
of high-speed local access technologies to meet customer needs.
RAPIDLY ESTABLISH A NATIONAL FOOTPRINT. Rhythms' initial goal is to rapidly
establish a nationwide footprint capable of serving 50% of all LANs in the
United States. As part of its initial deployment in California, Rhythms has
developed a scalable implementation plan which it believes can be replicated in
metropolitan areas nationwide. The Company believes this rollout plan will allow
it to establish early brand awareness, gain valuable market share and achieve
economies of scale.
PROVIDE BROAD MARKET COVERAGE. Rhythms intends to provide widespread,
broadband local access in each of its markets. The Rhythms Network will achieve
this coverage through collocation in ILEC central offices, which allows the
Company to offer high-speed local access to a majority of businesses and their
distributed locations and workers within a given target market. This broad
collocation strategy will enable Rhythms to significantly increase the reach of
its customers' data networks. Rhythms believes that broad deployment of its
local access services is critical in serving its Channel Partners' connectivity
needs by providing complete coverage of their customers' communities of
interest.
MINIMIZE UPFRONT CAPITAL INVESTMENT. The Company believes that the Rhythms
DSL network architecture requires lower initial and incremental capital
investment than many other currently available local access architectures, such
as cable modems and wireless alternatives. Rhythms has designed a business model
in which a significant portion of the capital deployed will be directly linked
to the success of acquiring customers.
CREATE STRATEGIC PARTNERSHIPS WITH SERVICE PROVIDERS. Rhythms intends to
develop strategic relationships with Service Providers in order to accelerate
the distribution of its service offerings. By selling its services through these
Channel Partners, Rhythms believes it will minimize its direct sales costs, gain
access to a wide audience of business customers, accelerate subscriber
penetration and, over time, speed the acceptance of new services. Rhythms
believes that its solution significantly enhances the competitiveness of its
Channel Partners by enabling them to quickly offer a national integrated
networking services solution, without the time, expense and effort required to
integrate telecommunications services and hardware components.
FINANCING PLAN
As of June 15, 1998, the Company has primarily funded all of its
expenditures with equity investments made by the Company's stockholders. The
execution of the Company's business plan will require substantial additional
capital to fund capital expenditures, working capital and operating losses. The
Company's principal capital requirements include building out Connection Points
and Metro Service Centers and, to a lesser extent, funding local operations'
infrastructure. The Company projects that a majority of its capital expenditures
will relate to expanding its footprint, deploying incremental capacity to meet
specific customer demand and reducing the risks associated with the Company's
capital investment. The Company believes that the net proceeds from the Old
Notes Issuance, together with its existing cash, lease line proceeds and future
revenue generated from operations, will be sufficient to fund the capital
expenditures, working capital and operating losses for the next 24 months
associated with the rollout and subsequent operation of its initial 11 markets.
The Company intends to subsequently build out in other markets across the
country. The Company's financing plan consists of the following:
- Completion of an incremental equity investment of $18.0 million in March
1998 by the Company's stockholders to bring the total equity investment
made to date to $30.4 million.
- Old Notes Issuance to raise net proceeds to the Company of approximately
$144.0 million after deducting the discounts and commissions and other
estimated expenses payable by the Company.
- Securing $24.5 million of equipment lease financing in May 1998.
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The actual amount of the Company's future capital requirements will depend
upon many factors, including the costs and speed of the development of its
network in each of its markets, the extent of competition and the pricing of
telecommunications services in its markets and the acceptance of the Company's
services.
------------------------
The Company's principal executive office is located at 7337 South Revere
Parkway, Englewood, Colorado 80112-3931, and its telephone number is (303)
476-4200.
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THE EXCHANGE OFFER
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The Exchange Offer................ $1,000 principal amount at maturity of the New Notes in
exchange for each $1,000 principal amount at maturity of
the Old Notes. As of June 15, 1998, $290,000,000 in
aggregate principal amount at maturity of Old Notes were
outstanding. The Company will issue the New Notes to
Holders on or promptly after the Expiration Date.
Based on an interpretation by the Staff of the SEC set
forth in the Staff's Exxon Capital Holdings Corp. SEC
No-Action Letter (available April 13, 1989), Morgan
Stanley & Co., Inc. SEC No-Action Letter (available June
5, 1991), Shearman & Sterling SEC No-Action Letter
(available July 7, 1993), and other no-action letters
issued to third parties, the Company believes that New
Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and
otherwise transferred by Holders thereof without
compliance with the registration and prospectus delivery
provisions of the Securities Act. However, any Holder
who is an "affiliate" of the Company or who intends to
participate in the Exchange Offer for the purpose of
distributing the New Notes, or any broker-dealer who
purchased Old Notes from the Company to resell pursuant
to Rule 144A or any other available exemption under the
Securities Act (i) cannot rely on the interpretation by
the Staff of the SEC set forth in the above referenced
no-action letters, (ii) cannot tender its Old Notes in
the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with any sale or transfer
of the Old Notes, unless such sale or transfer is made
pursuant to an exemption from such requirements. See
"Risk Factors--Consequences to Non-Tendering Holders of
Old Notes."
Each Participating Broker-Dealer that receives New Notes
for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by
delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. This
Prospectus may be used by a Participating Broker-Dealer
in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were
acquired by such Participating Broker-Dealer as a result
of market-making activities or other trading activities
and not acquired directly from the Company. The Company
has agreed that for a period of 180 days after the
effective date of the Registration Statement, it will
make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such
resale. See "Plan of Distribution."
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Expiration Date................... , 1998, unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest date
and time to which the Exchange Offer is extended.
Accretion of the New Notes and the
Old Notes....................... No cash interest will accrue or be payable in respect of
the New Notes prior to May 15, 2003. Thereafter,
interest will accrue at the rate of 13.5% per annum,
payable semiannually in arrears on each May 15 and
November 15, commencing November 15, 2003. The Old Notes
accepted for exchange will continue to accrete in
principal amount at the rate of 13.5% per annum to, but
excluding, the issuance date of the New Notes and will
cease to accrete in principal amount upon cancellation
of the Old Notes and issuance of the New Notes. Any Old
Notes not tendered or accepted for exchange will
continue to accrete in principal amount at the rate of
13.5% per annum in accordance with its terms. The
Accreted Value of the New Notes upon issuance will equal
the Accreted Value of the Old Notes accepted for
exchange immediately prior to issuance of the New Notes.
Conditions to the Exchange
Offer........................... The Exchange Offer is subject to certain customary
conditions. The conditions are limited and relate in
general to proceedings which have been instituted or
laws which have been adopted that might impair the
ability of the Company to proceed with the Exchange
Offer. As of the date hereof, none of these events had
occurred, and the Company believes their occurrence to
be unlikely. If any such conditions do exist prior to
the Expiration Date, the Company may (i) refuse to
accept any Old Notes and return all previously tendered
Old Notes, (ii) extend the Exchange Offer or (iii) waive
such conditions. See "The Exchange Offer--Conditions."
Procedures for Tendering Old
Notes........................... Each beneficial owner owning interests in Old Notes
("Beneficial Owner") through a DTC Participant (as
defined) must instruct such DTC Participant to cause Old
Notes to be tendered in accordance with the procedures
set forth in this Prospectus and in the applicable
Letter of Transmittal. See "The Exchange
Offer--Book-Entry Transfer; Delivery and Form."
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Each participant (a "DTC Participant") in the Depository
Trust Company ("DTC") holding Old Notes through DTC must
(i) electronically transmit its acceptance to DTC
through the DTC Automated Tender Offer Program ("ATOP"),
for which the transaction will be eligible, and DTC will
then verify the acceptance, execute a book-entry
delivery to the Exchange Agent's (as defined herein)
account at DTC and send an Agent's Message (as defined
herein) to the Exchange Agent for its acceptance, or
(ii) comply with the guaranteed delivery procedures set
forth in this Prospectus and in the Letter of
Transmittal. By tendering through ATOP, DTC Participants
will expressly acknowledge receipt of the accompanying
Letter of Transmittal and agree to be bound by its terms
and the Company will be able to enforce such agreement
against such DTC Participants. See "The Exchange
Offer--Procedures for Tendering--Book-Entry Transfer;
Delivery and Form" and "-- Guaranteed Delivery
Procedures--Old Notes held through DTC."
Each Holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or such
facsimile, together with such Old Notes to be exchanged
and any other required documentation to State Street
Bank and Trust Company of California, N.A., as Exchange
Agent (the "Exchange Agent"), at the address set forth
herein and therein or effect a tender of such Old Notes
pursuant to the procedures for book-entry transfer as
provided for herein. By executing the Letter of
Transmittal or effecting a book-entry transfer, each
Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of
business of the person receiving such New Notes, whether
or not such person is the Holder, that neither the
Holder nor any such other person has an arrangement or
understanding with any person to participate in the
distribution of such New Notes and that neither the
Holder nor any such person is an "affiliate," as defined
in Rule 405 under the Securities Act, of the Company.
Each Participating Broker-Dealer that receives New Notes
not acquired directly from the Company must acknowledge
that it will deliver a copy of this Prospectus in
connection with any resale of such New Notes. See "The
Exchange Offer-- Procedures for Tendering" and "Plan of
Distribution."
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Special Procedures for Beneficial
Owners.......................... Any beneficial owner whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender such
Old Notes in the Exchange Offer should contact such
registered Holder promptly and instruct such registered
Holder to tender such Old Notes on such beneficial
owner's behalf. If such beneficial owner wishes to
tender on such beneficial owner's own behalf, such owner
must, prior to completing and executing the Letter of
Transmittal and delivering its Old Notes, either make
appropriate arrangements to register ownership of the
Old Notes in such beneficial owner's name or obtain a
properly completed bond power from the registered
Holder. The transfer of registered ownership may take
considerable time and may not be able to be completed
prior to the Expiration Date. See "The Exchange Offer--
Procedures for Tendering."
Guaranteed Delivery Procedures.... Holders of Old Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or who
cannot deliver their Old Notes, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent, or cannot
complete the procedure for book-entry transfer, prior to
the Expiration Date must tender their Old Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights................. Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date by delivering
a written notice of such withdrawal to the Exchange
Agent in conformity with certain procedures set forth
under "The Exchange Offer-- Withdrawal of Tenders."
Acceptance of Old Notes and
Delivery of New Notes........... The Company will accept for exchange any and all Old
Notes which are properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued pursuant to the
Exchange Offer will be delivered promptly following the
Expiration Date. Any Old Notes not accepted for exchange
will be returned without expense to the tendering Holder
thereof as promptly as practicable after the expiration
or termination of the Exchange Offer. See "The Exchange
Offer--Terms of the Exchange Offer."
Certain Tax Considerations........ The exchange pursuant to the Exchange Offer should not
be a taxable event for federal income tax purposes. See
"Certain Federal Income Tax Considerations."
Exchange Agent.................... State Street Bank and Trust Company of California, N.A.
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TERMS OF NEW NOTES
The Exchange Offer applies to up to $290,000,000 aggregate principal amount
at maturity of the Company's Old Notes. The New Notes will be obligations of the
Company evidencing the same indebtedness as the Old Notes and will be entitled
to the benefits of the same Indenture. See "Description of the New Notes." The
form and terms of the New Notes are the same as the form and terms of the Old
Notes in all material respects except that the New Notes have been registered
under the Securities Act and hence do not include certain rights to registration
thereunder, do not contain transfer restrictions or terms with respect to
additional interest payments applicable to the Old Notes and interest on the New
Notes shall accrue from the last date on which interest was paid on the Old
Notes. See "Description of the New Notes."
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New Notes Offered................. $290,000,000 aggregate principal amount at maturity of
13 1/2% Senior Discount Notes due 2008, Series B.
Maturity May 15, 2008.
Yield and Interest................ 13 1/2% per annum (computed on a semiannual bond
equivalent basis calculated from May 5, 1998). Cash
interest will not accrue on the New Notes prior to May
15, 2003. Thereafter, cash interest on the New Notes
will accrue at a rate of 13 1/2% per annum and will be
payable semi-annually in arrears on May 15 and November
15 of each year, commencing November 15, 2003.
Original Issue Discount........... Each New Note is being offered with original issue
discount for United States Federal income tax purposes.
Thus, although cash interest will not begin to accrue on
the New Notes until May 15, 2003, and there will be no
periodic payments of interest on the New Notes prior to
November 15, 2003, the total amount of original issue
discount (i.e., the difference between the stated
redemption price at maturity of the New Notes and the
amount of the issue price of the Units allocated to the
New Notes) will start to accrue from the issue date and
will be includible as interest income periodically in a
holder's gross income for federal income tax purposes in
advance of receipt of the cash payments to which the
income is attributable. See "Certain Federal Income Tax
Considerations."
Optional Redemption............... The New Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after
May 15, 2003 at the redemption prices set forth herein,
plus accrued and unpaid interest, if any, and liquidated
damages, if any, to the date of redemption.
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In addition, on or prior to May 15, 2001, the Company
may redeem up to 35% of the originally-issued aggregate
principal amount at maturity of the New Notes, other
than in any circumstance resulting in a Change of
Control, at a redemption price equal to 113 1/2% of the
Accreted Value of the New Notes so redeemed, plus
liquidated damages, if any, as of the date of
redemption, with the net cash proceeds of (a) one or
more Public Equity Offerings and/or (b) the sale of
Capital Stock (other than Disqualified Stock) in one or
more transactions to Strategic Equity Investors,
resulting in gross cash proceeds to the Company of at
least $25.0 million in the aggregate; PROVIDED that not
less than 65% of the originally-issued aggregate
principal amount at maturity of New Notes is outstanding
immediately following such redemption. See "Description
of the Notes--Redemption--OPTIONAL REDEMPTION."
Change of Control................. Upon the occurrence of a Change of Control, the Company
shall make an offer to purchase all outstanding New
Notes at a purchase price equal to 101% of the Accreted
Value thereof, plus accrued and unpaid interest, if any,
and liquidated damages, if any, to the date of purchase.
See "Description of the Notes-- Certain
Covenants--CHANGE OF CONTROL."
Ranking........................... The New Notes will be general unsecured obligations of
the Company and, as such, will rank PARI PASSU in right
of payment with all existing and future unsecured and
unsubordinated Indebtedness of the Company. The New
Notes will be effectively subordinated to all secured
Indebtedness of the Company to the extent of the value
of the assets securing such Indebtedness and will be
structurally subordinated to all existing and future
Indebtedness of any subsidiary of the Company. As of
June 15, 1998, the Company had outstanding Indebtedness
of approximately $154.6 million of which approximately
$3.0 million is secured Indebtedness (consisting of bank
and lease line Indebtedness), which effectively ranks
senior in right of payment to the New Notes. As of March
31, 1998, on a pro forma basis after giving effect to
the creation and capitalization of the Company's
existing subsidiaries, such subsidiaries would have had
no outstanding Indebtedness. Although the Indenture (as
defined herein) contains limitations on the amount of
additional Indebtedness that the Company and its
Restricted Subsidiaries may incur, under certain
circumstances the amount of such Indebtedness could be
substantial. See "Description of the Notes--Ranking."
Asset Sale Offer.................. The Company, subject to certain conditions, will be
obligated to make an offer to purchase New Notes with
the net cash proceeds of certain Asset Sales at a
purchase price equal to 100% of the Accreted Value
thereof, plus accrued and unpaid interest thereon, if
any, and liquidated damages, if any, to the date of
purchase. See "Description of the Notes--Certain
Covenants--DISPOSITION OF PROCEEDS OF ASSET SALES."
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Certain Covenants................. The Indenture contains certain covenants, including,
among others, covenants with respect to the following
matters: (i) limitation on additional Indebtedness; (ii)
limitation on restricted payments; (iii) limitation on
liens securing certain Indebtedness; (iv) Change of
Control; (v) limitation on dividends and other payment
restrictions affecting Restricted Subsidiaries; (vi)
disposition of proceeds of Asset Sales; (vii) limitation
on issuances and sales of capital stock of Restricted
Subsidiaries; (viii) limitation on transactions with
affiliates; (ix) business activities; (x) limitation on
issuances of guarantees by Restricted Subsidiaries; (xi)
limitation on sale/leaseback transactions; (xii)
reports; (xiii) limitation on designations of
Unrestricted Subsidiaries; (xiv) limitation on status as
investment company; and (xv) consolidation, merger, sale
of assets, etc. These covenants are subject to important
exceptions and qualifications. See "Description of the
Notes--Certain Covenants" and "--Consolidation, Merger,
Sale of Assets, Etc."
Exchange Rights................... Holders of New Notes will not be entitled to any
exchange or registration rights with respect to the New
Notes. Holders of Old Notes are entitled to certain
exchange rights pursuant to the Registration Rights
Agreement. Under the Registration Rights Agreement, the
Company is required to offer to exchange the Old Notes
for New Notes having substantially identical terms which
have been registered under the Securities Act. This
Exchange Offer is intended to satisfy such obligation.
Once the Exchange Offer is consummated, the Company will
have no further obligations to register any Old Notes
not tendered by the Holders thereof for exchange. See
"Risk Factors-- Consequences to Non-Tendering Holders of
Old Notes."
Form of New Notes................. The New Notes will be represented by one or more
permanent global Notes in definitive, fully registered
form, to be deposited with State Street Bank and Trust
Company of California, N.A., as the Trustee (the
"Trustee") under the Indenture, as custodian for, and
registered in the name of, a nominee of DTC. The New
Notes sold in offshore transactions in reliance on
Regulation S under the Securities Act will be
represented by one or more permanent global Notes in
definitive, fully registered form deposited with the
Trustee as custodian for, and registered in the name of,
a nominee of DTC for the accounts of Cedel Bank and
Morgan Guaranty Trust Company of New York, Brussels
office, as operator of Euroclear. See "The Exchange
Offer--Book-Entry Transfer; Delivery and Form."
Use of Proceeds................... The Company will not receive any proceeds from, and the
Company has agreed to bear the expenses of, the Exchange
Offer.
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CERTAIN CONSEQUENCES OF A FAILURE TO EXCHANGE OLD NOTES
The Old Notes have not been registered under the Securities Act or any state
securities laws and therefore may not be offered, sold or otherwise transferred
except in compliance with the registration
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requirements of the Securities Act and any other applicable securities laws, or
pursuant to an exemption therefrom or in a transaction not subject thereto, and
in each case in compliance with certain other conditions and restrictions,
including the Company's and the Trustee's right in certain cases to require the
delivery of opinions of counsel, certifications and other information prior to
any such transfer. Old Notes which remain outstanding after consummation of the
Exchange Offer will continue to bear a legend reflecting such restrictions on
transfer. In addition, upon consummation of the Exchange Offer, Holders of Old
Notes which remain outstanding will not be entitled to any rights to have such
Old Notes registered under the Securities Act or to any similar rights under the
Registration Rights Agreement. The Company currently does not intend to register
under the Securities Act any Old Notes which remain outstanding after
consummation of the Exchange Offer (subject to such limited exceptions, if
applicable).
To the extent that Old Notes are tendered and accepted in the Exchange Offer
any trading market for Old Notes which remain outstanding after the Exchange
Offer could be adversely affected.
The New Notes and any Old Notes which remain outstanding after consummation
of the Exchange Offer will vote together as a single class for purposes of
determining whether Holders of the requisite percentage in outstanding principal
amount at maturity thereof have taken certain actions or exercised certain
rights under the Indenture. See "Description of the Notes."
The Registration Rights Agreement provides that, if the Exchange Offer were
not consummated within the time period specified therein, additional interest
will accrue on the Old Notes at a rate of 0.50% per annum over the rate at which
interest is then accruing or, as applicable, principal is then accreting, during
the 90-day period immediately following the occurrence of any Registration
Default (as defined) and shall increase by 0.50% per annum at the end of each
subsequent 90-day period until such Registration Default has been cured, but in
no event would such additional interest exceed 1.5% per annum. See "Description
of the Old Notes--Registration Rights; Additional Interest." Following
consummation of the Exchange Offer, neither the Old Notes nor the New Notes will
be entitled to any such additional interest.
RISK FACTORS
Prospective investors should carefully consider the matters set forth under
"Risk Factors," beginning on page 14, in evaluating an investment in the New
Notes.
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RISK FACTORS
PRIOR TO TENDERING THEIR OLD NOTES FOR NEW NOTES, PROSPECTIVE INVESTORS
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS.
LIMITED OPERATING HISTORY; EARLY STAGE OF DEVELOPMENT
The Company was incorporated in February 1997, entered into its first
interconnection agreement with an ILEC in July 1997, began to offer trial
services in San Diego, California in December 1997 and began offering commercial
services in San Diego on April 1, 1998 and in San Francisco on June 1, 1998. The
Company has a limited operating history, has limited commercial operations and
its primary activities to date have consisted of the procurement of required
governmental authorizations, the negotiation and execution of interconnection
agreements with three ILECs, the identification of collocation space and
locations for the Company's Connection Points, Metro Service Centers and
business offices, the acquisition and deployment of equipment and facilities,
the hiring of management and other personnel, the raising of capital and the
development and integration of its operational support system ("OSS") and other
back office systems. As of June 15, 1998, the Company had recognized
insignificant revenues. As a result of its limited operating history, the
Company does not have historical financial data for any period other than 1997
or operations upon which an evaluation of the Company or its prospects can be
based. In addition, the Company's senior management team and other employees of
the Company have worked together at the Company for less than one year.
The Company's prospects must be considered in light of the risks, expenses
and difficulties encountered by new companies competing in rapidly evolving
markets. To address these risks, the Company must, among other things, rapidly
expand the geographic coverage of its network services; enter into
interconnection agreements with additional ILECs, some of which are competitors
or potential competitors of the Company; deploy network infrastructure; attract
and retain customers; accurately assess potential markets; continue to develop
and integrate its OSS and other back office systems; obtain any required
governmental authorizations; comply with evolving governmental regulatory
requirements; raise additional capital; increase awareness of the Company's
services; respond to competitive developments; continue to attract, retain and
motivate qualified personnel and continue to upgrade its technologies and
commercialize its network services incorporating such technologies. There can be
no assurance that the Company will be successful in addressing these and other
risks, and failure to do so would have a material adverse effect on the
Company's business, prospects, operating results, financial condition and its
ability to make principal and interest payments on its indebtedness, including
the New Notes.
UNPROVEN BUSINESS STRATEGY; UNCERTAINTY OF MARKET ACCEPTANCE
The Company's business strategy is unproven and, to be successful, the
Company must, among other things, develop and market network services that are
widely accepted by businesses and its Channel Partners at prices that will yield
a profit. The Company began to offer trial services in San Diego, California in
December 1997 and began offering commercial services in San Diego on April 1,
1998 and in San Francisco on June 1, 1998. There can be no assurance that the
services offered in San Diego, San
Francisco or in any other geographic markets in the future will achieve
commercial acceptance. The prices the Company charges for its services are in
some cases higher than those charged for some competing services, and there can
be no assurance that sufficient numbers of customers will be willing to pay the
prices charged by the Company for its services. Accordingly, the Company cannot
predict whether its prices will prove to be commercially acceptable, whether
demand for the Company's services will materialize at the prices it desires to
charge or whether current or future pricing levels will be sustainable. Because
of the foregoing factors, among others, the Company cannot forecast its revenues
or the rate at which it will add new customers with any degree of accuracy.
There can be no assurance that the Company will ever achieve favorable operating
results or profitability, or generate sufficient positive cash flow to service
or repay its indebtedness, including the New Notes. The failure to achieve or
sustain desired pricing
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levels or to achieve or sustain broad market acceptance would result in a
material adverse effect on the Company's business, prospects, operating results,
financial condition and its ability to make principal and interest payments on
its indebtedness, including the New Notes.
HISTORICAL LOSSES AND ANTICIPATED FUTURE LOSSES; FLUCTUATIONS IN OPERATING
RESULTS
The Company has incurred net losses and experienced negative operating cash
flow each month since its inception (February 1997). As of March 31, 1998, the
Company had an accumulated deficit of approximately $4.5 million. The Company
currently intends to rapidly and substantially increase its capital expenditures
and operating expenses in an effort to expand its network services and to
increase sales, marketing and general and administrative activities. As a
result, the Company expects to incur substantial additional operating and net
losses and substantial negative cash flow for at least the next several years.
To the extent that increased expenses are not accompanied by significant
revenues, the Company would experience a material adverse effect on its
business, prospects, operating results, financial condition and its ability to
make principal and interest payments on its indebtedness, including the New
Notes. There can be no assurance that the Company's services will ever provide a
revenue base adequate to achieve or sustain profitability or to generate
positive cash flow.
The Company's annual and quarterly operating results may fluctuate
significantly in the future as a result of numerous factors, many of which are
outside the Company's control. Factors that may affect the Company's operating
results include the rate at which customers subscribe to the Company's services
and the prices the customers are willing to pay for such services, the amount
and timing of capital expenditures and other costs relating to the expansion of
the Company's services and infrastructure, the introduction of new services by
the Company or its competitors, price competition by competitors, technical
difficulties or network downtime, general economic conditions and economic
conditions specific to the telecommunications services industry. In addition,
the Company believes its financial performance will depend to a great extent on
attracting and retaining customers and reducing levels of customer churn, which
can result from a variety of sources, including employee turnover within the
Company's customers. Many providers of telecommunications services experience
high rates of customer churn, and there can be no assurance that Rhythms will
not experience substantial customer churn.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
As a result of the Old Note Issuance, the Company is highly leveraged. As of
March 31, 1998, on an as adjusted basis after giving effect to the Old Notes
Issuance, the Company had approximately $150.0 million of outstanding
indebtedness, the Company's total debt as a percentage of capitalization was 84%
and the Company had a deficiency of earnings to fixed charges of $2.3 million
for the quarter ended March 31, 1998. See "Capitalization." In addition, the
Indenture permits, and the Company seeks to structure its future credit
facilities, lease facilities and vendor credit facilities so that they are
expected to permit, the incurrence of certain additional indebtedness. In
addition, in May 1998, the Company entered into a financing arrangement with Sun
Financial Group, Inc. for up to $24.5 million of equipment lease financing. In
that regard, the Company intends to seek substantial additional indebtedness
(including secured indebtedness as permitted under the Indenture) following this
Offering for, among other things, the construction and expansion of its network
infrastructure, including the purchase and leasing of equipment, the
introduction of new service offerings, to obtain access to collocation space in
ILEC central offices ("COs"), the development and implementation of its OSS and
the funding of its operating losses. See "--Significant Capital Requirements;
Need for and Uncertainty of Additional Financing."
The degree to which the Company is leveraged could have important
consequences to the holders of the New Notes, including, but not limited to, the
following: (i) the ability of the Company to pay interest and liquidated
damages, if any, on, and the redemption price of or the principal amount at
maturity of, the Notes when due may be materially limited or impaired; (ii) the
Company's ability to obtain additional financing or refinancing in the future
for capital expenditures, repayment of outstanding indebtedness,
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working capital, acquisitions, general corporate or other purposes may be
materially limited or impaired; (iii) the Company's cash flow, if any, may be
unavailable for building the Company's business, as a substantial portion of
such cash flow may be dedicated to the payment of principal and interest on its
indebtedness, including the Notes, and the failure of the Company to generate
sufficient cash flow to service such indebtedness could result in a default
under such indebtedness; (iv) the terms of future permitted indebtedness may
limit the Company's ability to redeem the Notes in the event of a Change of
Control; (v) the Company's high degree of leverage may make it more vulnerable
to economic downturns, may limit its ability to withstand competitive pressures
and may reduce its flexibility in responding to changing business and economic
conditions; and (vi) the Company may be more highly leveraged than many of its
competitors, which may place it at a competitive disadvantage.
The Company's ability to make principal and interest payments on the New
Notes will depend upon, among other things, (i) the Company's ability to achieve
significant and sustained growth in cash flow; (ii) the rate of and successful
commercial deployment of its network services; (iii) the market acceptance,
customer demand, rate of utilization and pricing of the Company's services; (iv)
the future operating performance of the Company; (v) the Company's ability to
successfully complete development, upgrades and enhancements of its network
services; (vi) the level of Company expenses; (vii) the Company's ability to
secure additional financings, as necessary; (viii) the Company's ability to
complete the rollout of its network services on a timely basis; and (ix)
economic, financial, competitive and regulatory conditions and other factors.
Many of the foregoing matters are beyond the Company's control. There can be no
assurance that the Company will have adequate sources of liquidity to make
required payments of principal and interest on its indebtedness (including the
New Notes), whether at or prior to maturity, to finance anticipated capital
expenditures or to fund working capital requirements. If the Company does not
have sufficient available resources to repay its outstanding indebtedness when
it becomes due and payable, the Company may find it necessary to reduce the
scope of and/or delay the rollout of its network services, and/or attempt to
restructure or refinance its indebtedness. There can be no assurance that such
refinancing will be available, or available on reasonable terms, in light of the
Company's high leverage following the Old Notes Issuance and other factors. If
the Company were unable to obtain refinancing on satisfactory terms in order to
meet its debt service obligations, it would have to consider various other
options, such as the sale of equity or other options available to it under law,
and there can be no assurance that the Company will be able to sell equity or
take advantage of other options in a manner sufficient to meet its debt service
obligations.
SIGNIFICANT CAPITAL REQUIREMENTS; NEED FOR AND UNCERTAINTY OF ADDITIONAL
FINANCING
The expansion and development of the Company's business will require
significant capital to fund its capital expenditures, working capital and
operating losses. The Company's principal capital expenditures and lease
payments include the purchase, lease and installation of network equipment such
as routers and multiplexers, collocation space and customer premise equipment
("CPE") such as digital "modems." The Company's working capital is primarily
comprised of accounts receivable, accounts payable and accrued expenses. The
Company will need to secure additional financing beyond the net proceeds of the
Old Notes Issuance to enter markets beyond those included in its initial rollout
plan. In addition, there can be no assurance that the Company will be able to
finance the rollout strategy in a timely fashion, or at all. If demand for the
Company's services or its cash flow from operations is less than expected,
however, the Company may require additional financing prior to the completion of
its initial rollout. The actual amount and timing of the Company's future
capital requirements may differ materially from its estimates as a result of
regulatory, technological, competitive (including additional market developments
and new opportunities) and other developments in its industry. The Company also
expects that it will require additional financing (or require financing sooner
than anticipated) if the Company's development plans or projections change or
prove to be inaccurate. Due to the uncertainty of these factors, actual revenues
and costs may vary from expected amounts, possibly to a material degree, and
such variations are likely to affect the Company's future capital requirements.
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There can be no assurance that any future equity or debt financing will be
available to the Company on favorable terms or at all. In addition, the
Indenture contains certain covenants restricting the Company's ability to incur
further indebtedness, and future borrowing instruments such as credit facilities
and lease agreements are likely to contain similar or more restrictive covenants
and will likely require the Company to pledge assets as security for borrowings
thereunder. In the event that the Company is unable to obtain such additional
capital or is required to obtain it on unsatisfactory terms, the Company will be
required to delay the deployment of its network services or take or forego
actions that could materially adversely affect the Company's business,
prospects, operating results, financial condition and its ability to make
principal and interest payments on its indebtedness, including the New Notes. In
the event that the Company is unable to generate sufficient cash flow and is
otherwise unable to obtain funds necessary to meet required payments on its
indebtedness, the Company would be in default under the terms of the agreements
governing its indebtedness, including the New Notes. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
EXPANSION RISKS; POSSIBLE INABILITY TO MANAGE GROWTH
The Company's planned rapid expansion of its operations will place a
significant strain on its management, financial controls, operations systems,
personnel and other resources. The Company's ability to manage future growth,
should it occur, will depend in large part upon its ability to monitor its
operations, control costs, maintain regulatory compliance, maintain effective
quality controls, significantly expand its internal management and financial
control systems, streamline its customer qualification and provisioning
functions, acquire a significant amount of equipment to support its network
systems and attract, assimilate and retain qualified personnel. If the Company
is successful in implementing its marketing strategy, the Company also expects
the demands on its network infrastructure and the need for technical support
resources to grow rapidly, and it may experience difficulties responding to
customer demand for its services and providing technical support in a timely
manner and in accordance with its customers' expectations. These demands are
expected to require not only the addition of new management personnel, but also
the development of additional expertise by existing management personnel and the
establishment of long term relationships with third-party service vendors. There
can be no assurance that the Company will be able to keep pace with any growth,
successfully implement and maintain its operational and financial systems or
successfully obtain, integrate and utilize the employees, facilities,
third-party vendors and equipment, and management, operational and financial
resources necessary to manage a developing and expanding business in an
evolving, highly regulated and increasingly competitive industry. If the Company
is unable to manage growth effectively, its business, prospects, operating
results, financial condition and its ability to make principal and interest
payments on its indebtedness, including the New Notes, will be materially
adversely affected. Failure of the Company to manage its future growth
effectively could also adversely affect the expansion of the Company's customer
base and service offerings.
TECHNOLOGICAL CHANGE; UNPROVEN NETWORK PERFORMANCE AND SCALABILITY
The telecommunications industry is subject to rapid and significant changes
in technology, and the effect of technological changes on the business of the
Company, such as continuing developments in DSL technology and alternative
technologies for providing high speed data communications, cannot be predicted.
The Company will be relying in part on third parties (including certain of its
competitors and potential competitors) for the development of and access to
communications and networking technology. The effect of technological changes on
the business of the Company cannot be predicted. The Company believes its future
success will depend, in part, on its ability to anticipate or adapt to such
changes and to offer, on a timely basis, services that meet customer demands and
evolving industry standards. There can be no assurance that the Company will
obtain access to new technology on a timely basis or on satisfactory terms or
that the Company will be able to adapt to such technological changes, offer such
services on a timely basis or establish or maintain a competitive position. Any
technological change, obsolescence or failure to obtain access to important
technologies could have a material adverse effect on the Company's
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business, prospects, operating results, financial condition and its ability to
make principal and interest payments on its indebtedness, including the New
Notes. The Company expects that new products and technologies will emerge in the
future that will be applicable to the market in which the Company competes. Such
new products and technologies may be superior to and/or render obsolete the
products and technologies used by the Company. In addition, there can be no
assurance that these various products and technologies will interoperate
successfully or in a manner sufficient for the Company to execute its business
plan in a timely fashion. The Company believes that it will be important for
industry standards to be set in its markets in order to allow for the
compatibility of the various products and technologies. There can be no
assurance that standards will be set on a timely basis or at all.
Many of the products and technologies that the Company intends to use in its
network services are relatively new and unproven. There can be no assurance that
those products and technologies will be reliable on a consistent basis. In
addition, due to the limited deployment of the Company's services, the ability
of the Company's network to connect and manage a substantial number of end users
at high transmission speeds is still unknown, and the Company faces risks
related to its ability to scale its network to service significant end users
while achieving high performance. There can be no assurance that the Company's
network will be able to achieve and maintain competitive digital transmission
speeds. The Company's failure to achieve or maintain high speed reliable digital
transmissions would significantly reduce demand for its services and have a
material adverse effect on its business, prospects, operating results, financial
condition and its ability to make principal and interest payments on its
indebtedness, including the New Notes.
DEPENDENCE ON ILECS
The Company is dependent on the ILECs for (i) the provision of DSL-capable
copper loops; (ii) collocation space in ILEC COs; and (iii) in many cases the
provision of other ILEC services, such as facilities to connect the Rhythms
Connection Points with the Rhythms Metro Service Centers. In each of these
areas, the Company faces risks that the ILECs will not have sufficient inventory
to supply the Company's needs, that the ILECs will delay provisioning or that
the prices paid by the Company will exceed the ILECs' costs of providing the
elements and services.
In order to provide DSL connections to customers, the Company must use
copper loops controlled by the ILECs. In some ILEC COs, there may be an actual
shortage of DSL-capable copper loops, or the ILECs may claim such a shortage. In
some cases, the Company may not have alternative means of providing service to
end users. The Company will also be dependent on the ILECs to maintain on an
ongoing basis the quality of the copper loops the Company uses for its DSL-based
services. There can be no assurance that the Company will be able to
successfully address these issues through business and regulatory processes or
otherwise. The prices paid by the Company to ILECs for DSL-capable copper loops
will vary by ILEC and may vary by state. Those rates are established by state
regulatory commissions in ongoing public hearings, based on rate proposals and
cost studies submitted by the ILECs and, in some cases, by other parties as well
and until now, they have been based on FCC pricing rules which have been
overturned by the federal appeals court for the Eighth Circuit and will be
reviewed by the U.S. Supreme Court. See "--Government Regulation." ILECs may
from time to time propose new rates, which will also be decided by the state
commissions in public hearings. Participating in such hearings is expected to
involve significant management time and expense. The outcomes of such hearings
and rulings may have a material adverse effect on the Company. In addition, the
Company has not established a history of ordering and obtaining the provisioning
and repair of large volumes of DSL-capable copper loops from ILECs. There can be
no assurance that either the Company's or the ILECs' OSS will be capable of
handling a large volume of orders, or that the Company will be successful in
ordering and provisioning on a large scale.
The Company is dependent on the ILECs to make space available in their COs
so that the Company can physically collocate its own equipment which connects to
the ILEC copper loops and is used in providing the Company's DSL services. In
some COs, there may be an actual shortage of such collocation
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space, or the ILECs may claim such a shortage. In some of these cases, the
Company may not have alternative means of connecting its DSL equipment with the
ILECs' copper loops. In some COs, the Company's applications for physical
collocation have been rejected on the grounds that no such space is available.
There can be no assurance that additional applications will not be rejected in
the future. The availability of physical collocation space will also be affected
by the number of other CLECs requesting collocation. To the extent the Company
is unable to obtain physical collocation in its targeted ILEC COs, the Company
may face delays and additional cost in serving certain users, or may not be able
to offer services in certain locations.
The price, terms and conditions under which collocation space is made
available are determined, depending on the state in which the collocation space
is located, by state tariffs, State Public Utility Commission, and/or
interconnection agreements with the ILEC. Interconnection agreements also
determine the terms and conditions of access to unbundled copper loops (and
other UNEs), although many of those terms and conditions, including price, have
been or may be established by the state public utility commissions. There can be
no assurance that the terms and conditions of interconnection agreements that
can be negotiated, or that are determined by state commissions, will be
satisfactory to the Company. The interconnection agreements are generally short
term, and there can be no assurance that the agreements will be renewed on
favorable terms or at all. In addition, interconnection arrangements and
agreements are subject to varying degrees of oversight by the state commissions,
the FCC and the courts. There can be no assurance that these government entities
will not modify the terms or prices of the Company's interconnection
arrangements in ways that would have a material adverse effect on the Company.
Delays in obtaining interconnection agreements would delay the Company's entry
into certain markets, which could have a material adverse effect on the Company.
The Company will also seek to purchase additional services from ILECs, such
as transport services, although these services are generally also available from
other providers. There can be no assurance that the Company will be able to
obtain the services it requires from the ILECs, or to do so at rates, terms and
conditions, including timelines, that are satisfactory to the Company. An
inability to obtain access to copper loops, collocation space or services from
ILECs could have a material adverse effect on the Company's business, prospects,
operating results, financial condition, and its ability to make principal and
interest payments on its indebtedness, including the New Notes. There can be no
assurance that disputes will not arise between the Company and the ILECs with
respect to interconnection agreements or that any such disputes will be resolved
in favor of the Company.
UNCERTAIN QUALITY AND AVAILABILITY OF COPPER LOOPS
In order to provide service to its customers, the Company must interconnect
its network with the copper telecommunications loops within the control of the
ILEC that connect to the end user. In order for DSL connections to function
properly, these copper loops must be within certain physical parameters,
including length, minimization of loading coils, minimum numbers of bridge taps
and general physical condition. The Company's ability to provide DSL-based
service to potential customers is highly dependent upon the quality, physical
condition and availability of these copper loops, as well as the maintenance by
the ILECs of the copper loops. The Company believes that the current condition
of copper loops in many cases will be inadequate to permit the Company to fully
implement its network services. See "--Government Regulation." There can be no
assurance that the copper loops will be of sufficient quality, or that the
copper loops will always be maintained in such a condition, to allow the Company
to fully implement its network services. The inability of the Company to
implement its network effectively or broadly due to the availability, quality or
physical condition of copper loops would have a material adverse effect on the
Company's business, prospects, operating results, financial condition and its
ability to make principal and interest payments on its indebtedness, including
the New Notes. See "--Competition."
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GOVERNMENT REGULATION
Some of the services offered by the Company, particularly by its
wholly-owned ACI Corp. and ACI Corp. - Virginia subsidiaries, may be subject to
regulation at the federal, state, and/or local levels. There can be no assurance
that current or future federal or state regulations or legislation would not be
less favorable to the Company than current regulation and legislation and
therefore have a material adverse impact on the Company's business prospects,
operating results, financial condition, and ability to make payments on its
indebtedness, including the New Notes. In addition, participation in proceedings
setting rules at either the federal or state level could consume significant
financial and managerial resources, with no assurance of an outcome favorable to
the Company.
The Federal Communications Commission ("FCC") prescribes rules applicable to
interstate communications, including rules implementing the 1996
Telecommunications Act (the "1996 Act"), a responsibility it shares with the
state regulatory commissions. The 1996 Act removed many of the remaining
barriers to local competition, and the FCC's initial rules interpreting the Act
(the "FCC Order") were generally encouraging to increased local competition. A
federal appeals court for the 8th Circuit reviewed the FCC Order, and overruled
some of its provisions, including some rules on pricing and nondiscrimination.
That ruling is itself to be reviewed by the U.S. Supreme Court. In December,
1997 a federal court in Texas ruled unconstitutional the 1996 Act's requirement
that former Bell System ILECs cannot provide interLATA services until they meet
certain requirements. This could reduce the incentives of those ILECs to
cooperate in opening their markets to competition. The FCC and other parties
have asked the U.S. Supreme Court to review this ruling. In May, 1998 a federal
court in Washington, D.C. ruled that other 1996 Act limitations on Bell System
ILECs are not unconstitutional. These contrasting rulings may be resolved by the
U.S. Supreme Court at some point. There can be no assurance that the final
outcome of these reviews will not have a material adverse impact on the Company.
In addition, four of the Regional Bell Companies have petitioned the FCC to be
relieved of certain regulatory requirements in connection with their own DSL
services, including obligations to unbundle DSL-equipped loops (but not the
obligation to unbundle the loops Rhythms purchases for its DSL services). There
can be no assurance that the final outcome of these petitions or other
proceedings interpreting the requirements of the 1996 Act will not have a
material adverse impact on the Company.
State regulatory commissions prescribe rules applicable to intrastate
communications, and also set prices for wholesale services and unbundled network
elements, as well as for other terms and conditions under the 1996 Act. Rules
and prices vary from state to state, and there can be no assurance that the
rules in the states in which the Company operates will not have a material
adverse impact on the Company's business. Municipalities and other local
entities have the authority, where appropriate, to impose zoning and franchise
requirements, which would become applicable only if and when the Company
constructs its own facilities in public rights of way. In such an event, there
could be no assurance that the requirement would not have a materially adverse
effect on the Company. See "Business--Government Regulation."
DEPENDENCE ON CHANNEL PARTNERS
The Company's strategy relies, in large part, upon the distribution of its
products and services through Channel Partners. Accordingly, the performance of
the Company depends substantially on the ability of the Company to establish
favorable relationships with a large number of key Channel Partners, and the
performance of the Company's Channel Partners. To date, the Company has
established relationships with only a limited number of Channel Partners. There
can be no assurance that the Company will be able to establish favorable
relationships with Channel Partners or that the performance of its Channel
Partners will be satisfactory to the Company and its customers. The performance
of its Channel Partners will be beyond the control of the Company. The failure
of the Company to establish favorable relationships with a large number of key
Channel Partners or the unsatisfactory performance of its Channel Partners would
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have a material adverse effect on the Company's business, prospects, operating
results, financial condition and its ability to make principal and interest
payments on its indebtedness, including the New Notes.
COMPETITION
Rhythms will face competition from many competitors with significantly
greater financial resources, well-established brand names, and large, existing
installed customer bases. Moreover, the Company expects the level of competition
to intensify in the future. The Company expects significant competition from
ILECs, traditional and new IXCs, CAPs, CLECs, cable modem service providers,
ISPs and wireless and satellite data service providers. ILECs have existing
metropolitan area networks and circuit switched local access networks. In
addition, most ILECs are establishing their own ISP businesses and are in some
stage of market trials of DSL-based access services. Many of the leading
traditional IXCs, including MCI Telecommunications Corporation (with WorldCom,
Inc./MFS Communications Company, Inc./UUNet Technologies, Inc.), AT&T
Corporation (with Teleport Internet Services/TCG CERFnet, Inc. and its announced
TCI merger) and Sprint Corporation (with EarthLink Network Inc.) are expanding
their capabilities to support high-speed, end-to-end networking services. The
newer IXCs, including Williams Companies Inc. ("Williams"), Qwest Communications
International, Inc. ("Qwest") and Level 3 Communications, Inc., are building and
managing high bandwidth, nationwide IP-based packet networks and partnering with
ISPs to offer services directly to the public (Williams/Concentric; IXC
Communications, Inc./PSINet Inc.; Qwest/Supernet, Inc.). Cable modem service
providers, like @Home (with its cable partners) are offering or preparing to
offer high speed Internet access over hybrid fiber networks to consumers, and
@Work is positioned to do the same for businesses. Several new companies,
including WinStar Communications, Inc., Teligent, Inc., Teledesic LLC, Hughes
Space Communications and Iridium World Communications Ltd. are emerging as
wireless, including satellite-based, data service providers over a variety of
frequency allocations ranging from 2 GHz to 38 GHz. ISPs, including some with
significant and even nationwide presences, such as Concentric Network
Corporation ("Concentric"), Mindspring Enterprises, Inc. and PSINet Inc. provide
Internet access to residential and business customers, generally over the ILECs'
circuit switched networks, although some, including HarvardNet, Inc. in
Massachusetts, have begun offering DSL-based access. Certain CLECs, including
Covad Communications Company ("Covad") and NorthPoint Communications, Inc.
("NorthPoint"), have begun offering DSL-based access services, and others are
likely to do so in the future.
Many of these competitors are offering (or may soon offer) technologies and
services that will directly compete with some or all of the Company's service
offerings. Such technologies include ISDN, DSL, wireless data and cable modems.
Some of the competitive factors in the Company's markets include transmission
speed, reliability of service, breadth of service availability, price
performance, network security, ease of access and use, content bundling,
customer support, brand recognition, operating experience, capital availability
and exclusive contracts. The Company believes that it compares unfavorably with
its competitors with regard to, among other things, brand recognition, existing
relationships with end users, available pricing discounts, ILEC CO access,
capital availability and exclusive contracts. Substantially all of the Company's
competitors and potential competitors have substantially greater resources than
the Company. There can be no assurance that the Company will be able to compete
effectively in its target markets. A failure by the Company to compete
effectively would have a material adverse effect on the Company's business,
prospects, operating results, financial condition and its ability to make
principal and interest payments on its indebtedness, including the New Notes.
See "Business--Competition."
UNCERTAIN FEDERAL AND STATE TAX AND OTHER SURCHARGES ON THE COMPANY'S SERVICES
Telecommunications providers are subject to a variety of federal and state
surcharges and fees on their gross revenues from interstate and intrastate
services, including regulatory fees, and surcharges related to the support of
universal service. These surcharges and fees are revised from time to time. To
the extent
21
<PAGE>
that the Company is subject to these surcharges and fees, there can be no
assurance that such revisions would not have a material adverse effect on the
Company.
DIGITAL COMMUNICATIONS SIGNAL COMPATIBILITY AND POTENTIAL NETWORK INTERFERENCE
Digital services provided over copper loops can, under some circumstances,
pose the potential for interference with each other, including communications
services provided by ILECs and CLECs. Interference, if present, could cause
degradation of performance of the Company's services or render the Company
unable to offer its services on selected copper loops. Interference can be
difficult to detect. The procedures to resolve interference issues between CLECs
and ILECs are still being developed, and there is no assurance that these
procedures will be effective. There can be no assurance that the Company will
successfully negotiate interference resolution procedures with ILECs, or that
ILECs will not make claims regarding interference nor unilaterally take action
to resolve interference issues to the detriment of the Company's services.
Further, interference, if widespread, would have a material adverse effect on
the Company's reputation, brand image, service quality and customer satisfaction
and retention, which would have a material adverse effect on the Company's
business, prospects, operating results, financial condition and its ability to
make principal and interest payments on its indebtedness, including the New
Notes.
DEPENDENCE ON KEY PERSONNEL
The Company's performance is dependent on the performance of its officers
and key employees, especially its Chief Executive Officer. Members of the
Company's senior management team have worked together for only a short period of
time. The Company does not have "key person" life insurance policies on any of
its employees. The Company does not have employment agreements for fixed terms
with any of its employees. Any of the Company's employees, including its senior
management team members, may terminate his or her employment with the Company at
any time. Given the Company's early stage of development, the Company is
dependent upon its ability to retain and motivate high quality personnel,
especially its management. The Company's future success also depends on its
continuing ability to identify, hire, train and retain highly qualified
technical, sales, marketing and customer service personnel. Moreover, the
industry in which the Company competes is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel. There can be
no assurance that key personnel will continue to be employed by the Company or
that the Company will be able to attract and retain qualified personnel in the
future. Competition for such qualified personnel is intense, particularly in
software development, network engineering and product management. The inability
to attract and retain key managerial, technical, sales, marketing and managerial
personnel would have a material adverse effect upon the Company's business,
prospects, operating results, financial condition and its ability to make
principal and interest payments on its indebtedness, including the New Notes.
See "Business--Employees" and "Management."
DEPENDENCE ON EQUIPMENT SUPPLIERS, INSTALLERS AND FIELD SERVICE PROVIDERS
The Company currently plans to purchase all of its equipment from many
different vendors and outsource the installation and field service of its
networks to third parties. Any reduction or interruption in supply from any of
its suppliers or interruption in service from any significant installer or field
service provider could have a disruptive effect on the Company. Although
multiple manufacturers currently produce or are developing equipment that will
meet the Company's current and anticipated requirements, there can be no
assurance that the Company's suppliers will be able to manufacture and deliver
the amount of equipment ordered or that such supply will be sufficient to meet
demand. In addition, the pricing of the equipment purchased by the Company may
substantially increase over time (increasing the costs paid in the future by the
Company) or decrease over time (providing later market entrants with a cost
advantage over the Company). The availability and pricing of the equipment
purchased and technology licensed by the Company may be adversely affected if
its suppliers or licensors enter into competition with
22
<PAGE>
it, or if its competitors enter into exclusive or restrictive arrangements with
the suppliers or licensors. Any shortages in supply of equipment or personnel,
or quality issues relating to any of these third parties would have a material
adverse effect on the Company's business, prospects, operating results,
financial condition and its ability to make principal and interest payments on
its indebtedness, including the New Notes.
DEPENDENCE ON LEASED TRANSPORT FACILITIES
The Company seeks to lease from third parties transport capacity to connect
its network facilities, and is dependent upon the availability of fiber optic
transmission facilities owned by IXCs, ILECs, CLECs and other fiber optic
transport providers who lease their fiber optic networks to service providers,
such as the Company. Many of these entities are, or may become, competitors of
the Company. See "--Competition." The risks inherent in this approach include,
but are not limited to, the possible inability to negotiate and renew favorable
supply agreements and dependence on the timeliness of the IXCs, ILECs, CLECs or
other fiber optic transport providers in processing the Company's orders for
customers who seek to use the Company's services. Moreover, there can be no
assurance that fiber optic transport providers whose networks are being leased
by the Company will be able to maintain existing permits and rights-of-way or to
obtain and maintain the other permits and rights-of-way needed to develop and
operate existing and future networks.
INTELLECTUAL PROPERTY PROTECTION
The Company relies upon a combination of licenses, confidentiality
agreements and other contractual covenants to establish and protect its
technology and other intellectual property rights. The Company has applied for
trademarks and servicemarks on certain terms and symbols that it believes are
important for its business. The Company currently has no patents or patent
applications pending. There can be no assurance that the steps taken by the
Company will be adequate to prevent misappropriation of its technology or other
intellectual property, or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology. There can be no assurance that third parties will not
assert infringement claims against the Company and that, in the event of an
unfavorable ruling on any such claim, a license or similar agreement to utilize
technology relied upon by the Company in the conduct of its business will be
available to the Company on reasonable terms or at all. The loss of such rights
or failure to obtain any necessary licenses or agreements may have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations and its ability to make principal and interest payments on
its indebtedness, including the New Notes. The Company also relies on unpatented
trade secrets and know-how to maintain its competitive positions, which it seeks
to protect, in part, by confidentiality agreements with employees, consultants
and others. There can be no assurance that these agreements will not be breached
or terminated, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known or be
independently discovered by competitors. The Company's management personnel were
previously employed by other telecommunications companies. In many cases, these
individuals are conducting activities for the Company in areas similar to those
in which they were involved prior to joining the Company. As a result, the
Company, as well as these individuals, could be subject to allegations of
violation of trade secrets and other similar claims.
CONCENTRATION OF OWNERSHIP; VOTING AGREEMENT; POTENTIAL CONFLICTS OF INTEREST
The Company's executive officers and directors, together with the Brentwood
Entities, the KPCB Entities, the Enterprise Entities, the Sprout Entities and
Enron together beneficially own over 97.6% of the outstanding Common Stock of
the Company (assuming conversion of all outstanding Preferred Stock into Common
Stock and without giving effect to the exercise of the Warrants). Accordingly,
these stockholders are able to determine the composition of the Company's Board
of Directors, retain the voting power to approve all matters requiring
stockholder approval and continue to have significant influence
23
<PAGE>
over the affairs of the Company. This concentration of ownership could have the
effect of delaying or preventing a change in control of the Company. See
"Management," "Principal Stockholders" and "Description of Capital Stock."
Certain decisions concerning the operations or financial structure of the
Company may present conflicts of interest between these investors and the
holders of the New Notes. For example, if the Company encounters financial
difficulties or is unable to pay its debts as they mature, the interest of these
investors may conflict with those of the holders of New Notes. In addition,
these investors may have an interest in pursuing acquisitions, divestitures,
financings or other transactions and business strategies that, in their
judgment, could enhance their equity investment in the Company, even though such
transactions might involve increased risk to the holders of the New Notes.
EFFECTIVE SUBORDINATION OF NEW NOTES TO SECURED INDEBTEDNESS AND INDEBTEDNESS OF
THE COMPANY'S SUBSIDIARIES
The New Notes will be unsecured, senior obligations of the Company and will
rank pari passu in right of payment with all other existing and future senior
unsecured indebtedness of the Company and senior in right of payment to any
existing and future subordinated indebtedness of the Company. The New Notes will
not be secured by any assets of the Company, its current subsidiaries or any
future subsidiaries. The Indenture permits the Company and its subsidiaries to
incur certain secured indebtedness in the future, and such secured indebtedness
would have a prior claim over the New Notes to the extent of the assets that
secure such indebtedness. In the event that a default were to occur with respect
to any of the Company's or its subsidiaries' current or future secured
indebtedness and were the holders thereof to foreclose on the collateral
securing such indebtedness, or in the event of a bankruptcy, liquidation or
reorganization of the Company or its current or future subsidiaries, the holders
of such indebtedness would be entitled to payment out of the proceeds of their
collateral prior to any payout to the holders of general unsecured indebtedness,
including the New Notes, notwithstanding the existence of an event of default
with respect to the New Notes. Moreover, the New Notes will not be guaranteed by
the Company's current subsidiaries or any future subsidiaries, and,
consequently, the New Notes will be structurally subordinated in right of
payment to all indebtedness and other liabilities of the Company's subsidiaries,
including subordinated indebtedness and trade payables. See "Description of
Notes--Certain Covenants--LIMITATIONS ON LIENS SECURING CERTAIN INDEBTEDNESS."
The Indenture will permit the Company's subsidiaries to incur additional
indebtedness, subject to certain limitations. See "Description of the Notes--
Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS."
RISK OF SYSTEM FAILURE; NETWORK SECURITY RISK
The Company's operations are dependent upon its ability to avoid damages
from fires, earthquakes, floods, power losses, telecommunications failures,
network software flaws, transmission cable cuts and similar events. The
occurrence of a natural disaster or other unanticipated problem at the Company's
owned or leased facilities could cause interruptions in the services provided by
the Company. Additionally, failure of an ILEC or other service provider, such as
a CLEC, to provide communications capacity required by the Company, as a result
of a natural disaster, operational disruption or any other reason, could cause
interruptions in the services provided by the Company. Any damage or failure
that causes interruptions in the Company's operations could have a material
adverse effect on the Company's business, prospects, operating results,
financial condition and its ability to make principal and interest payments on
its indebtedness, including the New Notes.
Despite the implementation of security measures, the Company's network may
be vulnerable to unauthorized access, computer viruses and other disruptive
problems. Corporate networks and ISPs have in the past experienced, and may in
the future experience, interruptions in service as a result of accidental or
intentional actions of Internet users, current and former employees and others.
Unauthorized access could also potentially jeopardize the security of
confidential information stored in the computer systems of
24
<PAGE>
the Company's customers, which might result in liability of the Company to its
customers, and also might deter potential customers. Although the Company
intends to implement security measures that are standard within the
telecommunications industry, there can be no assurance that it will implement
such measures in a timely manner or to the degree that may be compatible with
its customers' expectations, or that, if and when implemented, such measures
will not be circumvented. Eliminating computer viruses and alleviating other
security problems may require interruptions, delays or cessation of service to
the Company's customers and such customers' end users. Any of the foregoing
factors relating to network security could have a material adverse effect on the
Company's business, prospects, operating results, financial condition and its
ability to make principal and interest payments on its indebtedness, including
the New Notes.
CONSEQUENCES TO NON-TENDERING HOLDERS OF OLD NOTES
Upon consummation of the Exchange Offer, the Company will have no further
obligation to register the Old Notes. Thereafter, any Holder of Old Notes who
does not tender its Old Notes in the Exchange Offer, including any Holder which
is an "affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company which cannot tender its Old Notes in the Exchange Offer, will
continue to hold restricted securities which may not be offered, sold or
otherwise transferred, pledged or hypothecated except pursuant to Rule 144 and
Rule 144A under the Securities Act or pursuant to any other exemption from
registration under the Securities Act relating to the disposition of securities,
provided that an opinion of counsel is furnished to the Company that such an
exemption is available. These restrictions may limit the trading market and
price for the Old Notes.
ABSENCE OF A PUBLIC MARKET FOR THE NEW NOTES; RESTRICTIONS ON TRANSFER
The New Notes are being offered to the Holders of the Old Notes. Prior to
this Exchange Offer, there was no existing trading market for the Old Notes and
there were no existing New Notes. The Company does not intend to apply for
listing of the New Notes on any securities exchange or on the Nasdaq National
Market. Although the New Notes will be eligible for trading in the PORTAL
Market, the New Notes may trade at a discount from their initial offering price,
depending upon prevailing interest rates, the market for similar securities, the
Company's performance and other factors. In connection with the Old Note
Issuance, the Company was advised by the Initial Purchasers that they intended
to make a market in the Old Notes following the Old Note Issuance; however, the
Initial Purchasers are not obligated to do so and any such market-making
activities may be discontinued at any time without notice. Therefore, there can
be no assurance that an active market for the New Notes will develop, either
prior to or after performance of the Company's obligations under the
Registration Rights Agreements. See "Description of the Notes-- Note
Registration Rights" and "Plan of Distribution."
FRAUDULENT CONVEYANCE CONSIDERATIONS
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer laws, if, among other things, the
Company at the time it incurred the indebtedness evidenced by the New Notes (i)
(a) was or is insolvent or rendered insolvent by reason of such occurrence or
(b) was or is engaged in a business or transaction for which the assets
remaining with the Company constituted unreasonably small capital or (c)
intended or intends to incur, or believed or believes that it would incur, debts
beyond its ability to pay such debts as they mature; and (ii) the Company
received or receives less than reasonably equivalent value or fair consideration
for the incurrence of such indebtedness, then the New Notes could be voided or,
under applicable case law, claims in respect of the New Notes could be
subordinated to all other debts of the Company, as the case may be. In addition,
the payment of interest and principal by the Company pursuant to the New Notes
could be voided and required to be returned to or on behalf of the Company. The
measures of insolvency for purposes of the foregoing considerations will vary
depending upon the law applied in any proceeding with respect to the foregoing.
Generally, however,
25
<PAGE>
the Company would be considered insolvent if (i) the sums of its debts,
including contingent liabilities, were greater than the value of all of its
assets at a fair valuation; (ii) the present fair saleable value of its assets
were less than the amount that would be required to pay its probable liabilities
on its existing debts, including contingent liabilities, as they become absolute
and mature; or (iii) it generally is not paying its debts as they become due.
The Company believes that it (i) is solvent and will continue to be solvent
after issuing the New Notes, because the Company believes the fair value of the
Company's assets exceeds and will exceed its probable liabilities; (ii) will
have sufficient capital for carrying on the business it intends to conduct after
such issuance; and (iii) will be able to pay its debts as they mature. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." There can be no assurance,
however, that a court would concur with such beliefs and positions. In rendering
its opinion on the validity of the Notes, counsel for each of the Company and
the Initial Purchasers will express no opinion as to federal or state laws
relating to fraudulent transfers.
PAYMENT UPON A CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control, the
Company will be required to make an offer to repurchase all of the New Notes
issued and then outstanding under the Indenture at a purchase price in cash
equal to 101% of the Accreted Value thereof plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of repurchase. See "Description
of the Notes--Certain Covenants--Change of Control." If a Change of Control were
to occur, there can be no assurance that the Company would be able to repay all
of its obligations under the New Notes and any other indebtedness that may
become payable in such event. In addition, the ability of the Company to
repurchase New Notes upon a Change of Control may be restricted by the terms of
other indebtedness of the Company. There can be no assurance that the Company
would be able to refinance on commercially reasonable terms, if at all, any of
such obligations, and consequently no assurance can be given that the Company
would be able to repurchase any of the New Notes upon a Change of Control.
INVESTMENT COMPANY ACT CONSIDERATIONS
After giving effect to the Old Notes Issuance, the Company has substantial
cash, cash equivalents and short-term investments. The Company intends to invest
the proceeds of the Old Notes Issuance so as to preserve capital (for use in the
rollout of the Company's network) by investing it in short-term instruments
consistent with prudent cash management and not primarily for the purpose of
achieving investment returns. See "Use of Proceeds." Investment in securities
primarily for the purpose of achieving investment returns could result in the
Company being treated as an "investment company" under the Investment Company
Act of 1940, as amended (the "1940 Act"). The 1940 Act requires the registration
of, and imposes various substantive restrictions on, certain companies that are,
or hold themselves out as being, engaged primarily, or propose to engage
primarily, in the business of investing, reinvesting or trading in securities,
or that fail certain statistical tests regarding composition of assets and
sources of income and are not primarily engaged in businesses other than
investing, reinvesting, owning, holding or trading securities.
The Company believes that it is primarily engaged in a business other than
investing, reinvesting, owning, holding or trading securities and, therefore, is
not an investment company within the meaning of the 1940 Act. If the Company
were required to register as an investment company under the 1940 Act, it would
become subject to substantial regulation with respect to its capital structure,
management, operations, transactions with affiliated persons (as defined in the
1940 Act) and other matters. Application of the provisions of the 1940 Act to
the Company would have a material adverse effect on the Company's business,
prospects, financial condition, results of operations and its ability to make
principal and interest payments on its indebtedness, including the New Notes.
26
<PAGE>
RISK REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains "forward-looking statements" (as such term is
defined in the Private Securities Litigation Reform Act of 1995), which
generally can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should" or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by discussion
of strategy, that involve risks and uncertainties. Management wishes to caution
the reader that these forward-looking statements, such as the Company's network
rollout plans and strategies and statements regarding the development of the
Company's business, the markets for the Company's services and products, the
Company's anticipated capital expenditures, possible changes in regulatory
requirements and other statements contained herein regarding matters that are
not historical facts, are only predictions and estimates regarding future events
and circumstances. Any forward-looking statements contained herein are subject
to material risks and uncertainties, many of which are beyond the control of the
Company. Market conditions and the Company's actual results may differ
materially from the market conditions and results discussed in these statements.
Factors that might cause such a difference include, without limitation, those
discussed in "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and those discussed elsewhere in this
Prospectus.
ORIGINAL ISSUE DISCOUNT
The New Notes will be issued with substantial original issue discount for
U.S. federal income tax purposes. Consequently, purchasers of the New Notes
generally will be required to include amounts in gross income for U.S. federal
income tax purposes in advance of receipt of the cash payments to which the
income is attributable. Furthermore, the New Notes may be subject to the high
yield discount obligation rules, which will defer and may, in part, eliminate
the Company's ability to deduct for U.S. federal income tax purposes the
original issue discount attributable to the New Notes. Accordingly, the
Company's after-tax cash flow might be less than if the original issue discount
on the New Notes was deductible when it accrued. See "Certain Federal Income Tax
Considerations" for a more detailed discussion of the U.S. federal income tax
consequences for the Company and the beneficial owners of the New Notes
resulting from their purchase, ownership and disposition of the New Notes. If a
bankruptcy case were commenced by or against the Company under the Bankruptcy
Code of 1978, as amended (the "Bankruptcy Code"), after the issuance of the New
Notes, the claim of a holder with respect to the principal amount thereof may be
limited to an amount equal the sum of (i) the initial offering price and (ii)
that portion of the original issue discount that is not deemed to constitute
"unmatured interest" for purposes of the Bankruptcy Code. Any original issue
discount that was not amortized as of the date of any such bankruptcy filing
would constitute "unmatured interest."
BROAD DISCRETION IN USE OF PROCEEDS BY MANAGEMENT
The net proceeds raised in the Old Notes Issuance are anticipated to be used
to fund the Company's capital expenditures, working capital requirements and
operating losses expected to be incurred in connection with its initial market
rollout. The Company's management will have broad discretion over the use of
such proceeds, and holders of the New Notes must rely on the judgment of
management in the application of such proceeds. See "Use of Proceeds."
IMPACT OF THE YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software belonging to the Company,
companies into which the Company's network is interconnected or any of the
Company's Channel Partners may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal
27
<PAGE>
business activities. While the Company believes its systems to be year 2000
compliant, if its systems or the systems of other companies on whose services
the Company depends or with whom the Company's systems interconnect are not year
2000 compliant, it could have a material adverse effect on the Company.
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the New Notes offered in the
Exchange Offer. In consideration for issuing the New Notes as contemplated in
this Prospectus, the Company will receive in exchange Old Notes in like
principal amount at maturity, the form and terms of which are the same in all
material respects as the form and terms of the New Notes except that the New
Notes (i) will have been registered under the Securities Act and therefore will
not be subject to certain restrictions on transfer applicable to the Old Notes
and (ii) will not be entitled to certain registration or other rights under the
Registration Rights Agreement, including the provision in the Registration
Rights Agreement for additional interest of up to 1.5% per annum upon failure by
the Company to consummate the Exchange Offer. The Old Notes surrendered in
exchange for New Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the New Notes will not result in any increase in the
indebtedness of the Company.
The net proceeds to the Company from the Old Note Issuance were
approximately $144.0 million, net of the Initial Purchasers' discount and other
estimated Old Note Issuance expenses payable by the Company. The net proceeds
from the Old Note Issuance, together with existing cash, lease line proceeds and
future revenue generated from operations, are expected to be used by the Company
to fund the capital expenditures, working capital and operating losses expected
to be incurred in connection with the Company's initial market rollout. The
amounts actually expended by the Company for these purposes will vary
significantly depending upon a number of factors, however, including future
revenue growth, if any, volume pricing discounts, competition, regulatory
factors, the amount of cash generated by the Company's operations and other
factors, many of which are beyond the Company's control. Additionally, if the
Company determines it would be in its best interest, the Company may modify the
number, selection and timing of its entry of any or all of the targeted markets.
Accordingly, the Company's management will retain broad discretion in the
allocation of such net proceeds. Although the Company may use a portion of the
net proceeds to pursue possible acquisitions of, or enter into joint ventures
with respect to, complementary businesses, technologies or products in the
future, there are no present understandings, commitments or agreements with
respect to any such acquisitions or joint ventures. Pending use of such net
proceeds for the above purposes, the Company intends to invest such funds in
short-term, investment grade securities to the extent permitted by the Indenture
and any statistical asset tests imposed by the 1940 Act. See "Risk Factors--
Limited Operating History; Early Stage of Development," "--Unproven Business
Strategy; Uncertainty of Market Acceptance," "--Historical Losses and
Anticipated Future Losses; Fluctuations in Operating Results," "--Significant
Capital Requirements; Need for and Uncertainty of Additional Financing" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DIVIDENDS
The Company has not paid any dividends since its inception and does not
intend to pay cash dividends on its capital stock in the foreseeable future. The
Company anticipates that it will retain all future earnings, if any, for use in
its operations and expansion of its business. In addition, the terms of the
Indenture restrict the Company's ability to pay dividends on, or make
distributions in respect of, its capital stock. See "Description of the Notes
Certain Covenants."
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<PAGE>
CAPITALIZATION
The following unaudited table sets forth the capitalization of the Company
as of March 31, 1998 on an actual basis and on an "as adjusted" basis to give
effect to the Old Notes Issuance. This table should be read in conjunction with
the Company's Financial Statements and the related Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-------------------------
<S> <C> <C>
AS ADJUSTED
ACTUAL (1)
--------- --------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.......................................... $ 26,519 $ 170,621
--------- --------------
--------- --------------
Debt:
Bank Note.................................................... 568 568
Senior Discount Notes (1).................................... -- 149,395
--------- --------------
Total debt................................................. 568 149,963
--------- --------------
Warrants offered in Old Notes Issuance (1)(2)...................... -- 970
Stockholders' equity:
Series A Convertible Preferred Stock, $0.001 par value;
12,900,000 shares authorized; 12,855,094 shares issued and
outstanding................................................ 13 13
Series B Convertible Preferred Stock, $0.001 par value;
4,044,943 shares authorized; 4,044,943 shares issued and
outstanding................................................ 4 4
Common Stock, $0.001 par value; 22,909,650 shares authorized
actual; 24,881,650 shares authorized as adjusted; 3,302,804
shares issued (3) and outstanding.......................... 3 3
Additional paid-in capital......................................... 31,075 31,075
Accumulated deficit................................................ (4,516) (4,516)
--------- --------------
Total stockholders' equity....................................... 26,579 26,579
--------- --------------
Total capitalization........................................... $ 27,147 $ 177,512
--------- --------------
--------- --------------
</TABLE>
- ------------------------
(1) Gives effect to the issuance of the Old Notes and accompanying Warrants. The
net proceeds from the issuance is allocated between the Notes and the
Warrants. The Notes will accrete in value through May 15, 2003 at a rate of
13.5% per annum, compounded semi-annually. No cash interest will be payable
on the Notes prior to that date. The value ascribed to the Warrants results
in additional debt discount, which will be amortized to interest expense
using the effective interest method over the period that the Notes are
outstanding.
(2) The Warrants may be required to be repurchased by the Company for cash upon
the occurrence of a Repurchase Event, as defined in the provisions of the
Warrant Agreement.
(3) Excludes 106,700 shares of Common Stock reserved for issuance upon exercise
of outstanding options as of March 31, 1998.
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<PAGE>
SELECTED FINANCIAL DATA
The following statement of operations and balance sheet data for the periods
from February 27, 1997 (date of inception) to December 31, 1997 (audited),
February 27, 1997 (inception) to March 31, 1997 (unaudited), and for the three
months ended March 31, 1998 (unaudited), and the balance sheet data as of
December 31, 1997 (audited) and March 31, 1998 (unaudited), have been derived
from the Company's Financial Statements and the related Notes thereto. The
following selected financial data should be read in conjunction with the
Company's Financial Statements and the related Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
<TABLE>
<CAPTION>
FEBRUARY 27, 1997
(DATE OF INCEPTION) FEBRUARY 27, 1997 THREE MONTHS
TO (INCEPTION) TO ENDED
DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998
--------------------- ------------------- ---------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS:
Revenue............................................................ $ -- $ -- $ 10
Operating expenses:
Network and service costs........................................ -- -- 198
Selling, general and administrative.............................. 2,342 3 2,228
Depreciation and amortization.................................... 1 -- 16
------- ------ -------
Total operating expenses....................................... 2,343 3 2,442
------- ------ -------
Loss from operations............................................... (2,343) (3) (2,432)
------- ------ -------
Interest income (expense):
Interest income.................................................. 114 -- 158
Interest expense................................................. (1) -- (12)
------- ------ -------
Net interest....................................................... 113 -- 146
------- ------ -------
Net loss........................................................... $ (2,230) $ (3) $ (2,286)
------- ------ -------
------- ------ -------
Net loss per share (basic and diluted)............................... $ (2.48) $ -- $ (2.54)
------- ------ -------
------- ------ -------
OTHER DATA:
EBITDA (1)......................................................... $ (2,342) $ (3) $ (2,416)
Net cash used for operating activities............................. (1,560) (8) (1,508)
Net cash used for investing activities............................. (500) -- (438)
Net cash provided by financing activities.......................... 12,226 200 18,299
Deficiency of earnings to cover fixed charges (2).................. (2,230) (3) (2,286)
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER AS OF MARCH 31, 1998
31, 1997 --------------------------
----------- AS
ACTUAL ACTUAL ADJUSTED (3)
----------- ------------ ------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 10,166 $ 26,519 $ 170,621
Net equipment.......................................................................... 172 124 124
Total assets........................................................................... 12,241 29,670 179,972
Total debt (3)......................................................................... 568 568 149,963
Warrants (3)(4)........................................................................ -- -- 970
Total stockholders' equity............................................................. 10,346 26,579 26,579
</TABLE>
- ------------------------
(1) EBITDA consists of net loss excluding net interest, depreciation and
amortization. EBITDA is presented to enhance an understanding of the
Company's operating results and is not intended to represent cash flow or
results of operations in accordance with generally accepted accounting
principles for the period indicated and may be calculated differently than
EBITDA for other companies.
(2) The deficiency of earnings to cover fixed charges represents the dollar
amount of earnings required to attain a one-to-one ratio to fixed charges,
which includes interest on debt and the interest component of operating
leases.
(3) Gives effect to the issuance of the Old Notes and accompanying Warrants. The
net proceeds from the issuance is allocated between the Notes and the
Warrants. The Notes will accrete in value through May 15, 2003 at a rate of
13.5% per annum, compounded semi-annually. No cash interest will be payable
on the Notes prior to that date. The value ascribed to the Warrants results
in additional debt discount, which will be amortized to interest expense
using the effective interest method over the period that the Notes are
outstanding.
(4) The Warrants may be required to be repurchased by the Company for cash upon
the occurrence of a Repurchase Event, as defined in the provisions of the
Warrant Agreement.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS IS BASED ON THE FINANCIAL STATEMENTS
OF THE COMPANY AND THE NOTES THERETO AND SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS. CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING
STATEMENTS." SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE
OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS TO BE MATERIALLY DIFFERENT
FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS. GIVEN THESE UNCERTAINTIES, PROSPECTIVE
INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" AND "BUSINESS." THE
COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE INFORMATION CONTAINED IN ANY
FORWARD-LOOKING STATEMENT.
OVERVIEW
Rhythms believes it is well positioned to capitalize on the explosive demand
for data communications services. The Rhythms Network is intended to be
nationwide and to provide Service Providers and other end users with a secure,
reliable, high-speed solution to the inherent shortcomings of today's legacy
networks. Rhythms will offer a turnkey solution that can be integrated with
Service Providers' existing service offerings in order to provide a
comprehensive package to end users. The Company believes its solution will be
attractive due to the Company's ability to provide (i) low cost, high-speed
local access; (ii) local and wide area balanced capacity; and (iii) end-to-end
network management. The Company is led by a management team with extensive
experience in data communications from such companies as !NTERPRISE, Sprint and
CompuServe.
Since inception in February 1997, the Company's primary activities have
consisted of the procurement of required governmental authorizations, the
negotiation and execution of interconnection agreements with three ILECs, the
identification of collocation space and locations for the Company's Connection
Points, Metro Service Centers and business offices, the acquisition and
deployment of equipment and facilities, the launching of service trials, the
hiring of management and other personnel, the raising of capital and the
development and integration of its OSS and other back office systems. The
Company has signed interconnection agreements with Pacific Bell, Bell Atlantic
and U S WEST, has obtained CLEC authority in California, Illinois, Maryland,
Massachusetts, New York and Virginia and is permitted to operate as a CLEC in
Pennsylvania. The Company began service trials in the greater San Diego
metropolitan area in December 1997, and began offering commercial services in
the area on April 1, 1998 and in San Francisco on June 1, 1998. Rhythms plans to
launch its services in the East Bay and San Jose in July 1998 and Los Angeles
and Orange County in September 1998. Rhythms is also currently in active
negotiations to interconnect with five other ILECs. The Company's initial
rollout of 11 markets is expected to be completed by the first half of 1999.
The Company has incurred operating losses, net losses and negative operating
cash flow each month since its inception. As of March 31, 1998, the Company had
an accumulated deficit of $4.5 million. The Company currently intends to
substantially increase its operating expenses and capital expenditures in order
to rapidly expand its infrastructure and network services to support additional
expected customers in San Diego and additional new markets. The Company expects
to incur substantial operating losses, net losses and negative cash flow during
the network buildout and initial penetration of each new market it enters. These
losses are expected to continue for at least the next several years, until the
Company's installed base of customers and resulting operating profits are large
enough to absorb losses from new or recently entered markets. The Company
believes that the net proceeds from the Old Notes Issuance, together with its
existing cash, lease line proceeds and future revenue generated from operations,
will be sufficient to fund the Company's capital expenditures, working capital
requirements and operating losses
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<PAGE>
for the next 24 months associated with the rollout and subsequent operation of
its initial 11 markets. The Company intends to subsequently build out in other
markets across the country.
FACTORS AFFECTING FUTURE OPERATIONS
NET REVENUES
SERVICE OFFERING. Rhythms initially intends to derive the majority of its
revenues from DSL and other high-speed access services and WAN connectivity,
including corporate and ISP connections to the Rhythms Network.
TARGET MARKET AND PENETRATION. The Company's target market consists of the
LANs in each market, which the Company believes is the best indication of data
intensive business density, as well as related remote users. According to a
leading data communications industry source, the total number of business LANs
in the United States is approximately 1.5 million, with an average of 40 users
per LAN. The Company believes that it will be able to address 28% of all LANs in
the United States with the buildout of its initial 11 markets. The Company's
goal is to address 50% of the LANs in the United States, which it believes is
achievable by building out a total of 30 markets. Based on other market data,
the Company estimates that 20% of LAN users require remote access. Accordingly,
the Company's total market opportunity in its target markets includes 431,000
LANs and 3.5 million remote users. The Company's addressable market opportunity
may then be derived by taking into consideration the estimated reach of DSL and
the Company's estimated coverage of the businesses and residences served from
ILEC COs. Initially, DSL is expected to reach over 65% of the businesses and
residences served from the ILEC COs. Within each metropolitan area, the Company
expects to collocate in the appropriate number of ILEC COs to cover 75% of the
total market opportunity.
PRICING. For both local access and WAN connectivity, the Company intends to
bill its end users for monthly recurring charges based on the bit rate chosen
for networking services, ranging from 384 Kbps to 7.0 Mbps downstream and 384
Kbps to 1.0 Mbps upstream. The Company plans to offer both flat rate plans and
usage-based plans for its services. In addition to monthly service fees, the
Company plans to bill users for nonrecurring service activation and installation
charges. The Company also intends to charge both monthly and nonrecurring
charges to ISPs for the high-speed egress connection between the Rhythms Metro
Service Center and the ISP router.
To encourage business customers to adopt the Company's services, the Company
may offer the first month(s) of DSL local service at a reduced price. The
Company believes that its services are competitively priced versus alternative
services at comparable bit rates. In order to preserve its price performance for
customers, the Company expects to offer higher bit rates without necessarily
increasing its prices. The Company expects that as a result of competitive
forces, its prices will decline over time.
CHURN. Similar to other telecommunications providers, the Company expects
to encounter customer churn as its customer base grows. The Company expects to
maintain a monthly churn rate not higher than 2% as a result of (i) the
complexity and inconvenience associated with switching data communications
service providers; (ii) the switching costs associated with disconnecting
service; and (iii) the economic impact of paying a new service activation and
installation charge.
UNBILLABLES AND BAD DEBTS. Approximately 4.5% of gross revenue is expected
by the Company to be either unbillable or uncollectible.
NETWORK AND SERVICE COSTS
The Company's network and service costs are comprised of the following:
installation, monthly recurring and nonrecurring line and service charges,
network facilities operating expenses, the cost of
32
<PAGE>
transport and backbone circuits, the cost of CPE, equipment operating lease
expenses, line repair and support costs. Over time, the Company's network and
service costs are expected to be predominantly variable with the number of
subscribers.
INSTALLATION. In each market, the Company will require a number of field
service technicians to install CPE at end user locations. The Company currently
outsources most of this function.
MONTHLY RECURRING AND NONRECURRING LINE AND SERVICE CHARGES. The Company
pays ILECs a one-time installation and activation fee and a monthly service fee
for each copper loop. The Company also pays IXCs a one-time installation and
activation fee and a monthly service fee for WAN connections over a frame relay
or ATM network. Initially, the Company leases these services from IXCs. Over
time, as traffic volume grows, the Company expects its WAN costs to improve
through discounts based on volume commitments and migration towards a partial
facilities oriented approach (potentially including long-term indefeasible
rights of use).
NETWORK FACILITIES OPERATING EXPENSES. The Company will incur various
recurring costs at its network and business locations.
TRANSPORT AND BACKBONE CHARGES. The Company incurs charges for transport
between the Company's Connection Points and its Metro Service Centers and incurs
charges for the backbone circuits connecting the Metro Service Centers to the
Rhythms Network Operating Center ("RNOC") in Denver.
COST OF CPE. As part of its DSL local access plans, the Company will
provide the CPE and will expense the cost of CPE for each customer line.
EQUIPMENT LEASING. The Company is initially taking advantage of short-term
operating leases to finance the acquisition of most of its network equipment,
including DSL multiplexers, ATM switches, routers and network "modems."
Depending on its tax position, the Company may decide to purchase and to
capitalize a portion or all of this equipment in the future.
LINE REPAIR AND SUPPORT COSTS. Similar to other telecommunications
providers, the Company estimates that a small percentage of its lines may
require repair or support. Such costs will be comprised of field dispatch labor
and a portion of RNOC costs.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
The Company incurs selling, general and administrative expenses common to
all telecommunications providers, including customer service and technical
support, information systems, billing and collections, general management and
overhead, and administrative functions. Headcount in functional areas, such as
customer service, engineering and operations, is expected to increase gradually
as the number of customers and network locations increases. Other areas,
particularly information and billing systems, may require significant upfront
capital expenditures to the extent that the Company purchases or builds its own
infrastructure. Since the Company does not have any legacy systems, it believes
it has an opportunity to develop systems that provide greater functionality and
flexibility than many existing systems.
GENERAL AND ADMINISTRATIVE COSTS. The Company's experienced management team
has demonstrated past success in building and managing operational functions.
The Company's management is currently hiring and developing the necessary staff
for all of its departments. As the Company commercializes its markets and its
customer base grows, the number of market-specific employees is expected to
grow. Management anticipates that certain functions, such as customer service,
network operations, billing and site planning, are likely to remain centralized
in order to achieve economies of scale; as such, these components will decrease
as a percentage of the Company's overall operating expenses over time.
33
<PAGE>
SALES AND MARKETING COSTS. Rhythms' sales efforts are focused on attracting
and retaining Channel Partners, including national and regional ISPs, national
and regional systems and network integrators, VARs, CLECs and IXCs. The Company
utilizes a direct sales organization to acquire enterprise customers. The
Company also has a group of employees focused on product development of network
services and network applications.
DEPRECIATION AND AMORTIZATION
Depreciation expense arising from the network equipment will be minimal
since leased equipment expenses will reflect most of the cost and financing of
this equipment. Collocation fees are capitalized and amortized over an estimated
useful life of 10 years.
CAPITAL EXPENDITURES
The development and expansion of the Company's business requires significant
capital expenditures. The principal capital expenditure incurred during the
buildout phase of any market involves the procurement, design and construction
of the Company's Connection Points and expenditures for other elements of the
Company's network design, which include a Metro Service Center in each market.
The Company is also in the process of building an RNOC in San Diego to
supplement the RNOC which is currently operational in Denver. The number of
targeted COs in a market varies, as does the average capital cost to build the
Company's Connection Points in a given market.
RESULTS OF OPERATIONS
Since its inception in February 1997, the Company has engaged principally in
the development of its business operations. Accordingly, the Company's
historical results of operations are not indicative of, and should not be relied
upon as an indicator of, the future performance of the Company.
PERIOD ENDED DECEMBER 31, 1997
REVENUES AND NETWORK AND SERVICE COSTS. The Company did not offer
commercial service in 1997 and, as a result, no revenues or network and service
costs were recorded in 1997. Revenues and network and service costs are expected
to be recorded in 1998 as the Company introduces commercial services under its
initial market rollout.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general and
administrative expenses for the period were approximately $2.3 million and
consisted primarily of salaries and legal and consulting fees incurred to
establish a management team and develop the Company's business. Selling, general
and administrative expenses are expected to significantly increase as the
Company expands its business.
INTEREST INCOME AND EXPENSE. Interest income in 1997 of $114,000 consisted
of interest earned on the Company's invested cash balances, principally the
proceeds raised in the Company's Series A Preferred Stock financing. Interest
expense in 1997 totaled $1,000 since borrowings under its note payable were not
drawn until December 30, 1997. Interest income in the future will consist of
interest earned from investing current cash balances and the proceeds from this
Offering in short-term instruments, consistent with any statistical asset tests
imposed by the 1940 Act, until such funds are used for operating expenses and
capital expenditures. Because of restrictions imposed by the 1940 Act on the
Company's short-term investments, the Company may earn less interest income than
it might have earned in the absence of these restrictions. As a result of
completing this Offering, future interest expense will increase significantly
and will consist primarily of interest on the Company's debt and accretion of
the original issue discount.
INCOME TAXES. The Company recognized no provision for income taxes in 1997.
As of December 31, 1997, the Company had generated net operating loss ("NOL")
carryforwards of approximately $2.1 million,
34
<PAGE>
which are available to offset future taxable income through 2016 for federal
taxes and 2005 for state taxes, subject to the limitations of Internal Revenue
Code Section 382 relating to changes in ownership of the Company. The net
deferred tax asset arising from the NOL carryforwards has been fully offset by a
valuation allowance since it is more likely than not that it will not be
realized. The Company expects to generate significant tax losses for the
foreseeable future, which would create additional NOL carryforwards that may be
subject to Section 382 use limitations. In addition, income taxes may be payable
during this time due to generation of taxable income in certain tax
jurisdictions. Once the Company achieves operating profits and its NOL
carryforwards have been exhausted or have expired, the Company may experience
significant tax expense.
THREE MONTHS ENDED MARCH 31, 1998
During the first quarter of fiscal year 1998, the Company continued the
development of its business operations. Commercial service commenced April 1,
1998 in the San Diego market. Insignificant revenues and network and service
costs were recorded during the first quarter as a result of alpha and beta
customer tests.
Selling, general and administrative expenses for the quarter were $2.2
million and reflect a continued increase in staffing levels, increased marketing
efforts coinciding with the launch of commercial services, and increased legal
fees associated with development of additional markets.
Interest income of $158,000 for the quarter was generated from the Company's
invested cash balances that were primarily raised through the Series A Preferred
Stock issuances in 1997 and a Series B Preferred Stock issuance of $18.0 million
in March 1998.
The Company continues to be in a NOL tax position through March 31, 1998;
consequently, no provision for income taxes was recorded in the first quarter of
1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception through March 31, 1998, the Company financed its operations
primarily through private placements of equity totaling $30.4 million and
borrowings under a note payable from a financial institution of $568,000. During
the first quarter of fiscal year 1998, the Company received proceeds of $18.0
million upon the issuance of Series B Preferred Stock; no debt was issued during
the quarter. As of March 31, 1998, the Company had an accumulated deficit of
$4.5 million and cash and cash equivalents of $26.5 million.
During the first quarter of 1998, net cash used in the Company's operating
activities was approximately $1.5 million. The net cash used for operations was
primarily due to working capital requirements and net losses, partially offset
by increases in accounts payable. Cash used by the Company for collocation fees
was $475,000. Net cash provided by financing activities was $18.3 million and
related to the issuance of Common Stock and Series A and B Preferred Stock. This
was partially offset by $220,000 in purchases of operating equipment that was
reimbursed to the Company in the second quarter of 1998 under an operating
lease. During May 1998, the Company issued 13.5% senior discount notes due 2008
for net proceeds of $144.1 million cash.
The note payable bears interest at the bank's prime rate plus 0.25% and is
secured by assets of the Company. An additional $432,000 was drawn in April
1998. The outstanding principal at April 29, 1998 is being amortized over a
36-month repayment period.
In November 1997, the Company entered into a Master Equipment Lease with Sun
Financial Group, Inc. ("SFG") to finance the Company's network equipment and
network installation and deployment. The Company as of March 31, 1998 had
utilized $1.4 million of this credit facility, and $600,000 remained available.
The facility is payable over 36 months. All related tax benefits will accrue to
the account of SFG. In May 1998, the Company entered into a financing
arrangement with SFG for up to $24.5 million of
35
<PAGE>
additional lease financing. In connection with this additional financing, the
Company issued 239,325 warrants to SFG to purchase common stock at $4.45 per
share.
ACI Corp. ("ACI") and ACI Corp.-Virginia ("ACI-Virginia"), the Company's
wholly-owned subsidiaries formed in 1998, each operate as a CLEC. ACI and
ACI-Virginia each procure, construct and operate network facilities and provide
the underlying DSL connections for Rhythms services. The network equipment held
under operating leases is for the benefit of ACI or ACI-Virginia as lessee, as
applicable.
The Company believes that the net proceeds from the Old Notes Issuance,
together with its existing cash, lease line proceeds and future revenue
generated from operations will be sufficient to fund the Company's operating
losses, capital expenditures, lease payments and working capital requirements
for the next 24 months associated with the operation of its initial 11 markets.
The Company intends to subsequently build out in other markets across the
country. The Company expects that additional financing will be required
following the initial market rollout; this may include commercial bank
borrowings, leasing, vendor financing or the private or public sale of equity or
debt securities. Actual capital requirements may vary based upon the timing and
success of the Company's rollout. The Company's capital requirements may change
as a result of regulatory, technological and competitive developments or if (i)
demand for the Company's services or its anticipated cash flow from operations
is less than expected; (ii) the Company's development plans or projections
change or prove to be inaccurate; (iii) the Company engages in any acquisitions;
or (iv) the Company accelerates deployment of its network services or otherwise
alters the schedule or targets of its rollout plan. Other than the lease
financing, the Company has no present commitments or arrangements assuring it of
any future equity or debt financing, and there can be no assurance that any such
equity or debt financing will be available to the Company on favorable terms or
at all. In the event other additional financing alternatives are not completed,
the Company believes that its existing cash resources are adequate to continue
expansion of its operations on a reduced scale. See "Risk Factors--Significant
Capital Requirements; Need For and Uncertainty of Additional Financing."
36
<PAGE>
BUSINESS
THE COMPANY
Rhythms is a comprehensive networking solutions company that provides
high-speed data communications services on an end-to-end basis to Service
Providers (as defined herein) and end users. Rhythms combines high-speed local
access through the deployment of DSL technology with capacity balanced local and
wide area networks to provide low cost networking solutions (the "Rhythms
Network"). The Rhythms Network is intended to be national in scope and to
provide national and regional ISPs, IXCs, CLECs, network and systems
integrators, value-added resellers (collectively, "Service Providers") and end
users with a secure, reliable, high throughput solution to the key shortcomings
of today's networks. Rhythms will offer turnkey end-to-end data communications
solutions that can be integrated with Service Providers' existing service
offerings to provide a comprehensive package to end users. The Company believes
the Rhythms solution will be attractive due to the Company's ability to provide
a complete networking solutions platform including (i) low cost, high-speed
local access; (ii) local and wide area balanced capacity; and (iii) end-to-end
network management.
Rhythms is positioned to capitalize on the increasing importance and rapid
growth in data networking. Rhythms' initial target markets include private line
replacement, remote LAN connectivity and Internet access. According to industry
sources, the total U.S. private line market (low-speed analog and digital
private lines and frame relay DS-0 circuits) was approximately $11.3 billion in
1997 and is expected to grow to $22.7 billion by 2000. In addition, the remote
Internet and LAN access market was approximately $5.9 billion in 1997, and is
expected to grow to $11.7 billion by 2000, representing a projected compound
annual growth rate of 26%. Based on industry sources regarding the number of
LANs in the United States, the Company believes it will be able to address 28%
of all LANs in the United States with the buildout of its initial 11 markets,
expected to be completed by the first half of 1999.
Since its inception in February 1997, Rhythms has made substantial progress
in developing a scalable platform designed to be rapidly rolled out on a
nationwide basis. The Company has signed interconnection agreements with Pacific
Bell, Bell Atlantic and U S WEST, has obtained CLEC authority in California,
Illinois, Maryland, Massachusetts, New York and Virginia, is permitted to
operate as a CLEC in Pennsylvania, and is currently in negotiations to
interconnect with five other ILECs. The Company began service trials in the
greater San Diego metropolitan area in December 1997 and began offering
commercial services in San Diego on April 1, 1998 and in San Francisco on June
1, 1998. The Company believes that the net proceeds from the Old Notes Issuance,
together with its existing cash, lease line proceeds and future revenue
generated from operations, will be sufficient to fund the Company's operating
losses, capital expenditures and working capital requirements for the next 24
months associated with the rollout and subsequent operation of its initial 11
markets. The Company intends to subsequently build out in other markets across
the country.
The Company has assembled a management team with substantial experience in
the development, growth and operation of data networking businesses. The
Company's Chief Executive Officer and President, Catherine Hapka, previously
served as President and Chief Operating Officer of !NTERPRISE Networking
Services, U S WEST's data networking business. Under her leadership, !NTERPRISE
grew from a start-up to $500 million in annual contract sales. James Greenberg,
the Company's Chief Network Officer, directed the design, planning, operation
and construction of Sprint's data networks, during which time Sprint's data
networking business grew from a multi-million to a multi-billion dollar
business. Rhythms' sponsors have invested $30.4 million in equity to date, and
include Kleiner Perkins Caufield & Byers, a leading investor in technology and
telecommunications companies, and Enron Communications Group, Inc., a subsidiary
of Enron Corporation, one of the world's largest energy producers, distributors
and marketers. Other investors include Brentwood Venture Capital, The Sprout
Group and Enterprise Partners.
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<PAGE>
MARKET OPPORTUNITY
Data communications is the fastest growing segment of the telecommunications
industry. Industry sources indicate that data traffic is growing seven times
faster than voice traffic, and that by the end of 2000 data communications will
represent nearly 77% of enterprise network traffic. Much of the growth in data
traffic will be driven by the widespread adoption of bandwidth intensive data
networking applications, such as intranets, collaborative workflow, e-commerce
and data warehousing. The growing use of such bandwidth-intensive applications
is creating a number of challenges for the existing Public Switched Telephone
Network ("PSTN"), public data networks and private networks. These challenges
affect the entire architecture of the existing telecommunications network and
limit the ability of business users to optimally leverage the benefits of new
information technologies. The Company believes that the key shortcomings of
today's networks include:
LOW-SPEED, UNRELIABLE LOCAL ACCESS. The current local access network
represents the greatest bottleneck to high performance data networking. In the
vast majority of cases, distributed workers and remote business locations must
rely on low-speed, unreliable dial-up modems or ISDN connections over the
traditional circuit-switched telephone network to gain access to their corporate
LAN or the public Internet. Industry sources predict that the number of
teleworkers/employees who spend some portion of their workday at other than
company locations will grow to approximately 66 million by 2002. Industry
sources also estimate that over 95% of teleworkers currently gain access to
their corporate LAN or the public Internet through dial-up modems, which
generally provide sub-optimal performance due to lowspeed, dropped connections
and busy signals. In addition, industry sources indicate that 88% of businesses
with intracompany networks currently use dial-up connections for site-to-site
connectivity.
INEFFICIENT NETWORK ARCHITECTURE. Current network architecture is a result
of regulatory restrictions and outdated network design. For example, prior to
deregulation brought about by the passage of the Telecommunications Act of 1996,
local and long distance networks remained separate and distinct. This
architecture results in a number of network inefficiencies, including local
traffic often traversing the long distance network to reach the same local
destination, wasting increasingly valuable wide area backbone bandwidth and
reducing overall network reliability and speed.
INCREASING NETWORK CONGESTION. Networks are becoming increasingly congested
due to the rapid growth in data traffic and the imbalance in capacity between
local and wide area networks. While high-speed local access technologies such as
DSL will be deployed to help solve the local access bottleneck, other
bottlenecks throughout the existing networks, including the PSTN, will likely
become exposed, making it necessary to redesign the existing networks.
LIMITED DISTRIBUTED STORAGE CAPACITY. Little if any distributed storage
capacity currently exists in either private or public networks. As a result,
when user volume exceeds network capacity, data transmission is either slowed or
information is lost. Today, each time a user accesses a high usage company
database or web site, the data must traverse the entire local and wide area
network, wasting capacity and decreasing user performance.
LACK OF AN INTEGRATED SOLUTION. Today, Service Providers and end users are
forced to integrate telecommunications services with offerings from multiple
vendors to create a complete network solution. This requires frequent
interactions with many representatives within the ILECs and other suppliers
resulting in a complex, time-consuming process and limited ability to
proactively monitor and manage the overall performance of customer networks.
THE RHYTHMS NETWORK SOLUTION
The Rhythms Network has been designed to meet the requirements of broadband,
highly reliable end-to-end data communications and solve the performance
problems of today's networks. The Company's
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solution offers business customers an affordable network with the performance,
reliability and security of high performance private networks. The Rhythms
Network solution consists of:
HIGH-SPEED, DEDICATED LOCAL ACCESS. Rhythms has constructed a high-speed,
"always on" (i.e., dedicated) local access network in the greater San Diego
metropolitan area using DSL technology over standard copper telephone lines to
give users access speeds of up to 7.0 Mbps downstream and 1.0 Mbps
upstream--substantially greater speeds than a standard 56 Kbps (0.056 Mbps)
modem. The Company believes this technology will offer substantially greater
price performance as compared to conventional network alternatives.
OPTIMIZED LOCAL AND WIDE AREA TRAFFIC MANAGEMENT. Rhythms' network
architecture is designed to switch and route traffic within each metropolitan
area, keeping local traffic local and sending only remote traffic over the wide
area network, thereby increasing overall network capacity and reliability.
END-TO-END BALANCED CAPACITY. In order to provide balanced local and wide
area networks, Rhythms plans to connect its high-speed local access networks to
leased backbone facilities at equivalent or greater speeds to provide uniform
throughput.
PACKAGED NETWORKING SOLUTIONS. Rhythms believes that its solutions can
offer its Channel Partners and end users national, fully integrated, local and
wide area business networking and proactive network management and monitoring.
DISTRIBUTED STORAGE. The Company plans to build storage capacity in the
network to improve network performance. This distributed storage capacity is
designed to (i) increase overall network performance by placing dense content,
software and applications close to the end user; (ii) reduce network volume by
sending high usage content over the wide area network only once, thereby
reducing the number of times that data is transmitted; and (iii) increase
overall throughput by reducing traffic levels across the wide area network.
SECURITY. The Rhythms Network is designed to provide secure communications
on an end-to-end basis by implementing both IP virtual private networks and ATM
permanent virtual circuits (PVCs) to ensure a single, secure path among customer
endpoints.
BUSINESS STRATEGY
The key elements of the Company's business strategy are as follows:
LEVERAGE EXPERIENCED MANAGEMENT TEAM. The Company believes that its ability
to combine and draw upon the diverse and extensive talent of its senior
management gives it a competitive advantage in providing data networking
solutions. The senior management team has come from industry leaders such as
Sprint, U S WEST and CompuServe. On average, each member of the senior
management team has over 15 years of experience in the data networking and
telecommunications industries.
LEAD WITH DSL LOCAL ACCESS NETWORKS. Rhythms intends to capitalize on the
attractive economic, performance and deployment characteristics of DSL to offer
users local access at speeds many times faster than conventional dial-up modems
and with a favorable performance to price ratio relative to existing
alternatives. High-speed local access bandwidth will improve the ability of
customers to better utilize bandwidth intensive applications. Over time, Rhythms
plans to offer a portfolio of high-speed local access technologies to meet
customer needs.
RAPIDLY ESTABLISH A NATIONAL FOOTPRINT. Rhythms' initial goal is to rapidly
establish a nationwide footprint capable of serving 50% of all LANs in the
United States. As part of its initial deployment in California, Rhythms has
developed a scalable implementation plan which it believes can be replicated in
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metropolitan areas nationwide. The Company believes this rollout plan will allow
it to establish early brand awareness, gain valuable market share and achieve
economies of scale.
PROVIDE BROAD MARKET COVERAGE. Rhythms intends to provide widespread,
broadband local access in each of its markets. The Rhythms Network will achieve
this coverage through collocation in ILEC central offices, which allows the
Company to offer high-speed local access to a majority of businesses and their
distributed locations and workers within a given target market. This broad
collocation strategy will enable Rhythms to significantly increase the reach of
its customers' data networks. Rhythms believes that broad deployment of its
local access services is critical in serving its Channel Partners' connectivity
needs by providing complete coverage of their customers' communities of
interest.
MINIMIZE UPFRONT CAPITAL INVESTMENT. The Company believes that the Rhythms
DSL network architecture requires lower initial and incremental capital
investment than many other currently available local access architectures, such
as cable modems and wireless alternatives. Rhythms has designed a business model
in which a significant portion of the capital deployed will be directly linked
to the success of acquiring customers.
CREATE STRATEGIC PARTNERSHIPS WITH SERVICE PROVIDERS. Rhythms intends to
develop strategic relationships with Service Providers in order to accelerate
the distribution of its service offerings. By selling its services through these
Channel Partners, Rhythms believes it will minimize its direct sales costs, gain
access to a wide audience of business customers, accelerate subscriber
penetration and, over time, speed the acceptance of new services. Rhythms
believes that its solution significantly enhances the competitiveness of its
Channel Partners by enabling them to quickly offer a national, integrated
networking services solution, without the time, expense and effort required to
integrate telecommunications services and hardware components.
TARGET MARKET OVERVIEW
Rhythms has identified three primary market segments as the focus of its
initial marketing activities: Edge Networks, Reach Networks and Legacy Networks.
In each of these segments, the Company believes that the Rhythms Network will be
capable of capturing as well as creating new demand as a result of its
attractive price performance and ease of implementation.
EDGE NETWORKS: CONNECTING DISTRIBUTED WORKERS. The number of distributed
workers is large and growing rapidly. According to industry sources, distributed
workers (teleworkers, at-home workers and self-employed professionals) account
for approximately one-third of all workers in the United States. Based on
industry sources, the Company estimates that the number of teleworkers alone
will exceed 66 million by 2002. Industry sources indicate that 90% of all
businesses have employees who work from home at least some of the time. In the
vast majority of cases, these distributed workers must rely on low-speed,
unreliable dial-up modems or ISDN connections over the traditional
circuit-switched telephone network to gain access to their private network or to
the public Internet.
REACH NETWORKS: CONNECTING INTRACOMPANY AND INTERCOMPANY SITES. The large
and growing need for reliable, secure, high-speed connections to a business'
remote offices, customers and business partners is a significant opportunity.
Industry sources indicate that 88% of intracompany communications (e.g.,
business site-to-site connections) currently depend on dial-up access either to
a private network or to the Internet. In addition, businesses have an increasing
need to be electronically linked to each other to collaborate. Intercompany
communication is largely based on dial-up connections to the Internet. Industry
sources indicate that intercompany communication is projected to grow at a much
faster rate than intracompany communication, and that by 2000 intercompany
traffic will approximately equal intracompany traffic.
LEGACY NETWORKS: REPLACING AND UPGRADING CORPORATE NETWORKS. Upgrading and
replacing slow, expensive circuits in legacy enterprise networks represents an
additional opportunity. Over the years, large
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businesses have built enterprise networks to connect multiple intracompany sites
through some combination of low-speed, dial-up, private line and frame relay
connections. In many cases, these conventional networks provide lower relative
price performance than DSL networks. According to industry sources, the total
U.S. private line market (low-speed analog and digital private lines and frame
relay DS-0 circuits) was approximately $11.3 billion in 1997 and is expected to
grow to $22.7 billion by 2000, representing a projected compound annual growth
rate of 26%.
PRODUCTS AND SERVICES
Rhythms' initial products and services will consist of (i) Power-Internet
solutions for high-speed Internet access; (ii) MetroLAN solutions for secure
intranets and extranets; (iii) Enterprise Telework solutions for remote access
to corporate applications; (iv) Legacy Network Integration solutions for private
line and frame relay networks; and (v) Distributed Storage solutions for access
to corporate software and applications.
POWER-INTERNET SOLUTIONS. Together with its ISP Channel Partners, Rhythms
offers Internet access at speeds ranging from 384 Kbps to 7.0 Mbps. The Company
intends to offer its customers a choice of speeds depending on the length and
quality of the copper loop. Unlike dial-up access or ISDN, this high bandwidth
Internet solution is always on, significantly reducing latency. The
Power-Internet solution is designed to serve customers' throughput needs with
scalable bandwidth and to protect their sites with ISP or campus firewalls.
Rhythms' existing ISP Channel Partners integrate the Rhythms Network with their
own Internet services (e.g., DNS registration, e-mail, FTP and Usenet) and
consulting/help desk services to create fully functional turnkey Internet
solutions for small, medium and large business customers. The Company intends to
sell the Power-Internet solution into the Edge and Reach Network markets. See
"-- Target Market Overview."
METROLAN SOLUTIONS. The Company's MetroLAN solution offers dedicated
network connectivity for intranets and extranets. The MetroLAN solution can be
connected to existing private networks, leveraging the investment in existing
network access devices and routers. MetroLAN is designed to provide secure
private local connectivity and access to the Internet through a secure gateway.
The Rhythms Network enables firewall capabilities, including source address
routing, packet filtering and physical address binding to ensure traffic is
delivered to subscriber destinations. The Company intends to sell the MetroLAN
solution into the Edge, Reach and Legacy Network markets.
ENTERPRISE TELEWORK SOLUTIONS. Rhythms intends to work with network and
systems integrators to configure corporate teleworker access to the Internet and
the corporate backbone, and to provide high-speed web access, e-mail and file
transfer protocol ("FTP") connectivity. This solution is designed to deliver
highly effective distributed networking, for example, for high-tech
professionals such as corporate systems administrators or network managers or
for groups of remote customer service agents located in a home office setting.
In certain cases, Rhythms will work with information technology departments to
integrate applications at the teleworker's home desktop, or in other cases, host
the end-user's corporate applications on the Rhythms Network. The Company
intends to sell the Enterprise Telework solution into the Edge Network market.
LEGACY NETWORK INTEGRATION SOLUTIONS. Rhythms intends to offer a
comprehensive network solution to upgrade or replace legacy private line
networks and low-speed frame relay networks. For businesses with legacy private
line networks supporting systems network architecture ("SNA") traffic or delay
sensitive traffic, Rhythms intends to provide a more reliable, cost effective
data network. For existing low-speed frame relay networks, Rhythms plans to
re-engineer multi-carrier interfaces to enable frame relay over DSL and private
connections to end user sites, improving network carrying capacity and security.
The Company intends to sell the Legacy Network Integration solution into the
Legacy Network market.
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DISTRIBUTED STORAGE SOLUTIONS. The Distributed Storage solution is designed
to provide cost effective, reliable and secure distributed storage of content
rich data files (e.g., software upgrades, catalogs and customer databases) for
remote business locations and distributed workers. Businesses can store their
data intensive files on servers that reside in each Rhythms Metro Service
Center, giving users more rapid response to their requests for downloads by
reducing the distance the data must travel. In addition, contention among users
simultaneously attempting to access a single host computer will be reduced by
distributing the access load among multiple hosts, each located in a Rhythms
Metro Service Center. The Company intends to sell the Distributed Storage
solution into the Edge and Reach Network markets.
SALES AND MARKETING
As of June 1998, the Company employed a sales and technical support force of
approximately 15 persons in California. The Company will increase the size of
its sales and technical support force to recruit and support new Channel
Partners and to sell and support end users as it enters new markets.
Rhythms' sales strategy will focus on entering into partner relationships
with a variety of indirect channels, including Service Providers, to sell its
solutions to end users. The Company believes that distribution arrangements with
such Service Providers will give it access to their large customer bases.
Rhythms intends to strategically partner with those companies that offer
services to information-intensive businesses with multiple locations and
distributed workers and that provide superior customer service. These Channel
Partners relationships will include distribution and resale arrangements.
Marketing support services include training, proposal development, channel
support materials, web promotion, joint participation in national and regional
customer events, trade shows and press announcements. Rhythms intends to bring
to its Channel Partners a fully integrated network solution. The Company intends
to relieve its Channel Partners of the burden of acting as a network integrator
by qualifying potential customers, ordering connections, installing and turning
up network services, installing equipment on the customer premises, monitoring
the network, trouble shooting, making repairs and providing a single bill.
To date, the Company has primarily offered its services through ISPs in San
Diego. Rhythms has entered into commercial arrangements with 10 ISPs in San
Diego and five ISPs in San Francisco. The Company is also seeking to sell its
solutions directly to select enterprise customers that have large numbers of
distributed locations and workers currently using hundreds or thousands of ISDN
or dial-up connections. Rhythms has entered into a trial agreement with Cisco
Systems, Inc. and a commercial agreement with QUALCOMM.
The Company began service trials in San Diego in December 1997 and began
offering commercial services in the San Diego area on April 1, 1998 and in San
Francisco on June 1, 1998. Rhythms plans to launch its services in San Jose and
East Bay in July 1998 and Los Angeles and Orange County in September 1998.
CUSTOMER SERVICE
Rhythms intends to offer both its Channel Partners and end users a single
point of contact for implementation, maintenance and billing. The Rhythms
Customer Service Center ("RCSC"), located in Englewood, Colorado, is available
at 1.800.RHYTHMS, from 8 a.m. to 6 p.m., mountain standard time, five days a
week. The Rhythms Network Operations Center ("RNOC"), working in tandem with the
RCSC, will provide both proactive and customer initiated maintenance services
and operates 24 hours a day, seven days a week. The Company intends to develop
web-based systems to support customer transactions electronically.
IMPLEMENTATION. Working with a Channel Partner, a Rhythms customer service
technician and a sales engineer will develop a project implementation plan for
each customer. The plan will include qualifying
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the customer (i.e., for DSL-based services, determining the availability of an
appropriate copper loop for the customer) for the Company's service offerings,
placing orders for the connection facilities, coordinating the delivery of the
connection, turn up and final installation. In the San Diego and San Francisco
markets, Rhythms has entered into an arrangement with Genicom, Inc. ("Genicom"),
under which Genicom will provide field services for the Company 24 hours a day,
seven days a week. The Company intends to use third parties for field services
in other markets.
MAINTENANCE. The RNOC provides network surveillance through standard Simple
Network Management Protocol ("SNMP") tools for each element in the Rhythms
network. Because the Company has complete visibility of the customer's network,
Rhythms believes it will be able to proactively detect and correct the majority
of the customer's maintenance problems remotely. The Company's goal is to
proactively detect and repair 90% of the customer's maintenance problems before
the customer is aware of a problem. The Company believes that customer initiated
maintenance and repair requests will be managed and resolved primarily through
the RCSC. The Company will utilize a trouble ticket management system to
communicate customer maintenance problems from the RCSC to the RNOC engineers
and the field services providers.
BILLING. Customer bills are currently issued on a monthly basis through the
Company's internal systems. Customer billing inquiries are managed by the RCSC.
The Company has entered into an arrangement with Federal Trans Tel, Inc. ("FTT")
under which, beginning June 30, 1998, FTT has agreed to provide all of the
Company's billing requirements, including service rating, invoicing, bill
creation, mailing, lock box receipts, remittance processing and tax reporting.
The RCSC will continue to be the single point of contact for billing inquiries.
CUSTOMER SUPPORT SYSTEMS. The Company's system architecture is designed to
facilitate rapid service responsiveness and reduce the cost of customer support.
An integrated set of standard, off-the-shelf systems is used to support the
Company's business processes. All business functions, including sales, ordering,
provisioning, maintenance and repair, billing, accounting and decision support,
are designed to use a single database repository, ensuring that every function
has accurate, up-to-date information. Automation within and between processes is
enabled through the use of client/server tools and scalable Unix and Microsoft
NT servers.
SERVICE DEPLOYMENT
To rapidly rollout services in new markets, Rhythms has developed a
structured methodology and process for selecting target cities, deploying its
high performance network services and identifying potential Channel Partners.
The Company developed a prototype rapid deployment process in San Diego and in
San Francisco and is currently replicating this model in East Bay and San Jose
(expected July 1998) and Los Angeles and Orange County (expected September
1998). The Company believes that the rapid deployment process will significantly
reduce time to market and can be refined and replicated in its other targeted
markets.
The target cities were selected based on high volumes and concentrations of
LANs, both of which the Company believes are the best indicators of data
intensive business density. Network deployment locations within a metropolitan
market are selected using proprietary demographic algorithms applied to third
party databases of businesses and households. These concentrations of businesses
and high income households are plotted using sophisticated mapping software that
also overlays ILEC CO boundaries with street level detail.
Rhythms' rapid deployment process includes an integrated operations buildout
and market development plan to achieve multiple objectives in parallel. The
network related processes include identifying space facilities; designing the
metropolitan network; ordering, staging and installing equipment; and turning up
the network and the support infrastructure. Concurrently, the sales, business
development and
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marketing teams staff the sales and technical support positions, attempt to
identify and engage the best Channel Partners and launch a marketing and public
relations campaign.
THE RHYTHMS NETWORK ARCHITECTURE
The Rhythms Network Architecture consists of endpoints, transport, Rhythms
Connection Points ("RCPs"), Rhythms Metro Service Centers ("RMSCs") and the
Rhythms Backbone, all centrally managed by the RNOC. These components are
integrated into local, metropolitan and wide area networks that combine speed
and balanced capacity in a manner designed to deliver a high performance
networking experience for the Company's customers.
ENDPOINT. The Rhythms Network begins with the integration of the Rhythms
endpoint device into the customer's personal computer, local area network or
enterprise router. The Company currently offers DSL and private line DS-1 level
and higher connectivity but is not limited to these technologies. For DSL
access, the Company will provide a DSL modem at the customer premises. For DS-1
level and higher access, the Company intends to provide a channel/digital
service unit on the customer premise.
TRANSPORT. Rhythms transport connects customer endpoints to the Rhythms
Network. For subscriber loop access, the transport is a DSL-capable copper loop
ordered by Rhythms from an ILEC. For DS-1 level and higher access, the transport
is leased copper or fiber trunks provided by the ILEC or a CAP. The Company will
act as a single point of contact between its customers and the transport vendors
and will manage the ordering, engineering and implementation processes
associated with connecting the customer endpoint and transport to the Rhythms
Network.
RHYTHMS CONNECTION POINT. An RCP is a physical point of presence within a
market that will connect the DSL equipped copper loop to the Company's DSL
multiplexing equipment. The Company expects that RCPs will typically be
collocated within an ILEC CO, at multiple points throughout a metropolitan area.
RHYTHMS METRO SERVICE CENTER. An RMSC is a physical point of presence
within a market that will accept high speed connectivity over SONET rings from
the RCPs. The Company expects to have one RMSC for each of its markets. The RMSC
houses the Company's ATM switches, IP routers and application servers to connect
traffic to and from a customer endpoint within a region or across the Rhythms
Backbone.
RHYTHMS BACKBONE. The Rhythms Backbone will interconnect RMSCs so that data
traffic can be transported between customer endpoints located in different
regions. Initially, the Company intends to lease high speed ATM, frame relay and
IP technologies from third parties to create the Rhythms Backbone.
COMPETITION
Rhythms will face competition from many competitors with significantly
greater financial resources, well-established brand names, and large, existing
installed customer bases. Moreover, the Company expects the level of competition
to intensify in the future. The Company expects significant competition from
ILECs, traditional and new IXCs, CAPs, CLECs, cable modem service providers,
ISPs and wireless and satellite data service providers.
Many of these competitors are offering (or may soon offer) technologies and
services that will directly compete with some or all of the Company's service
offerings. Such technologies include ISDN, DSL, wireless data and cable modems.
Some of the competitive factors in the Company's markets include transmission
speed, reliability of service, breadth of service availability, price
performance, network security, ease of access and use, content bundling,
customer support, brand recognition, operating experience, capital availability
and exclusive contracts. The Company believes that it compares unfavorably with
its competitors with regard to, among other things, brand recognition, existing
relationships with end-
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users, available pricing discounts, ILEC CO access, capital availability and
exclusive contracts. Substantially all of the Company's competitors and
potential competitors have substantially greater resources than the Company.
There can be no assurance that the Company will be able to compete effectively
in its target markets.
INCUMBENT LOCAL EXCHANGE CARRIERS. ILECs, such as GTE and U S WEST, are
leasing wide area connectivity from IXCs, have existing metropolitan area
networks and have circuit-switched local access networks. In addition, most
ILECs are establishing their own ISP businesses and are presently conducting
technical and/or market trials of DSL-based services. Most ILECs have announced
commercial DSL services in certain areas. The Company believes that ILECs have
the potential to quickly overcome many of the issues that have delayed
widespread deployment of DSL services in the past; if and when they do so, the
ILECs will represent strong competition in all of the Company's target markets.
The ILECs have an established brand name in their service areas, possess
sufficient capital to deploy DSL services rapidly and are in a position to offer
service from central offices where the Company may be unable to secure
collocation space.
TRADITIONAL INTER-EXCHANGE CARRIERS, FIBER BASED CAPS AND COMBINATIONS OF
THE TWO. Long distance companies such as WorldCom and AT&T already have, or are
rapidly acquiring, all of the network functionality needed to support
high-speed, end-to-end networking services. This functionality includes wide
area networking (e.g., WorldCom and MCI); metropolitan area networking (e.g.,
WorldCom's acquisition of MFS Communications Company, Inc. and Brooks Fiber
Properties, Inc.; Qwest/LCI; and AT&T's acquisition of Teleport Internet
Services and its announced TCI merger); distributed local access (e.g.,
WorldCom's alliance with MFS); and basic ISP services (e.g., WorldCom's
ownership of UUNET Technologies, Inc., ANS Communications, Inc. and CompuServe;
AT&T's association with TCG CERFnet, Inc.; and Sprint's partnership with
EarthLink Network, Inc.). These carriers have deployed large scale networks,
have large numbers of existing business and residential customers and enjoy
strong brand recognition. For instance, these companies have extensive fiber
networks in many metropolitan areas that primarily provide high speed digital
and voice elements to large companies. These companies could deploy high speed
off-net services using DSL in combination with their current fiber networks.
They also have interconnection agreements with many of the ILECs and have
secured collocation spaces from which they could begin to offer competitive DSL
services. Sprint made an announcement in May 1998 of its intent to create a
high-speed end-to-end data network.
NEW INTER-EXCHANGE CARRIERS. Long-haul backbone providers, such as
Williams, Qwest and Level 3 Communications, Inc., are building and managing high
bandwidth, nationwide IP-based packet technology networks for the wide area
network. These same providers are acquiring or partnering with ISPs to provide
gateways to the public Internet and basic ISP services (e.g.,
Williams/Concentric, IXC/PSINet, Qwest/ Supernet, Inc.). These companies could
extend their existing networks to include fiber metropolitan area networks and
high speed, off-net services using DSL, either alone, or in partnership with
others.
CABLE MODEM SERVICE PROVIDERS. Cable modem service providers such as @Home
Networks (and their respective cable partners) are deploying high-speed Internet
access services over hybrid fiber coaxial cable networks. Where deployed, these
networks provide local access services similar to the Company's services, and in
some cases at higher speed. They also offer these services at lower price points
than the Company's services and target both residential and business customers.
They achieve these lower price points in part by sharing the bandwidth available
on the cable network among multiple end users. Actual or prospective cable modem
service provider competition may have a significant negative effect on the
ability of the Company to secure customers and may create downward pressure on
the prices the Company can charge for its services.
WIRELESS AND SATELLITE DATA SERVICE PROVIDERS. Wireless and satellite data
service providers are developing wireless and satellite-based Internet
connectivity. The Company may face competition from terrestrial
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wireless services, including 2 GHz and 28 GHz wireless cable systems
(Multi-channel Multi-point Distribution System ("MMDS") and Local Multi-channel
Distribution System ("LMDS")), and 18 GHz and 38 GHz point-to-point microwave
systems. For example, the FCC is currently considering new rules to permit MMDS
licensees to use their systems to offer two-way services, including high-speed
data, rather than solely to provide one-way video services. The FCC also
recently auctioned LMDS licenses in all markets which can be used for high-speed
data services and Internet access. In addition, companies such as Teligent,
Inc., Advanced Radio Telecom Corp. and WinStar Communications, Inc. hold
point-to-point and point-to-multi-point microwave licenses to provide fixed
wireless services such as voice, data, Internet access and video. The Company
also may face competition from satellite-based systems. Motorola Satellite
Systems, Inc., Hughes Space Communications (a subsidiary of Hughes Electronic
Corporation), Teledesic, Iridium World Communications, Ltd., Globalstar and
others are planning or are in the process of building global satellite networks
which can be used to provide broadband voice and data services. In January 1997,
the FCC allocated 300 MHz of spectrum in the 5 GHz band for unlicensed devices
to provide short-range, high-speed wireless digital communications. These
frequencies must be shared with incumbent users without causing interference.
Although the allocation is designed to facilitate the creation of new wireless
LANs, it is too early to predict what kind of equipment might ultimately be
manufactured and for what purposes it might be utilized.
INTERNET SERVICE PROVIDERS. Independent ISPs such as Concentric Network
Corporation and Mindspring Enterprises provide Internet access to residential
and business customers, generally using the existing PSTN at ISDN speeds or
below. Some ISPs, such as HarvardNet, Inc. in Massachusetts, InterAccess in
Illinois and Vitts Network in New Hampshire, have begun offering DSL-based
services. To the extent the Company is not able to partner with ISPs to provide
its services, ISPs could become DSL service providers competitive with the
Company.
OTHER CLECS. Other companies have plans to enter the market and offer
high-speed data services using a business strategy similar to that of the
Company. The 1996 Act specifically grants CLECs the right to negotiate
interconnection agreements with ILECs. Furthermore, the 1996 Act allows CLECs to
enter into interconnection agreements which are identical in all respects to
that of the Company. Certain CLECs, including Covad and NorthPoint, have begun
offering DSL-based access services, and others are likely to do so in the
future.
GOVERNMENT REGULATIONS
Some of the services offered by the Company, particularly by its
wholly-owned ACI Corp. and ACI Corp. - Virginia subsidiaries may be subject to
regulation at the federal, state and/or local levels. There can be no assurance
that current or future federal or state regulations or legislation and therefore
have a material adverse impact on the Company's business prospects, operating
results, financing condition, and ability to make payments on its indebtedness,
including the New Notes. In addition, participation in proceedings setting rules
at either the federal or state level could consume significant financial and
managerial resources, with no assurance of an outcome favorable to the Company.
FEDERAL LEGISLATION AND REGULATION
THE 1996 ACT. The 1996 Act, enacted on February 8, 1996, substantially
departs from prior legislation in the telecommunications industry by
establishing local exchange competition as a national policy through the removal
of state regulatory barriers to competition and the preemption of laws
restricting competition in the local exchange market.
The 1996 Act in some sections is self-executing, but in most cases the FCC
must issue regulations that identify specific requirements before the Company
and its competitors can proceed to implement the changes the 1996 Act
prescribes. The outcome of these various ongoing FCC rulemaking proceedings or
judicial appeals of such proceedings could materially affect the Company's
business prospects, operating
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results, financial condition and its ability to make principal and interest
payments on its indebtedness, including the New Notes.
The Federal Communications Commission ("FCC") prescribes rules applicable to
interstate communications, including rules implementing the 1996
Telecommunications Act (the "1996 Act"), a responsibility it shares with the
state regulatory commissions. The 1996 Act removed many of the remaining
barriers to local competition, and the FCC's initial rules interpreting the Act
(the "FCC Order") were generally encouraging to increased local competition. A
federal appeals court for the 8th Circuit reviewed the FCC Order, and overruled
some of its provisions, including some rules on pricing and nondiscrimination.
That ruling is itself to be reviewed by the U.S. Supreme Court. In December,
1997 a federal court in Texas ruled unconstitutional the 1996 Act's requirement
that former Bell System ILECs cannot provide interLATA services until they meet
certain requirements. This could reduce the incentives of those ILECs to
cooperate in opening their markets to competition. The FCC and other parties
have asked the U.S. Supreme Court to review this ruling. In May, 1998 a federal
court in Washington, D.C. ruled that other 1996 Act limitations on Bell System
ILECs are not unconstitutional. These contrasting rulings may be resolved by the
U.S. Supreme Court at some point. There can be no assurance that the final
outcome of these reviews will not have a material adverse impact on the Company.
In addition, four of the Regional Bell Companies have petitioned the FCC to be
relieved of certain regulatory requirements in connection with their own DSL
services, including obligations to unbundle DSL-equipped loops (but not the
obligation to unbundle the loops Rhythms purchases for its DSL services). There
can be no assurance that the final outcome of these petitions or other
proceedings interpreting the requirements of the 1996 Act will not have a
material adverse impact on the Company.
STATE REGULATION
Some of the Company's services, particularly those of ACI Corp. and ACI
Corp. -Virginia, may be classified as intrastate services subject to state
regulation. All of the states where the Company operates, or will operate,
require some degree of state regulatory commission approval to provide certain
intrastate services. In most states, intrastate tariffs are also required for
various intrastate services, although the Company is not typically subject to
price or rate of return regulation for tariffed intrastate services. Actions by
state public utility commissions could cause the Company to incur substantial
legal and administrative expenses.
Under the 1996 Act, if a request is made by the Company, ILECs have a
statutory duty to negotiate in good faith with the Company for agreements for
interconnection and access to unbundled network elements. These negotiations are
conducted on a region-wide basis, and individual agreements are then signed for
each of the states in the region for which a request has been made. The Company
has completed interconnection negotiations with Bell Atlantic, Pacific Bell and
US West. The Company and Ameritech currently are negotiating interconnection
agreements for Illinois and Michigan. The Company and Bell Atlantic have signed
an agreement for Pennsylvania, and are currently negotiating agreements for
Massachusetts, New York, New Jersey, Maryland and Virginia. The Company and
Pacific Bell have signed an agreement for California. The Company and U S West
have signed an agreement for Washington, and are currently negotiating
agreements for Colorado, Arizona and Oregon. In addition, the Company is
currently negotiating with SNET for Connecticut, with GTE for Washington,
Oregon, California and Florida, with SBC for Texas, Missouri and Kansas, and
with BellSouth for Georgia and Florida. There can be no assurance that these
interconnection agreements will be on terms that are entirely satisfactory to
the Company.
During these negotiations, the Company or the ILEC may submit disputes to
the state regulatory commissions for mediation and, after the expiration of the
statutory negotiation period set forth in the 1996 Act, the parties may submit
outstanding disputes to the states for arbitration. To date, the Company has not
submitted any disputes to the states for mediation or arbitration.
47
<PAGE>
Under the 1996 Act, states have begun and, in a number of cases, completed
regulatory proceedings to determine the pricing of UNEs and services, and the
results of these proceedings will determine whether it is economically
attractive to use these elements.
LOCAL GOVERNMENT REGULATION
Should the Company in the future decide to operate its own transport
facilities over public rights-of-way, it may be required to obtain various
permits and authorizations from municipalities in which it operates such
facilities. Some municipalities may seek to impose similar requirements on users
of transmission facilities, even though they do not own such facilities. The
actions of municipal governments in imposing conditions on the grant of permits
or other authorizations or their failure to act in granting such permits or
other authorizations could have a material adverse effect on the Company's
business.
EMPLOYEES
As of June 1998, the Company had approximately 75 employees. The Company
believes that its future success will depend in part on its continued ability to
attract, hire and retain qualified personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to
identify, attract and retain such personnel in the future. None of the Company's
employees are represented by a labor union or are the subject of a collective
bargaining agreement. The Company has never experienced a work stoppage and
believes that its employee relations are good.
PROPERTIES
The Company's headquarters are located in facilities consisting of
approximately 34,000 square feet in Englewood, Colorado, which the Company
occupies under a lease that expires in October 1999. The Company also leases
space in a number of other locations for network equipment installations.
LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings. The Company
is, however, subject to state commission, FCC and court decisions as they relate
to the interpretation and implementation of the 1996 Act, the interpretation of
CLEC interconnection agreements in general and the Company's interconnection
agreements in particular. In some cases, the Company may be deemed to be bound
by the results of ongoing proceedings of these bodies. The Company therefore may
participate in proceedings before these regulatory agencies or judicial bodies
that affect, and allow the Company to advance, the Company's business plans.
48
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the executive officers
and the directors of the Company as of the date of this Prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Catherine M. Hapka............................ 44 President, Chief Executive Officer and Director
James A. Greenberg............................ 37 Chief Network Officer
Jeffrey Blumenfeld............................ 50 Vice President and General Counsel
Scott C. Chandler............................. 36 Chief Financial Officer
Joseph R. D'Angelo............................ 32 Vice President and General Manager, Eastern Region
Gloria A. Farler.............................. 50 Vice President, Marketing Support
Eric H. Geis.................................. 52 Vice President and General Manager, Western Region
Rand A. Kennedy............................... 40 Vice President and Chief Network Architect
Robert T. Masitti............................. 36 Vice President, Operations and Information Systems
James J. Masterson............................ 42 Vice President, Business Development
Fredrick H. Smith............................. 40 Vice President, National Sales
Kevin R. Compton.............................. 39 Director
Keith B. Geeslin.............................. 45 Director
Ken L. Harrison............................... 55 Director
William R. Stensrud........................... 48 Director
John L. Walecka............................... 38 Director
</TABLE>
All the officers identified above serve at the discretion of the Board of
Directors of the Company. There are no family relationships between any persons
identified above. The following are brief biographies of the persons identified
above.
CATHERINE M. HAPKA has been President, Chief Executive Officer and a
Director of the Company since June 1997. Prior to joining Rhythms, Ms. Hapka
served as President of NETS, Inc., an electronic commerce software company, from
March 1997 to May 1997. Prior to joining NETS, Inc., Ms. Hapka served as
Executive Vice President, Markets, for U S WEST Communications, Inc. ("U S
WEST") from January 1995 to October 1996. In this capacity, Ms. Hapka led
business and consumer telecommunications units responsible for the voice, data,
wireless, video and long distance businesses. From 1991 to 1994, Ms. Hapka
served as President and Chief Operating Officer of the !NTERPRISE Networking
Services Unit of U S WEST ("!NTERPRISE"). Prior to joining U S WEST, Ms. Hapka
held general management positions with General Electric and McKinsey & Co., Inc.
JAMES A. GREENBERG has been the Chief Network Officer of the Company since
July 1997. From January 1990 to July 1997, Mr. Greenberg served in various
positions at Sprint Communications, most recently as Senior Director and interim
Vice President of the Data Operation and Engineering Group. In that capacity,
Mr. Greenberg directed the design, planning, operation and construction of
Sprint's data networks.
JEFFREY BLUMENFELD has been Vice President and General Counsel of the
Company since August 1997, and has been a partner in the Washington, D.C. law
firm of Blumenfeld & Cohen since 1984, which specializes in pro-competition
advocacy for technology-intensive companies. Since 1995, Mr. Blumenfeld has
served as senior trial counsel to the Antitrust Division of the U.S. Department
of Justice in several matters. Before starting Blumenfeld & Cohen in 1984, Mr.
Blumenfeld held positions with the U.S.
49
<PAGE>
Department of Justice from 1973 to 1984, most recently as Chief of the U.S. v.
AT&T staff of the Antitrust Division. Mr. Blumenfeld is an adjunct professor of
communications law at the Georgetown University Law Center. Pursuant to his
employment agreement, Mr. Blumenfeld has agreed to expend approximately 24 hours
a week in his capacity as an officer of the Company. See "--Employment
Agreements and Change in Control Arrangements."
SCOTT C. CHANDLER has served as the Company's Chief Financial Officer since
April 1998. From August 1996 to April 1998, Mr. Chandler served as President and
Chief Executive Officer of C-Cor Electronics, Inc., a manufacturer of broadband
telecommunications equipment. From June 1990 to August 1996, Mr. Chandler served
in various positions at U S WEST and its subsidiaries, most recently as Vice
President-General Manager of U S WEST Cable & Multimedia from September 1995 to
August 1996. While at U S WEST, Mr. Chandler also served as Vice President and
General Manager of the U S WEST subsidiary, !NTERPRISE AMERICA, from January
1994 to August 1995 and as Director of Vendor Relations/Channel Support of
!NTERPRISE Networking Services from January 1992 to December 1993.
JOSEPH R. D'ANGELO has served as Vice President and General Manager, Eastern
Region, of the Company since August 1997 and also served as its Acting Chief
Financial Officer from August 1997 to April 1998. Prior to joining the Company,
Mr. D'Angelo served in a variety of positions from August 1992 through August
1997 in marketing, sales, business development and general management at Sprint
Communications. Most recently, Mr. D'Angelo served as a Project Director in the
Sprint Business Division of Sprint Long Distance.
GLORIA A. FARLER has been Vice President, Marketing Support of the Company
since October 1997. From January 1993 until she joined Rhythms, Ms. Farler was
employed by U S WEST, most recently as Executive Director, Market Intelligence
and Decision Support. Ms. Farler also led multi-disciplinary marketing strategy
teams serving all of U S WEST's business and operating units and provided
counsel on new business ventures, customer loyalty programs and competitive
response strategy.
ERIC H. GEIS has been Vice President and General Manager, Western Region of
the Company since June 1997 and was a consultant to the Company from April 1997
to June 1997. From November 1995 to December 1996, Mr. Geis served as National
Sales Director at GRC International, a producer and seller of wide area data
network design and optimization software applications. Between July 1991 and
November 1995, Mr. Geis served as President and Chief Executive Officer of
Quintessential Solutions Inc., a provider of WAN design, pricing and
optimization software applications for IXCs, RBOCs, ILECs, ISPs and major
corporate accounts. Mr. Geis was also Founder, President and Chief Executive
Officer of TeleQuest, Inc., a telecommunications products company from May 1983
to December 1990.
RAND A. KENNEDY has served as Vice President and Chief Network Architect of
the Company since August 1997. Prior to joining Rhythms, Mr. Kennedy held
various positions at CompuServe Incorporated ("CompuServe") between 1976 and
1997, most recently in the position of Principal Network Architect. In that
capacity, Mr. Kennedy directed the engineering of CompuServe's global 500+ POP
network. While at CompuServe, Mr. Kennedy was awarded a United States Patent for
communications technology involving financial card authorization. In addition,
Mr. Kennedy holds lead committee positions within the ATM Forum and the DSL
Forum.
ROBERT T. MASITTI has served as Vice President, Operations and Information
Systems of the Company since August 1997. From January 1996 until he joined the
Company, Mr. Masitti served as Manager of Operations at Sprint's Internet
Service Center, where he supervised a team of 54 engineers. Previously, Mr.
Masitti served as Manager of Data Systems for Sprint Long Distance from February
1993 to December 1995. While at Sprint, Mr. Masitti received both Sprint's Quest
for Excellence and Impact awards for outstanding contributions in customer
service and cost improvement, and the Sprint Diamond Award, the Business
Division's highest technical award.
50
<PAGE>
JAMES J. MASTERSON has been Vice President, Business Development of the
Company since October 1997. Prior to joining Rhythms, Mr. Masterson was a
founding member of !NTERPRISE. From January 1993 to October 1997, Mr. Masterson
held a variety of management positions at !NTERPRISE, most recently as Vice
President of Sales Channels, where he was responsible for sales and channel
management for data products. From January 1995 to April 1996, as Director of
Data Integration at !NTERPRISE, Mr. Masterson crafted that company's strategic
partnership strategy.
FREDRICK H. SMITH has been Vice President, National Sales of the Company
since July 1997. From October 1994 until he joined Rhythms, Mr. Smith served as
Vice President and General Partner at Bolder Heuristics, Inc., an advanced
software applications integrator. Previously, Mr. Smith served as Vice President
of Sales and Marketing for Supernet, Inc., an ISP recently acquired by Qwest
from February 1994 to October 1994. From November 1992 to February 1994, Mr.
Smith also served as Director of Sales Support of !NTERPRISE, where he was
responsible for market development, merchandising and sales channel development.
KEVIN R. COMPTON has been a Director of Rhythms since July 1997. Since 1990,
Mr. Compton has served as a general partner of Kleiner Perkins Caufield & Byers,
a venture capital investment firm ("KPCB"). Mr. Compton is a director of Citrix
Systems, Inc., Digital Generation Systems, Inc., Global Village Communication,
Inc. and Corsair Communications, Inc., and is also a director of several
privately held companies. Mr. Compton was elected to the position of Director of
the Company as the nominee of KPCB, pursuant to the terms of a voting agreement.
See "Description of Capital Stock--Board Representation Rights and Voting."
KEITH B. GEESLIN has been a Director of Rhythms since July 1997. Since 1988,
Mr. Geeslin has served as a general partner of The Sprout Group, a venture
capital investment firm. Mr. Geeslin is a director of Actel Corp. and SDL, Inc.,
and is also a director of several privately held companies, including Paradyne
Corporation, a DSL equipment manufacturer and supplier to the Company. Mr.
Geeslin was elected to the position of Director of the Company as the nominee of
The Sprout Group, pursuant to the terms of a voting agreement. See "Description
of Capital Stock--Board Representation Rights and Voting."
KEN L. HARRISON has been a Director of Rhythms since March 1998. Since 1975,
Mr. Harrison has held various management positions at Portland General Electric
Company, where he currently serves as its Chairman and Chief Executive Officer,
a position he has held since December 1988. In addition, Mr. Harrison currently
serves as Vice Chairman and is a Director of Enron Corporation, a position he
has held since July 1997. Mr. Harrison has also served as Chairman of Enron
Communications Group, Inc. since September 1997, and as a Director of Enron Oil
and Gas Corporation since October 1997. Mr. Harrison was elected to the position
of Director of the Company as the nominee of Enron, pursuant to the terms of a
voting agreement. See "Description of Capital Stock--Board Representation Rights
and Voting."
WILLIAM R. STENSRUD has been a Director of Rhythms since its inception in
February 1997 and also served as its President and Chief Executive Officer of
the Company from February 1997 to June 1997. Mr. Stensrud has been a general
partner at the venture capital investment firm of Enterprise Partners since
January 1997. From June 1996 through December 1996, Mr. Stensrud served as
President of Paradyne Corporation. Previously, from February 1992 to March 1996,
Mr. Stensrud served as President and Chief Executive Officer of Primary Access
Corporation. Mr. Stensrud is a director of several privately held companies,
including Paradyne Corporation. Mr. Stensrud was elected to the position of
Director of the Company as the nominee of Enterprise Partners, pursuant to the
terms of a voting agreement. See "Description of Capital Stock--Board
Representation Rights and Voting."
JOHN L. WALECKA has been a Director of Rhythms since July 1997. Since 1984,
Mr. Walecka has served as a general partner of Brentwood Venture Capital, a
venture capital investment firm. Mr. Walecka is a director of Documentum, Inc.
and Xylan Corporation, and is also a director of several privately held
companies. Mr. Walecka was elected to the position of Director of the Company as
the nominee of
51
<PAGE>
Brentwood Venture Capital, pursuant to the terms of a voting agreement. See
"Description of Capital Stock Board Representation Rights and Voting."
DIRECTOR COMPENSATION
Except for grants of stock options, Directors of the Company do not receive
compensation for services provided as a Director or for participation on any
committee of the Board of Directors. All Board members are reimbursed for their
out-of-pocket expenses in serving on the Board of Directors or any committee
thereof.
EXECUTIVE COMPENSATION
The following table sets forth, for 1997, the compensation earned by the
Company's Chief Executive Officer, its former President and Chief Executive
Officer who resigned in June 1997 and its two other most highly compensated
executive officers (the "Named Executive Officers") whose total compensation for
1997 exceeded $100,000 for services rendered to the Company in all capacities
during that year. No executive who would otherwise have been includable in such
table on the basis of salary and bonus earned for 1997 has resigned or otherwise
terminated employment during 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
-------------------------------- STOCK UNDERLYING
NAME AND PRINCIPAL POSITION(S) YEAR SALARY BONUS AWARD(S) OPTIONS (#)
- ------------------------------------------------------------ --------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Catherine M. Hapka (1)...................................... 1997 $ 163,654 $ 50,000 $ -- 1,460,377(2)
President, Chief Executive Officer and Director 365,094(3)
William R. Stensrud (4)..................................... 1997 -- -- -- --
President, Chief Executive Officer and Director
James A. Greenberg (5)...................................... 1997 63,205 16,615 -- 228,184(2)
Chief Network Officer
Eric H. Geis (7)............................................ 1997 96,519 18,417 -- 55,000(2)
Vice President and General Manager
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION(S) COMPENSATION
- ------------------------------------------------------------ -------------
<S> <C>
Catherine M. Hapka (1)...................................... $ --
President, Chief Executive Officer and Director
William R. Stensrud (4)..................................... --
President, Chief Executive Officer and Director
James A. Greenberg (5)...................................... 50,000(6)
Chief Network Officer
Eric H. Geis (7)............................................ --
Vice President and General Manager
</TABLE>
- ------------------------
(1) Ms. Hapka has been employed by the Company since June 1997 and the amount
listed sets forth her compensation since such date.
(2) Represents the number of shares of Common Stock that may be purchased upon
the exercise of options.
(3) Represents the number of shares of Series A Preferred Stock that may be
purchased in accordance with Ms. Hapka's employment agreement. See
Employment Agreements and Change in Control Arrangements.
(4) Mr. Stensrud served as the Company's President and Chief Executive Officer
from its inception in February 1997 to June 1997. He received no
compensation for his services.
(5) Mr. Greenberg has been employed by the Company since July 1997 and the
amount listed sets forth his compensation since such date.
(6) Represents a flat fee relocation payment made by the Company.
(7) Mr. Geis has been employed by the Company since April 1997 and the amount
listed sets forth his compensation since such date.
52
<PAGE>
The following table sets forth information with respect to stock options
granted by the Company to the Named Executive Officers during 1997 pursuant to
the 1997 Stock Option/Stock Issuance Plan. No stock appreciation rights were
granted to the Named Executive Officers during 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES PRICE PER ---------------------
NAME GRANTED IN 1997(2) SHARE EXPIRATION DATE 0% 5%
- --------------------------------------- ---------- ------------- ----------- --------------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Common Stock:
Catherine M. Hapka................... 1,460,377 52.5% $ 0.10 August 14, 2007 -- $ 91,842
William R. Stensrud.................. -- -- -- -- -- --
James A. Greenberg................... 228,184 8.2 0.10 August 14, 2007 -- 14,350
Eric H. Geis......................... 55,000 2.0 0.10 October 29, 2007 -- 3,459
Series A Preferred Stock:
Catherine M. Hapka................... 365,094 13.1 0.80 December 31, 1998 $ 73,019 103,032
<CAPTION>
NAME 10%
- --------------------------------------- ----------
<S> <C>
Common Stock:
Catherine M. Hapka................... $ 232,746
William R. Stensrud.................. --
James A. Greenberg................... 36,367
Eric H. Geis......................... 8,766
Series A Preferred Stock:
Catherine M. Hapka................... 135,373
</TABLE>
- ------------------------
(1) Option grants are immediately exercisable for all the option shares, but any
shares purchased under such option will be subject to repurchase by the
Company, at the option of the Company, at the option exercise price paid per
share with respect to unvested shares. See--1997 Stock Option/Stock Issuance
Plan.
(2) The Company granted options to purchase 2,417,381 shares of Common Stock and
365,094 shares of Series A Preferred Stock during 1997.
(3) Represents potential realizable value of option grants, assuming the initial
fair market value of the Common Stock to equal the option exercise price and
assuming the initial fair market value of the Series A Preferred Stock to
equal $1.00, at the assumed levels of appreciation indicated. There can be
no assurance provided to any executive officer or other holder of the
Company's securities that the actual stock price appreciation over the
ten-year option term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of the Common Stock appreciates
over the option term, no value will be realized from those option grants
which were made to the Named Executive Officers.
The following table provides information, with respect to each of the Named
Executive Officers, concerning the exercise of options during 1997 and
unexercised options held by them at the end of 1997. None of the Named Executive
Officers exercised any options during 1997.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1997 DECEMBER 31, 1997(1)
---------------------------- --------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------- ------------- ------------- ----------- -------------
Common Stock:
Catherine M. Hapka........................... 1,460,377(2) -- $ -- $ --
William R. Stensrud.......................... -- -- -- --
James A. Greenberg........................... 228,184(3) -- -- --
Eric H. Geis................................. 55,000(4) -- -- --
Series A Preferred Stock:
Catherine M. Hapka........................... 365,094(2) -- 73,019(2) --
</TABLE>
- ------------------------
(1) Based on the fair market value of the Company's Common Stock and Series A
Preferred Stock at fiscal year end, $0.10 per share and $1.00 per share,
respectively (in each case as determined by the Company's Board of
Directors), less the exercise price payable for such shares.
(2) Ms. Hapka exercised all of these options in February 1998.
(3) Mr. Greenberg exercised all of these options in January 1998.
(4) Mr. Geis exercised all of these options in January 1998.
53
<PAGE>
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
No Rhythms employees are employed for a specified term, and each employee's
employment with Rhythms is subject to termination at any time by either party
for any reason, with or without cause.
Pursuant to the terms of a written employment agreement with Ms. Hapka,
Rhythms has agreed to employ Ms. Hapka as President and Chief Executive Officer
at a salary of $350,000 per year, subject to periodic increases by the Board of
Directors at its discretion. In addition, Rhythms has agreed to pay Ms. Hapka a
guaranteed bonus of $100,000, payable in quarterly installments, for her first
year of employment (ending in June 1998) and a bonus potential of 50% of her
base salary for her second year of employment (ending in June 1999), payable
upon achievement of certain milestones to be proposed by Ms. Hapka and agreed to
by the Board of Directors. In connection with her employment in June 1997, Ms.
Hapka was granted an option to purchase 1,460,377 shares of Common Stock at an
exercise price of $0.10 per share under the 1997 Stock Plan. See "--1997 Stock
Option/Stock Issuance Plan." Ms. Hapka exercised such options in February 1998,
subject to a right of repurchase by the Company with respect to the unvested
shares. In connection with her employment, Ms. Hapka was also given the right to
purchase up to 365,094 shares of Series A Preferred Stock at $0.80 per share. In
February 1998, Ms. Hapka purchased these shares for an aggregate purchase price
of $292,075. In the event Ms. Hapka's employment is terminated involuntarily and
without cause, Ms. Hapka will be entitled to receive a lump sum payment in an
amount equal to her then-current annual salary.
Pursuant to the terms of a written employment agreement with Mr. Greenberg,
Rhythms has agreed to employ Mr. Greenberg as Chief Network Officer at an annual
salary of $145,000, subject to periodic increases by the Board of Directors at
its discretion. In addition, Rhythms has a severance agreement with Mr.
Greenberg that provides for payment equal to one year's base salary payable in
12 monthly installments in the event of termination without cause during the
first year of employment, which period expires in July 1998.
Pursuant to the terms of a written employment agreement with Mr. Kennedy,
Rhythms has agreed to employ Mr. Kennedy as Vice President and Chief Network
Architect at an annual salary of $132,000, subject to periodic increases by the
Board of Directors at its discretion. In addition, Rhythms has a severance
agreement with Mr. Kennedy that provides for payment equal to one year's base
salary payable in 12 monthly installments in the event of termination without
cause during the first year of employment, which period expires in August 1998.
Pursuant to the terms of a written employment agreement with Mr. Blumenfeld,
Rhythms has agreed to employ Mr. Blumenfeld as Vice President and General
Counsel at an annual salary of $110,000 for a minimum time commitment by Mr.
Blumenfeld of 24 hours a week. Under the terms of such agreement, Mr.
Blumenfeld's law firm, Blumenfeld & Cohen, has agreed to charge Rhythms at a
discount from its regular rates for legal services, including Mr. Blumenfeld's
time in excess of his minimum time commitment. See "Certain Transactions--Legal
Services."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors currently has a Compensation Committee that
reviews and approves the compensation and benefits to be provided to the
executive officers and other key employees of the Company. In addition, the
Compensation Committee administers the Company's 1997 Stock Option/Stock
Issuance Plan. The Compensation Committee currently consists of Messrs. Compton
and Walecka.
1997 STOCK OPTION/STOCK ISSUANCE PLAN
As of June 15, 1998, the Company had reserved 4,863,971 shares of Common
Stock for issuance pursuant to its 1997 Stock Option/Stock Issuance Plan (the
"1997 Stock Plan"), which has been approved
54
<PAGE>
by the Company's Board of Directors and stockholders. The 1997 Stock Plan
provides for the granting to employees (including officers) of qualified
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and for the granting to employees
(including officers and directors) and consultants of nonqualified stock
options. The 1997 Stock Plan also provides for the granting of restricted stock.
As of June 15, 1998, options to purchase an aggregate of 2,875,681 shares had
been granted and 1,988,290 shares remained available for future grants. From
January 1, 1998 through June 15, 1998, 2,288,545 options were exercised. On two
occasions, the Company has made loans to employees to allow them to exercise
options.
The 1997 Stock Plan is administered by the Compensation Committee of the
Board of Directors. Options granted generally vest at a rate of 25% of the
shares at the end of the first year and 2.083% of the shares at the end of each
month thereafter and generally expire ten years from the date of grant. All
options granted are immediately exercisable, subject to a repurchase right held
by the Company that lapses in accordance with the vesting schedule of the
options.
In the event of a merger of the Company with or into another corporation or
the sale of all or substantially all of the assets of the Company (a "Corporate
Transaction"), all outstanding options shall be assumed or an equivalent option
substituted by the successor corporation. In the event a successor corporation
refuses to assume or substitute for the options, a portion of each outstanding
option shall be accelerated so that such portion shall become fully exercisable
for vested shares of Common Stock. The portion of the option which shall so
accelerate shall be a number of shares equal to the number of unvested shares
immediately prior to the Corporate Transaction available under the option
multiplied by a fraction, the numerator of which is the number of complete
months of which elapsed after the vesting commencement date under the option and
the date of the Corporate Transaction, and the DENOMINATOR of which is the
number of months required under the option agreement for the rights of the
optionee to become fully vested. See "--Employment Agreements and Change in
Control Arrangements."
The exercise price of incentive stock options granted under the 1997 Stock
Plan must be at least equal to the fair value of the Company's Common Stock on
the date of grant. The exercise price of options to an optionee who owns more
than 10% of the Company's outstanding voting securities must equal at least 110%
of the fair value of the Common Stock on the date of grant, and the option term
shall not exceed five years measured from the option grant date.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of Directors
to the maximum extent permitted by Delaware law, and the Company's Bylaws
provide that the Company shall indemnify its Directors and officers and may
indemnify its other employees and agents to the fullest extent permitted by law.
The Company has also entered into agreements to indemnify its Directors and
certain executive officers. The Company believes that these provisions and
agreements are necessary to attract and retain qualified Directors and executive
officers. At present, there is no pending litigation or proceeding involving any
Director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that might result in a claim for such indemnification. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to Directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
55
<PAGE>
CERTAIN TRANSACTIONS
SERIES A PURCHASE AGREEMENT
Pursuant to the Series A Preferred Stock Purchase Agreement by and among
Enterprise Partners, Brentwood Venture Capital, KPCB, The Sprout Group and
certain other investors (together, the "Series A Purchasers") and Rhythms, dated
as of July 3, 1997 (the "Series A Purchase Agreement"), the Series A Purchasers,
in a series of three closings, purchased in the aggregate 12,280,000 shares of
Series A Preferred Stock of the Company for an aggregate purchase price of
$12,280,000. Pursuant to a Subsequent Closing Purchase Agreement dated as of
December 23, 1997 (the "Subsequent Closing Agreement"), the Company sold an
additional 210,000 shares of its Series A Preferred Stock to certain other
investors (the "Additional Series A Purchasers") for an aggregate purchase price
of $210,000. In connection with the Series A Purchase Agreement and Subsequent
Closing Agreement, the Company, Enterprise Partners, as holder of 900,735 shares
of Common Stock (the "Common Holder"), the Series A Purchasers and the
Additional Series A Purchasers entered into an Investors' Rights Agreement and
Addendum thereto, dated as of July 3, 1997 and December 23, 1997, respectively
(the "Series A Rights Agreement"), which provides the Series A Purchasers,
Additional Series A Purchasers and the Common Holder with certain demand and
piggyback registration rights, and certain rights of first offer in the event
the Company proposes to offer for sale certain of its securities. The Series A
Rights Agreement was superseded by the Amended and Restated Investors' Rights
Agreement. See "--Series B Purchase Agreement" and "-- Investors' Rights
Agreement," "Description of Capital Stock--Registration Rights;" and "--Right of
First Offer."
In connection with the Series A Purchase Agreement, the Subsequent Closing
Agreement and an employment agreement between the Company and Catherine Hapka,
the Company issued an aggregate of 12,855,094 shares of Series A Preferred
Stock, 12,490,000 shares of which were issued at a purchase price of $1.00 per
share to the Series A Purchasers and the Additional Series A Purchasers and
365,094 shares of which were issued at a purchase price of $0.80 per share to
Ms. Hapka. See "Management--Employment Agreements and Change in Control
Arrangements."
SERIES B PURCHASE AGREEMENT
Certain of the Series A Purchasers and Enron (together, the "Series B
Purchasers") and Rhythms entered into a Series B Preferred Stock Purchase
Agreement, dated as of March 12, 1998 (the "Series B Purchase Agreement"),
pursuant to which the Series B Purchasers acquired, in the aggregate, 4,044,943
shares of Series B Preferred Stock for an aggregate purchase price of $18.0
million. In connection with the Series B Purchase Agreement, the Company, the
Common Holder, the Series A Purchasers, the Additional Series A Purchasers and
the Series B Purchasers entered into an Amended and Restated Investors' Rights
Agreement, dated as of March 12, 1998 (the "Investors' Rights Agreement"). The
Investors' Rights Agreement replaced the Series A Rights Agreement. See
"--Investors' Rights Agreement."
INVESTORS' RIGHTS AGREEMENT
Pursuant to the terms of the Investors' Rights Agreement, the Common Holder,
the holders of Series A Preferred Stock and the holders of Series B Preferred
Stock (together, the "Investors") acquired certain registration rights with
respect to the Common Stock of Company. At any time after the earlier of (i)
March 11, 2002, or (ii) six months after the effective date of the first
registration statement filed by the Company under the Securities Act, holders of
60% or more of the Registrable Securities (as defined in the Investors' Rights
Agreement) or Enron may require the Issuer to effect registration under the
Securities Act covering at least 20% of the Registrable Securities then
outstanding, or, if initiated by Enron, covering at least 20% of the Registrable
Securities then held by Enron, subject in either case to the Board of Directors'
right to defer such registration for a period up to 120 days; provided, however,
that Rhythms is obligated to effect only (A) two such registrations pursuant to
the request of holders of 60% or more of the
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Registrable Securities, and (B) one such registration pursuant to the request of
Enron. In addition, if Rhythms proposes to register securities under the
Securities Act (other than a registration relating either to the sale of
securities to employees pursuant to a stock option, stock purchase or similar
plan or a registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), then any of the Investors has
a right (subject to quantity limitations determined by underwriters if the
offering involves an underwriting) to request that the Company register such
holder's Registrable Securities. All registration expenses incurred in
connection with the registrations described in (A) and (B) above and all
piggyback registrations will be borne by the Issuer. The participating Investors
will pay for underwriting discounts and commissions incurred in connection with
any such registrations. Rhythms has agreed to indemnify the Investors against
certain liabilities in connection with any registration effected pursuant to the
foregoing Investors' Rights Agreement, including Securities Act liabilities.
Subject to certain conditions and limitations, each Major Investor (as
defined in the Investors' Rights Agreement) has the right of first refusal to
purchase its pro rata portion each time the Company proposes to offer any shares
of, or securities convertible into or exercisable for any shares of, any class
of its capital stock, on the same terms and conditions as the Company offers
such securities to other investors. If any Major Investor declines to exercise
such right in full, the remaining electing Major Investors are entitled to
purchase such Major Investor's unpurchased portion of the offered securities on
a pro rata basis.
In connection with the issuance of Warrants pursuant to this Offering, the
Major Investors have agreed to waive their rights of first offer under the
Investors' Rights Agreement.
DIRECTOR RELATIONSHIPS
Mr. Stensrud, a director of the Company, also served as President and Chief
Executive Officer of the Company from February 1997 through June 1997. Mr.
Stensrud and Mr. Geeslin, directors of the Company, each also serve as directors
for Paradyne Corporation, a vendor to the Company. Mr. Walecka, a director of
the Company, also serves as a director for Xylan Corporation, an indirect vendor
to the Company. As of December 31, 1997, the Company made purchases totaling
approximately $419,000 from Paradyne; during the first quarter of fiscal 1998,
the Company purchased approximately $865,000 from Paradyne. The Company does not
purchase any products directly from Xylan; rather, the Company's purchase of
Xylan products is sourced through Paradyne. The Company believes that its
transactions with Paradyne and Xylan were completed at rates similar to those
available from alternative vendors.
LEGAL SERVICES
Jeffrey Blumenfeld, Vice President and General Counsel of Rhythms, also
serves as a partner of Blumenfeld & Cohen, which performs legal services for the
Company. In connection with Mr. Blumenfeld's employment with the Company,
Rhythms sold to certain partners of Blumenfeld & Cohen (including Mr.
Blumenfeld) and to Mr. Blumenfeld 85,000 shares and 55,000 shares, respectively,
of Series A Preferred Stock at $1.00 per share, and Blumenfeld & Cohen agreed to
permanently discount its rates for legal services provided to Rhythms. The
Company incurred expenses for legal fees to Blumenfeld & Cohen through December
31, 1997 of approximately $92,000 and for the first quarter of 1998 of
approximately $207,000.
LOANS TO EMPLOYEES
The Company has entered into three loan agreements with Robert T. Masitti,
the Vice President, Operations and Information Systems of the Company. To assist
Mr. Masitti in relocating to Colorado, the Company loaned Mr. Masitti an
aggregate of $197,000 pursuant to two promissory notes, each dated January 15,
1998. The first of these notes, in the principal amount of $190,000, bearing
interest at the rate of 5.7%, is secured by a first deed of trust on Mr.
Masitti's personal residence in Colorado and is payable in
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a lump sum upon the earlier to occur of the sale of Mr. Masitti's personal
residence or January 15, 1999. The second of these notes, in the principal
amount of $7,000, bearing interest at the rate of 5.56%, is unsecured and is
payable in equal monthly installments over a 24 month period ending January 15,
2000. In addition, pursuant to a promissory note secured by stock pledge
agreement dated January 7, 1998, the Company loaned $4,500 to Mr. Masitti to
assist him in exercising stock options.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of June 15, 1998 with
respect to the beneficial ownership of the Company's Common Stock, Series A
Preferred Stock and Series B Preferred Stock by (i) each person known by the
Company to own beneficially more than five percent, in the aggregate, of the
outstanding shares of the Company's Common Stock, Series A Preferred Stock and
Series B Preferred Stock, on a fully diluted basis, (ii) the directors and Named
Executive Officers of the Company who hold securities of the Company and (iii)
all executive officers and directors as a group. All shares of the Preferred
Stock vote with the Common Stock, have class votes with respect to certain
matters and are convertible into Common Stock. Certain of the outstanding shares
of capital stock of the Company are subject to a voting agreement. See
"Description of Capital Stock Board Representation Rights and Voting." Unless
otherwise indicated, the address for each stockholder is c/o Rhythms
NetConnections Inc., 7337 South Revere Parkway, Englewood, Colorado 80112-3931.
<TABLE>
<CAPTION>
SERIES A PREFERRED SERIES B PREFERRED
COMMON STOCK(2) STOCK (3) STOCK (4)
-------------------- ----------------------------- -----------------------------
BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
- ---------------------------------------- --------- ------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Brentwood Venture Capital(6)............ -- -- 3,000,000(20) 23.3% 449,438(20) 11.1%
Enterprise Partners(7).................. 900,735(20) 27.1% 3,000,000(20) 23.3% 449,438(20) 11.1%
Kleiner Perkins Caufield & Byers(8)..... -- -- 3,000,000(20) 23.3% 449,438(20) 11.1%
The Sprout Group(9)..................... -- -- 3,000,000(20)(21) 23.3% 449,438(20)(21) 11.1%
Enron Communications Group(10).......... -- -- -- -- 2,247,191(20)(21) 55.6%
Catherine M. Hapka(11).................. 1,460,377 44.0% 365,094 2.8% -- --
James A. Greenberg(12).................. 228,184 6.9% -- -- -- --
Eric H. Geis(13)........................ 55,000 1.7% -- -- -- --
Kevin R. Compton(14).................... -- -- -- -- -- --
Keith B. Geeslin(15).................... -- -- -- -- -- --
Ken Harrison(16)........................ -- -- -- -- -- --
William R. Stensrud(17)................. -- -- -- -- -- --
John L. Walecka(18)..................... -- -- -- -- -- --
All directors and effective officers as
a group (16 persons)(19).............. 2,374,883(22) 67.4% 420,094 3.3% -- --
<CAPTION>
BENEFICIAL OWNERSHIP
OF COMMON STOCK (5)
----------------------
BENEFICIAL OWNER(1) TOTAL SHARES PERCENT
- ---------------------------------------- ------------ -------
<S> <C> <C> <C>
Brentwood Venture Capital(6)............ 3,449,438 17.1%
Enterprise Partners(7).................. 4,350,173 21.5%
Kleiner Perkins Caufield & Byers(8)..... 3,449,438 17.1%
The Sprout Group(9)..................... 3,449,438 17.1%
Enron Communications Group(10).......... 2,247,191 11.1%
Catherine M. Hapka(11).................. 1,825,471 9.0%
James A. Greenberg(12).................. 228,184 1.1%
Eric H. Geis(13)........................ 55,000 0.3%
Kevin R. Compton(14).................... -- --
Keith B. Geeslin(15).................... -- --
Ken Harrison(16)........................ -- --
William R. Stensrud(17)................. -- --
John L. Walecka(18)..................... -- --
All directors and effective officers as
a group (16 persons)(19).............. 2,794,977 13.7%
</TABLE>
- ------------------------
(1) Except as indicated by footnote, the Company understands that the persons
named in the table above have sole voting and investment power with respect
to all shares shown as beneficially owned by them, subject to community
property laws where applicable.
(2) Shares of Common Stock subject to options, which are currently exercisable
or exercisable within 60 days of June 15, 1998, are deemed outstanding for
computing the percentages of the person holding such options but are not
deemed outstanding for computing the percentages of any other person.
Percentage ownership is based on shares of Common Stock outstanding as of
June 15, 1998.
(3) The number of shares reflects the number of shares of Common Stock in the
aggregate issuable upon the conversion of the Series A Preferred Stock. Each
share of Series A Preferred Stock is currently convertible into one share of
Common Stock. See Description of Capital Stock--Preferred Stock.
(4) The number of shares reflects the number of shares of Common Stock in the
aggregate issuable upon the conversion of the Series B Preferred Stock. Each
share of Series B Preferred Stock is currently convertible into one share of
Common Stock. See Description of Capital Stock--Preferred Stock.
(5) Reflects the beneficial ownership of the Company's Common Stock, assuming
the conversion of the Series A Preferred Stock and Series B Preferred Stock.
Shares of Common Stock subject to options, which are currently exercisable
or exercisable within 60 days of June 15, 1998, are deemed outstanding for
computing the percentage of the person holding such options but are not
deemed outstanding for computing the percentage of any other person.
(6) Consists of shares held directly by Brentwood Affiliates Fund, L.P. and
Brentwood Associates VII, L.P. (collectively, the Brentwood Entities). The
address for the Brentwood Entities is 3000 Sand Hill Road, Building 1, Suite
260, Menlo Park, California 94025.
(7) Consists of shares held directly by Enterprise Partners III Associates,
L.P., Enterprise Partners III, L.P. and Enterprise Partners IV, L.P.
(collectively, the Enterprise Entities). The address for each of the
Enterprise Entities is 7979 Ivanhoe, Suite 550, La Jolla, California 92037.
(8) Consists of shares held directly by Kleiner Perkins Caufield & Byers VIII,
KPCB VIII Founders Fund and KPCB VIII Information Sciences Zaibatsu Fund II
(collectively, the KPCB Entities). The address for each of the KPCB Entities
is 2750 Sand Hill Road, Menlo Park, California 94025.
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<PAGE>
(9) Consists of shares beneficially owned by DLJ Capital Corporation, DLJ First
ESC L.L.C., Sprout Capital VII, L.P. and The Sprout CEO Fund, L.P.
(collectively, the Sprout Entities). Of these, Sprout Capital VII, L.P.
beneficially owns 2,609,686 shares of Series A Preferred Stock and 390,966
shares of Series B Preferred Stock. All of the shares beneficially owned by
Sprout Capital VII, L.P. are subject to a voting trust agreement and are
held and voted by an independent third party, First Union Trust Company,
National Association (First Union), as voting trustee. See Description of
Capital Stock--Board Representation Rights and Voting--SPROUT VOTING TRUST.
The address for each of the Sprout Entities is 3000 Sand Hill Road, Building
3, Suite 170, Menlo Park, California 94025.
(10) The address for Enron Communications Group, Inc. (Enron) is 210 Southwest
Morrison Street, Suite 400, Portland, Oregon 97204.
(11) Includes 1,460,377 shares of Common Stock that are subject to a right of
repurchase in favor of the Company. The repurchase right as to 25% of these
shares expires in June 1998, and thereafter expires in equal monthly
installments over the next 36 months.
(12) Includes 228,184 shares of Common Stock that are subject to a right of
repurchase in favor of the Company. The repurchase right as to 25% of these
shares expires in July 1998, and thereafter expires in equal monthly
installments over the next 36 months.
(13) Includes 55,000 shares of Common Stock that are subject to a right of
repurchase in favor of the Company. The repurchase right as to 25% of these
shares expires in June 1998, and thereafter expires in equal monthly
installments over the next 36 months.
(14) Excludes shares held by the KPCB Entities. Mr. Compton, as a General
Partner of KPCB, may be deemed to have voting and investment power over the
shares held by the KPCB Entities. Mr. Compton disclaims beneficial interest
in such shares, except to the extent of his interest in the KPCB Entities.
(15) Excludes shares held by The Sprout Entities. Mr. Geeslin, as a General
Partner of The Sprout Group, may be deemed to have voting and investment
power over the shares held by the Sprout Entities. Mr. Geeslin disclaims
beneficial interest in such shares, except to the extent of his interest in
the Sprout Entities.
(16) Excludes shares held by Enron. Mr. Harrison, as Chairman of Enron, may be
deemed to have voting and investment power over the shares held by Enron.
Mr. Harrison disclaims beneficial interest in such shares, except to the
extent of his interest in Enron.
(17) Excludes shares held by Enterprise Entities. Mr. Stensrud, as a General
Partner of Enterprise Partners, may be deemed to have voting and investment
power over the shares held by the Enterprise Entities. Mr. Stensrud
disclaims beneficial interest in such shares, except to the extent of his
interest in the Enterprise Entities.
(18) Excludes shares held by the Brentwood Entities. Mr. Walecka, as a General
Partner of Brentwood Venture Capital, may be deemed to have voting and
investment power over the shares held by the Brentwood Entities. Mr. Walecka
disclaims beneficial interest in such shares, except to the extent of his
interest in the Brentwood Entities.
(19) Excludes shares held by the Brentwood Entities, the Enterprise Entities,
the KPCB Entities, the Sprout Entities and Enron. See Notes 6, 7, 8, 9, 10,
14, 15, 16, 17 and 18 above.
(20) These shares are subject to a voting agreement. See Description of Capital
Stock--Board Representation Rights and Voting.
(21) A portion or all of these shares are subject to a voting trust agreement.
See Description of Capital Stock--Board Representation Rights and Voting.
(22) See Notes 11, 12 and 13. Includes options exercisable for 200,000 shares of
Common Stock under the 1997 Stock Plan, and 2,174,883 shares of Common Stock
that are subject to a right of repurchase in favor of the Company that
expires, as to each individual, in accordance with the vesting schedule
under the 1997 Stock Plan.
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THE EXCHANGE OFFER
PURPOSES OF THE EXCHANGE OFFER
The Old Notes were sold by the Company to the Initial Purchasers, who
subsequently resold the Old Notes to "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act) and non-U.S. persons pursuant to
offers and rates that occurred outside the U. S. pursuant to Regulation S. In
connection with the issuance of the Old Notes, the Company agreed to use its
reasonable best efforts to cause to become effective within the time period
specified in the Registration Rights Agreement, a registration statement with
respect to the Exchange Offer (the "Exchange Offer Registration Statement").
However, if (i) the Company is not required to file the Exchange Offer
Registration Statement or permitted to consummate the Exchange Offer because the
Exchange Offer is not permitted by applicable law or SEC policy or (ii) any
Holder of Old Notes notifies the Company prior to the 20th day following
consummation of the Exchange Offer that (a) it is prohibited by law or SEC
policy from participating in the Exchange Offer or (b) that it may not resell
the Exchange Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales or (c)
that it is a broker-dealer and owns Old Notes acquired directly from the Company
or an affiliate of the Company, the Company will file with the SEC a shelf
registration statement (the "Shelf Registration Statement") to cover resales of
the Old Notes by the Holders thereof who satisfy certain conditions relating to
the provision of information in connection with the Shelf Registration
Statement.
The Exchange Offer is being made by the Company to satisfy its obligations
pursuant to the Registration Rights Agreement. Once the Exchange Offer is
consummated, the Company will have no further obligation to register any of the
Old Notes not tendered by the Holders for exchange. See "Risk Factors--
Consequences to Non-Tendering Holders of Old Notes." A copy of the Registration
Rights Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
Based on an interpretation by the Staff of the SEC set forth in the Staff's
Exxon Capital Holdings Corp. SEC No-Action Letter (available April 13, 1989),
Morgan Stanley & Co., Inc. SEC No-Action Letter (available June 5, 1991),
Shearman & Sterling SEC No-Action Letter (available July 7, 1993), and other
no-action letters issued to third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by Holders thereof without
compliance with the registration and prospectus delivery provisions of the
Securities Act. However, any Holder who is an "affiliate" of the Company or who
intends to participate in the Exchange Offer for the purpose of distributing the
New Notes (i) cannot rely on the interpretation by the staff of the SEC set
forth in the above referenced no-action letters, (ii) cannot tender its Old
Notes in the Exchange Offer, and (iii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or transfer of the Old Notes, unless such sale or transfer is made pursuant
to an exemption from such requirements. See "Risk Factors--Consequences to Non-
Tendering Holders of Old Notes."
In addition, each Participating Broker-Dealer that receives New Notes for
its own account in exchange for Old Notes not acquired directly from the Company
must acknowledge that it will deliver a prospectus in connection with any resale
of such New Notes. See "Plan of Distribution."
Except as aforesaid, this Prospectus may not be used for an offer to resell,
resale or other transfer of New Notes.
TERMS OF THE EXCHANGE OFFER
GENERAL. Upon the terms and subject to the conditions of the Exchange Offer
set forth in this Prospectus and the Letter of Transmittal, the Company will
accept any and all Old Notes validly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the Expiration Date. The Company will issue
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<PAGE>
$1,000 principal amount at maturity of New Notes in exchange for each $1,000
principal amount at maturity of outstanding Old Notes accepted in the Exchange
Offer. Holders may tender some or all of their Old Notes pursuant to the
Exchange Offer; provided, that Old Notes may be tendered only in integral
multiples of $1,000 principal amount at maturity.
As of June 15, 1998, there was $290,000,000 of aggregate principal amount at
maturity of the Old Notes outstanding. This Prospectus, together with the Letter
of Transmittal, is being sent to such registered Holder(s) as of ,
1998.
In connection with the issuance of the Old Notes, the Company arranged for
the Old Notes to be issued and transferable in book-entry form through the
facilities of DTC, acting as depositary. The New Notes will be issued and
transferable in book-entry form through DTC. See "--Book-Entry Transfer;
Delivery and Form."
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Old Notes for the purpose of receiving the New Notes from the Company. If any
tendered Old Notes are not accepted for exchange because of an invalid tender,
the occurrence of certain other events set forth herein or otherwise, the
certificates for any such unaccepted Old Notes will be returned, without
expense, to the tendering Holder thereof or the appropriate book-entry transfer
will be made, in each case, as promptly as practicable after the Expiration
Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay the expenses, other than
certain applicable taxes, of the Exchange Offer. See "--Fees and Expenses.
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS
OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE
EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD NOTES TO TENDER AFTER
READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR
ADVISERS, IF ANY, BASED ON THEIR OWN FINANCIAL POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS. The term "Expiration Date" shall
mean , 1998, unless the Company in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date to which the Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent and the record Holders of Old Notes of any extension by oral (followed by
written) notice, each prior to 9:00 a.m., New York City time, on the business
day following the previously scheduled Expiration Date. Such notice may state
that the Company is extending the Exchange Offer for a specified period of time
or on a daily basis until 5:00 p.m., New York City time, on the date on which a
specified percentage of Old Notes are tendered.
The Company reserves the right to delay accepting any Old Notes, to extend
the Exchange Offer, to amend the Exchange Offer or to terminate the Exchange
Offer and not accept Old Notes not previously accepted if any of the conditions
set forth herein under "--Conditions" shall have occurred and shall not have
been waived by the Company by giving oral or written notice of such delay,
extension, amendment or termination to the Exchange Agent as promptly as
practicable. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the Holders of such
amendment and the
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Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to Holders of the Old Notes, if the Exchange Offer would otherwise
expire during such five to ten business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
ACCRETION OF THE NEW NOTES AND THE OLD NOTES; INTEREST
The Old Notes will continue to accrete in principal amount through (but not
including) the date of issuance of the New Notes. Any Old Notes not tendered or
accepted for exchange will continue to accrete in principal amount at the rate
of 13.5% per annum in accordance with its terms. From and after the date of
issuance of the New Notes, the New Notes shall accrete in principal amount at
the rate of 13.5% per annum, but no cash interest will accrue or be payable in
respect of the New Notes prior to May 15, 2003. Thereafter, the New Notes will
bear interest at a rate equal to 13.5% per annum. Interest on the New Notes will
be payable semi-annually in arrears on May 15 and November 15 of each year,
commencing on November 15, 2003.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a Holder of certificated Old Notes must
complete, sign and date the Letter of Transmittal, or a facsimile thereof, have
the signatures thereon guaranteed if required by Instruction 3 of the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile, together with the Old Notes and any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
If delivery of the Old Notes is to be made through book-entry transfer into the
Exchange Agent's account at DTC, tenders of the Old Notes must be effected in
accordance with DTC's Automated Tender Offer Program ("ATOP") procedures. See
"--Book-Entry Transfer; Delivery and Form."
The tender by a Holder of Old Notes will constitute an agreement between
such Holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders of Old Notes may also request their respective brokers,
dealers, commercial banks, trust companies or nominees to effect the above
transactions for such Holders.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS, IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO INSURE TIMELY DELIVERY.
Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "Holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered Holder.
Any beneficial Holder whose Old Notes are registered in the name of its
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered Holder promptly and instruct such
registered Holder to tender on its behalf. If such beneficial Holder wishes to
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tender on its own behalf, such beneficial Holder must, prior to completing and
executing the Letter of Transmittal and delivering its Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such Holder's
name or obtain a properly completed bond power from the registered Holder. The
transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined) unless the
Old Notes tendered pursuant thereto are tendered (i) by a registered Holder who
has not completed the box entitled "Special Payment Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution. In the event that signatures on a Letter of Transmittal
or a notice of withdrawal, as the case may be, are required to be guaranteed,
such guarantee must be by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or correspondent in the U.S.
(an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by appropriate bond powers signed as the name of the registered
Holder or Holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons shall so indicate when signing and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Old Notes not properly tendered or any Old Notes the
Company's acceptance of which would, in the opinion of counsel for the Company,
be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine.
Neither the Company, the Exchange Agent nor any other person shall be under any
duty to give notification of defects or irregularities with respect to tenders
of Old Notes, nor shall any of them incur any liability for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made until
such irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders of Old Notes, unless otherwise provided in the
Letter of Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date or, as set forth under "--Conditions," to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of such Holder's business, that such Holder has no
arrangement with any person to participate in the distribution of such New
Notes, and that such Holder is not an "affiliate," as defined under Rule 405 of
the Securities Act, of the Company. If the Holder is a Participating
Broker-Dealer that will receive New Notes for its own account in exchange for
Old Notes that were not acquired directly from the Company, such Holder by
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tendering will acknowledge that it will deliver a prospectus in connection with
any resale of such New Notes. See "Plan of Distribution."
BOOK-ENTRY TRANSFER; DELIVERY AND FORM
The Old Notes were initially represented (i) in the case of Old Notes
initially purchased by "qualified institutional buyers" (as such term is defined
in Rule 144A under the Securities Act), by one global Old Note in fully
registered form, all registered in the name of a nominee of the DTC, and (ii) in
the case of Old Notes initially purchased by persons other than U.S. persons in
reliance upon Regulation S under the Securities Act, by one global Regulation S
Old Note in fully registered form, all registered in the name of a nominee of
DTC for the accounts of Euroclear and Cedel Bank. The New Notes exchanged for
the Old Notes represented by the global Old Notes and global Regulation S Old
Note will be represented (a) in the case of "qualified institutional buyers", by
one global New Note in fully registered form, registered in the name of the
nominee of DTC, and (b) in the case of persons outside of the U. S., by one
global Regulation S New Note in fully registered form, registered in the name of
the nominee of DTC for the accounts of Euroclear and Cedel Bank. The global New
Note and global Regulation S New Note will be exchangeable for definitive New
Notes in registered form, in denominations of $1,000 principal amount at
maturity and integral multiples thereof. The New Notes in global form will trade
in The Depository Trust Company's Same-Day Funds Settlement System, and
secondary market trading activity in such New Notes will therefore settle in
immediately available funds.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish an account with respect to the
Old Notes at DTC for the purpose of facilitating the Exchange Offer, and subject
to the establishment thereof, any financial institution that is a participant in
DTC's system may make book-entry delivery of Old Notes by causing DTC to
transfer such Old Notes into the Exchange Agent's account with respect to the
Old Notes in accordance with DTC's ATOP procedures for such book-entry
transfers. Although delivery of the Old Notes may be effected through book-entry
transfer into the Exchange Agent's account at DTC, the exchange for Old Notes so
tendered will only be made after timely confirmation (a "Book-Entry
Confirmation") of such book-entry transfer of the Old Notes into the Exchange
Agent's account, and timely receipt by the Exchange Agent of a Book-Entry
Confirmation with an Agent's Message (as defined). The term "Agent's Message"
means a message, transmitted by DTC and received by the Exchange Agent and
forming part of the Book-Entry Confirmation, which states that DTC has received
express acknowledgment from a participant tendering Old Notes that such
participant has received and agrees to be bound by the terms of the Letter of
Transmittal, and that such agreement may be enforced against such participant.
GUARANTEED DELIVERY PROCEDURES
OLD NOTES HELD THROUGH DTC. DTC Participants holding Old Notes through DTC
who wish to cause their Old Notes to be tendered, but who cannot transmit their
acceptances through ATOP prior to the Expiration Date, may cause a tender to be
effected if:
(a) guaranteed delivery is made by or through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time on the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed and
duly executed Notice of Guaranteed Delivery (by mail, hand delivery, facsimile
transmission or overnight courier) substantially in the form provided by the
Company herewith; and
(c) Book-Entry Confirmation and an Agent's Message in connection therewith
(as described above) are received by the Exchange Agent within three New York
Stock Exchange trading days after the date of the execution of the Notice of
Guaranteed Delivery.
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OLD NOTES HELD BY HOLDERS. Holders who wish to tender their Old Notes and
(i) whose Old Notes are not immediately available, (ii) who cannot deliver their
Old Notes, the Letter of Transmittal or any other required documents to the
Exchange Agent or (iii) who cannot complete the procedures for book-entry
transfer prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the Holder of the Old Notes, the certificate number or
numbers of such Old Notes and the principal amount at maturity of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing that,
within three New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes to be tendered in proper form for transfer and any
other documents required by the Letter of Transmittal, or a Book-Entry
Confirmation, as the case may be, will be delivered by the Eligible Institution
to the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or facsimile
thereof), as well as the certificate(s) representing all tendered Old Notes in
proper form for transfer and all other documents required by the Letter of
Transmittal, or a Book-Entry Confirmation, as the case may be, are received by
the Exchange Agent within three New York Stock Exchange trading days after the
Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
OLD NOTES HELD THROUGH DTC. DTC Participants holding Old Notes who have
transmitted their acceptances through ATOP may, prior to 5:00 p.m., New York
City time, on the Expiration Date, withdraw the instruction given thereby by
delivering to the Exchange Agent, at its address set forth under "--Exchange
Agent," a written or facsimile notice of withdrawal of such instruction. Such
notice of withdrawal must contain the name and number of the DTC Participant,
the principal amount due at the maturity date of the Old Notes to which such
withdrawal is related and the signature of the DTC Participant. Withdrawal of
such an instruction will be effective upon receipt of such written notice of
withdrawal by the Exchange Agent.
OLD NOTES HELD BY HOLDERS. Holders may withdraw a tender of Old Notes in
the Exchange Offer, by a written or facsimile notice of withdrawal received by
the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Old Notes to be withdrawn
(the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number or numbers and principal amount at maturity of such Old
Notes), (iii) be signed by the Holder in the same manner as the original
signature on the Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the Trustee with respect to the Old Notes register
the transfer of such Old Notes into the name of the person withdrawing the
tender, and (iv) specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no New Notes will be issued with
respect thereto unless the Old Notes so withdrawn are validly retendered. Any
Old Notes which have been tendered but which are not accepted for exchange
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will be returned to the Holder thereof without cost to such Holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures, described above under "--Procedures for Tendering" at any time prior
to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange New Notes for, any Old Notes not
theretofore accepted for exchange, and may terminate or amend the Exchange Offer
as provided herein before the acceptance of such Old Notes, if any of the
following conditions exist:
(a) the Exchange Offer, or the making of any exchange by a Holder, violates
applicable law or any applicable interpretation of the SEC;
(b) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer which, in
the sole judgment of the Company, might impair the ability of the Company to
proceed with the Exchange Offer;
(c) any law, statute, rule or regulation is adopted or enacted which, in the
sole judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer;
(d) a banking moratorium is declared by U.S. federal or California or New
York state authorities which, in the Company's judgment, would reasonably be
expected to impair the ability of the Company to proceed with the Exchange
Offer;
(e) trading on the New York Stock Exchange or generally in the U.S.
over-the-counter market is suspended by order of the SEC or any other
governmental authority which, in the Company's judgment, would reasonably be
expected to impair the ability of the Company to proceed with the Exchange
Offer; or
(f) a stop order is issued by the SEC or any state securities authority
suspending the effectiveness of the Registration Statement or proceedings are
initiated or, to the knowledge of the Company, threatened for that purpose.
If any such conditions exist, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to exchanging Holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of Holders to withdraw such Old
Notes (see"--Withdrawal of Tenders") or (iii) waive certain of such conditions
with respect to the Exchange Offer and accept all properly tendered Old Notes
which have not been withdrawn or revoked. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver in
a manner reasonably calculated to inform Holders of Old Notes of such waiver.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
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EXCHANGE AGENT
State Street Bank and Trust Company of California, N.A. has been appointed
as Exchange Agent for the Exchange Offer. Letters of Transmittal and Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Overnight Courier:
Attention: Kellie Mullen Attention: Kellie Mullen
State Street Bank and Trust Company State Street Bank and Trust Company
of California, N.A. of California, N.A.
c/o State Street Bank and Trust c/o State Street Bank and Trust
Company Company
2 International Place 2 International Place
Boston, MA 02110 Boston, MA 02110
Phone: (617) 664-5587 Phone: (617) 664-5587
By Hand: By Facsimile:
Attention: Kellie Mullen Attention: Kellie Mullen
State Street Bank and Trust Company (617) 664-5290
of California, N.A.
c/o State Street Bank and Trust Confirm by telephone:
Company (617) 664-5587
2 International Place
Boston, MA 02110
Phone: (617) 664-5587
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this Prospectus and related documents to the beneficial owners of the
Old Notes, and in handling or forwarding tenders for exchange.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and will include fees and expenses of the Exchange Agent
and the Trustee under the Indenture and accounting and legal fees.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts at maturity not
tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered Holder
of the Old Notes tendered, or if tendered Old Notes are registered in the name
of any person other than the person signing the Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other persons) will be payable
by the tendering Holder. If satisfactory evidence of payment of such taxes or
exception therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering Holder.
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ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value less original issue discount plus accretion to date as
reflected in the Company's accounting records on the date of the Exchange Offer.
Accordingly, no gain or loss for accounting purposes will be recognized upon
consummation of the Exchange Offer. The issuance costs incurred in connection
with the Exchange Offer will be capitalized and amortized over the term of the
New Notes.
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DESCRIPTION OF THE NOTES
The Old Notes were issued under an Indenture (the "Indenture") dated as of
May 5, 1998, between Rhythms NetConnections Inc. (the "Company") and State
Street Bank and Trust Company of California, N.A., as Trustee, a copy of the
form of which will be made available to prospective purchasers upon request, in
a private transaction that was not subject to the registration requirements of
the Securities Act. The terms of the Old Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Old Notes are
subject to all such terms, and Holders of Old Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the material provisions of the Indenture and the Registration Rights
Agreement does not purport to be complete and is qualified in its entirety by
reference to such agreements, including the definitions therein of certain terms
used below. Copies of such agreements have been filed as exhibits to the
Registration Statement of which this Prospectus is a part and are available from
the SEC or as set forth below under "Additional Information." The following
summary of certain provisions of the Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act and to all of the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part of the
Indenture by reference to the Trust Indenture Act, as in effect on the date of
the Indenture. The definitions of certain capitalized terms used in the
following summary are set forth below under "--Certain Definitions."
GENERAL
The Notes were issued only in fully registered form without coupons, in
denominations of $1,000 principal amount and integral multiples thereof.
Principal of, premium on, if any, and interest on the Notes are payable, and the
Notes are exchangeable and transferable, at the office or agency of the Company
in the City of New York maintained for such purposes (which initially will be
the corporate trust office of the Trustee). See "Exchange Offer--Book-Entry
Transfer; Delivery and Form." No service charge will be made for any
registration of transfer, exchange or redemption of the Notes, except in certain
circumstances for any tax or other governmental charge that may be imposed in
connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The Notes are general unsecured obligations of the Company, limited to
$290,000,000 aggregate principal amount at maturity, and will mature on May 15,
2008. Cash interest will not accrue on the Notes prior to May 15, 2003. See
"Certain Federal Income Tax Considerations." Thereafter, cash interest on the
Notes will accrue at a rate of 13 1/2% per annum and will be payable
semi-annually in arrears on each May 15 and November 15 to registered holders of
Notes on the May 1 or November 1, as the case may be, immediately preceding such
interest payment date, commencing November 15, 2003. Interest on the Notes will
accrue from the most recent interest payment date to which interest has been
paid or duly provided for or, if no interest has been paid or duly provided for,
from May 15, 2003. Based on the foregoing, the yield to maturity of each Note
will be 13 1/2% per annum (computed on a semiannual bond equivalent basis
calculated from May 5, 1998). Interest will be computed on the basis of a
360-day year of twelve 30-day months. If the Company defaults on any payment of
principal (whether at maturity, upon redemption or otherwise), cash interest
will continue to accrue and, to the extent permitted by law, cash interest will
accrue on overdue installments of interest at the rate of interest borne by the
Notes.
REDEMPTION
OPTIONAL REDEMPTION. The Notes will be redeemable, at the option of the
Company, in whole or in part, at any time on or after May 15, 2003, upon not
less than 30 nor more than 60 days' written notice at the redemption prices
(expressed as percentages of principal amount at maturity) set forth below, plus
accrued and unpaid interest thereon, if any, and liquidated damages, if any, to
the applicable redemption
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date, if redeemed during the twelve-month period beginning on May 15 of each of
the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2003............................................................................. 106.750%
2004............................................................................. 104.500%
2005............................................................................. 102.250%
2006 and thereafter.............................................................. 100.000%
</TABLE>
In addition, at any time on or prior to May 15, 2001, the Company may, other
than in any circumstances resulting in a Change of Control, redeem, at its
option, up to a maximum of 35% of the originally-issued aggregate principal
amount at maturity of Notes at a redemption price (determined at the applicable
redemption date) equal to 113 1/2% of the Accreted Value of the Notes so
redeemed plus liquidated damages, if any, with the net cash proceeds of (a) one
or more Public Equity Offerings and/or (b) the sale, subsequent to the Issue
Date, of Capital Stock (other than Disqualified Stock) in one or more
transactions to Strategic Equity Investors, resulting in gross cash proceeds to
the Company of at least $25.0 million in the aggregate; provided that not less
than 65% of the originally-issued aggregate principal amount at maturity of
Notes is outstanding immediately following such redemption. Any such redemption
must be effected upon not less than 30 nor more than 60 days' notice given
within 30 days after the consummation of a Public Equity Offering or sale to one
or more Strategic Equity Investors the net proceeds from which, together with
any net proceeds from any prior Public Equity Offerings or sales to Strategic
Equity Investors, are to be used to effect an optional redemption in accordance
with this paragraph.
MANDATORY REDEMPTION. The Company will not be required to repurchase the
Notes or make any mandatory redemption or sinking fund payments in respect of
the Notes. However, (i) following the occurrence of a Change of Control, the
Company will be required to make an offer to purchase all outstanding Notes at a
price equal to 101% of the Accreted Value thereof as of the date of purchase,
and (ii) following the occurrence of an Asset Sale, the Company may be obligated
to make an offer to purchase all or a portion of the outstanding Notes at a
price equal to 100% of the Accreted Value thereof as of the date of purchase, in
each case plus accrued and unpaid interest, if any, and liquidated damages, if
any, to the date of purchase. See "--Certain Covenants--Change of Control" and
"--Disposition of Proceeds of Asset Sales," respectively.
SELECTION; EFFECT OF REDEMPTION NOTICE. In the case of a partial
redemption, selection of the Notes for redemption will be made pro rata, by lot
or such other method as the Trustee in its sole discretion deems appropriate and
just; provided that any redemption pursuant to the provisions relating to
redemptions from the proceeds of one or more Public Equity Offerings or sales to
one or more Strategic Equity Investors shall be made on a pro rata basis or on
as nearly a pro rata basis as practicable (subject to DTC procedures). No Notes
of a principal amount at maturity of $1,000 or less shall be redeemed in part.
Notice of redemption shall be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each holder of Notes to be
redeemed at its registered address. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note shall state the portion of
the principal amount thereof to be redeemed. A new Note in a principal amount at
maturity equal to the unredeemed portion thereof will be issued in the name of
the holder thereof upon surrender for cancellation of the original Note. Upon
giving of a redemption notice, interest on Notes called for redemption will
cease to accrue from and after the date fixed for redemption (unless the Company
defaults in providing the funds for such redemption) and such Notes will cease
to be outstanding.
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RANKING
The Indebtedness of the Company evidenced by the Notes ranks senior in right
of payment to all Subordinated Indebtedness of the Company and pari passu in
right of payment with all existing and future unsecured and unsubordinated
Indebtedness of the Company. The Notes will be effectively subordinated in right
of payment to all secured Indebtedness of the Company to the extent of the value
of the assets securing such Indebtedness. Assuming the Notes had been issued on
March 31, 1998, and after giving pro forma effect to the application of the net
proceeds therefrom as described in "Use of Proceeds," the Company would have had
outstanding at that date Indebtedness of approximately $150.0 million of which
approximately $568,000 is secured Indebtedness (consisting of bank
Indebtedness), which would have been effectively senior in right of payment to
the Notes. The Notes will also be structurally subordinated to all existing and
future Indebtedness of any Subsidiary of the Company. As of March 31, 1998, on a
PRO FORMA basis, after giving effect to the creation and capitalization of the
Company's existing Subsidiaries, such Subsidiaries would have had no outstanding
Indebtedness.
Although the Indenture contains limitations on the amount of additional
Indebtedness that the Company or its Restricted Subsidiaries may incur, under
certain circumstances the amount of such Indebtedness could be substantial. See
"--Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS" below. If the
Company becomes insolvent or is liquidated, or if payment under any secured
Indebtedness is accelerated, the lenders under such Indebtedness would be
entitled to exercise the remedies available to a secured lender under applicable
law pursuant to the terms of the applicable financing agreements. Accordingly,
any claims of such lenders with respect to assets secured in their favor will be
prior to any claims of the holders of the Notes with respect to such assets.
CERTAIN COVENANTS
Set forth below are certain covenants that are contained in the Indenture.
LIMITATION ON ADDITIONAL INDEBTEDNESS. The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, create, incur, assume, issue, Guarantee or in any manner become
directly or indirectly liable for or with respect to, contingently or otherwise,
the payment of (collectively, to "incur") any Indebtedness (including any
Acquired Indebtedness), except for Permitted Indebtedness (including Acquired
Indebtedness to the extent it would constitute Permitted Indebtedness); provided
(i) the Company will be permitted to incur Indebtedness (including Acquired
Indebtedness) and (ii) a Restricted Subsidiary will be permitted to incur
Acquired Indebtedness, if, in either case, after giving pro forma effect to such
incurrence (including the application of the net proceeds therefrom), the
Indebtedness to EBITDA Ratio would be less than or equal to 6 to 1, in the case
of any such incurrence on or before June 30, 2001, or less than or equal to 5 to
1, in the case of any such incurrence thereafter.
Indebtedness of any Person or any of its Subsidiaries existing at the time
such Person becomes a Restricted Subsidiary (or is merged into or consolidated
with the Company or any Restricted Subsidiary), whether or not such Indebtedness
was incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary (or being merged into or consolidated with the Company or
any Restricted Subsidiary) shall be deemed incurred at the time such Person
becomes a Restricted Subsidiary or merges into or consolidates with the Company
or any Restricted Subsidiary. In addition, pursuant to the purchase agreement
entered into among the Company and each of Merrill Lynch and Donaldson, Lufkin &
Jenrette Securities Corporation, the Company has agreed that for a period of 180
days from April 28, 1998, it will not, without the prior written consent of
Merrill Lynch, directly or indirectly, offer, sell, grant any option to
purchase, or otherwise dispose of, any debt security of the Company or security
of the Company that is convertible into, or exchangeable for, any debt security
of the Company (other than the New Notes). See "Plan of Distribution."
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LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides that the Company
will not, and will not permit any of the Restricted Subsidiaries to, make,
directly or indirectly, any Restricted Payment unless:
(i) no Default shall have occurred and be continuing at the time of or
upon giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted Payment, the
Company would be able to incur $1.00 of Indebtedness under the proviso of
the covenant "--Limitation on Additional Indebtedness"; and
(iii) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after the
Issue Date does not exceed an amount equal to the sum of, without
duplication, (a) 50% of the Consolidated Net Income accrued on a cumulative
basis during the period beginning on the first day of the first fiscal
quarter immediately subsequent to the Issue Date and ending on the last day
of the fiscal quarter of the Company immediately preceding the date of such
proposed Restricted Payment (or, if such cumulative Consolidated Net Income
of the Company for such period is a deficit, minus 100% of such deficit) for
which financial statements are available, in any event determined by
excluding income resulting from transfers of assets by the Company or a
Restricted Subsidiary to an Unrestricted Subsidiary, PLUS (b) the aggregate
net cash proceeds received by the Company either (x) as capital
contributions to the Company after the Issue Date or (y) from the issuance
and sale of its Capital Stock (other than Disqualified Stock) or options,
warrants or other rights to acquire its Capital Stock (other than
Disqualified Stock), in each case on or after the Issue Date to a Person who
is not a Subsidiary of the Company, PLUS (c) the aggregate net proceeds
received by the Company from the issuance (other than to a Subsidiary of the
Company) on or after the Issue Date of its Capital Stock (other than
Disqualified Stock) upon the conversion of, or in exchange for, Indebtedness
of the Company or upon the exercise of options, warrants or other rights of
the Company, PLUS (d) in the case of the disposition or repayment (in whole
or in part) of any Investment constituting a Restricted Payment made after
the Issue Date, an amount equal to the lesser of the return of capital with
respect to the applicable portion of such Investment and the cost of the
applicable portion of such Investment, in either case, less the cost of the
disposition of such Investment, PLUS (e) in the case of any Revocation with
respect to a Subsidiary of the Company that was made subject to a
Designation after the Issue Date, an amount equal to the lesser of the
Designation Amount with respect to such Subsidiary or the Fair Market Value
of the Investment of the Company and the Restricted Subsidiaries in such
Subsidiary at the time of Revocation, MINUS (f) 50% of the principal amount
of any Indebtedness incurred pursuant to clause (g) of the definition of
"Permitted Indebtedness." For purposes of the preceding clause (b), there
shall be excluded in all cases any issuance and sale of Capital Stock in one
or more Public Equity Offerings or to Strategic Equity Investors to the
extent the net cash proceeds are used, prior to May 15, 2001, to redeem
Notes as described under "--Redemption--OPTIONAL REDEMPTION." The Company
may not redeem Notes as described under "--Redemption--OPTIONAL REDEMPTION"
from net cash proceeds received by the Company from the issuance on or after
the Issue Date of its Capital Stock if such net cash proceeds have ever been
included in a determination of the amount of Restricted Payments that may be
made by the Company pursuant to this covenant, unless the Company would have
been able to make such Restricted Payment without including such net cash
proceeds in such determination.
For purposes of determining the amount expended for Restricted Payments,
cash distributed shall be valued at the face amount thereof and property other
than cash shall be valued at its Fair Market Value.
The provisions of this covenant shall not prohibit the following (each of
which shall be given independent effect): (1) the payment of any dividend or
other distribution within 60 days after the date of declaration thereof if at
such date of declaration such payment would be permitted by the provisions of
the Indenture; (2) the purchase, redemption, retirement or other acquisition of
any shares of Capital Stock of the Company in exchange for, or out of the net
cash proceeds of the substantially concurrent issue and sale
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(other than to a Subsidiary of the Company) of, shares of Capital Stock of the
Company (other than Disqualified Stock); PROVIDED that any such net cash
proceeds are excluded from clause (iii) (b) of the second preceding paragraph;
(3) so long as no Default shall have occurred and be continuing, the purchase,
redemption, retirement, defeasance or other acquisition of Subordinated
Indebtedness (A) made by exchange for, or out of the net cash proceeds of, a
substantially concurrent issue and sale (other than to a Subsidiary of the
Company) of (x) Capital Stock (other than Disqualified Stock) of the Company
PROVIDED that any such net cash proceeds are excluded from clause(iii)(b) of the
second preceding paragraph; or (y) other Subordinated Indebtedness to the extent
that (I) its stated maturity for the payment of principal thereof is not prior
to the 91st day after the final stated maturity of the Notes, (II) its principal
amount does not exceed the principal amount (or, if such Subordinated
Indebtedness being refinanced provides for an amount less than the principal
amount thereof to be due and payable upon an acceleration thereof, such lesser
amount) of the Subordinated Indebtedness being refinanced, PLUS any premium
required to be paid in connection with such refinancing pursuant to the terms of
such Subordinated Indebtedness being refinanced, plus the amount of expenses of
the Company incurred in connection with such refinancing, and (III) such new
Subordinated Indebtedness is subordinated to the Notes to the same extent as the
Subordinated Indebtedness being refinanced, or (B) with Unutilized Cash Proceeds
remaining after completion of an Asset Sale pursuant to the fifth paragraph of
the covenant described under "--DISPOSITION OF PROCEEDS OF ASSET SALES"; (4) so
long as no Default shall have occurred and be continuing, purchases or
redemptions of Capital Stock (including cash settlements of stock options) held
by employees, officers or directors upon or following termination (whether by
reason of death, disability or otherwise) of their employment with the Company
or one of its Subsidiaries; PROVIDED that payments shall not exceed $500,000 in
any fiscal year in the aggregate; (5) payments or distributions to dissenting
stockholders pursuant to applicable law, pursuant to or in contemplation of
merger, consolidation or transfer of assets that complies with the provisions of
the Indenture relating to mergers, consolidations or transfers of substantially
all of the assets of the Company; (6) any purchase of any fractional share of
Common Stock of the Company in connection with an exercise of the Warrants and
any repurchase of Warrants pursuant to a Repurchase Offer (as defined in
"Description of Warrants"); and (7) Restricted Payments in addition to those
otherwise permitted pursuant to this covenant in an aggregate amount not to
exceed $2.0 million.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (1), (4) and (7) above shall be
included, without duplication, as Restricted Payments.
LIMITATION ON LIENS SECURING CERTAIN INDEBTEDNESS. The Indenture will
provide that the Company will not, and will not permit any Restricted Subsidiary
to, create, incur, assume or suffer to exist any Liens of any kind against or
upon any of the property or assets of the Company or any Restricted Subsidiary,
whether now owned or hereafter acquired, or any proceeds therefrom, which secure
either (x) Subordinated Indebtedness, unless the Notes are secured by a Lien on
such property, assets or proceeds that is senior in priority to the Liens
securing such Subordinated Indebtedness or (y) Indebtedness of (A) the Company
that is not Subordinated Indebtedness or (B) any Restricted Subsidiary, unless
in each case the Notes are equally and ratably secured with the Liens securing
such other Indebtedness, except, in the case of this clause (y), Permitted
Liens.
CHANGE OF CONTROL. Upon the occurrence of a Change of Control (the date of
such occurrence being the "Change of Control Date"), the Company shall make an
offer to purchase (the "Change of Control Offer"), on a business day (the
"Change of Control Payment Date") not later than 60 days following the Change of
Control Date, all Notes then outstanding at a purchase price equal to 101% of
the Accreted Value thereof as of any Change of Control Payment Date, plus
accrued and unpaid interest thereon, if any, and liquidated damages, if any, to
such Change of Control Payment Date. Notice of a Change of Control Offer shall
be given to holders of Notes, not less than 30 days nor more than 60 days before
the Change of
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Control Payment Date. The Change of Control Offer is required to remain open for
at least 20 business days and until the close of business on the Change of
Control Payment Date.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the holders of the Notes to require that
the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction which may be highly leveraged.
Future Indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or may
require such Indebtedness to be repurchased upon a change of control (as defined
in the instruments governing such Indebtedness). Moreover, the exercise by the
Holders of their right to require the Company to repurchase the Notes could
cause a default under such Indebtedness, even if the Change of Control itself
does not.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay for all of the Notes that
might be delivered by holders of Notes seeking to accept the Change of Control
Offer. The Company's obligation to make a Change of Control Offer following a
Change of Control shall be satisfied if a third party makes the Change of
Control Offer in the manner, at the times and otherwise in compliance with the
requirements applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer. See "Risk Factors--Risks Associated with a Change of Control."
If the Company is required to make a Change of Control Offer, the Company
shall comply with all applicable tender offer laws and regulations, including,
to the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act,
and any other applicable securities laws and regulations. To the extent that the
provisions of any such securities laws or regulations conflict with provisions
of this covenant, the Company will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
this covenant solely by virtue of such compliance.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Indenture provides that the Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or otherwise
enter into or cause to become effective any encumbrance or restriction of any
kind on the ability of any Restricted Subsidiary to (a) pay dividends, in cash
or otherwise, or make any other distributions on its Capital Stock or any other
interest or participation in, or measured by, its profits to the extent owned by
the Company or any Restricted Subsidiary, (b) pay any Indebtedness owed to the
Company or any Restricted Subsidiary, (c) make any Investment in the Company or
any Restricted Subsidiary or (d) transfer any of its properties or assets to the
Company or to any Restricted Subsidiary, except for (i) any encumbrance or
restriction in existence on the Issue Date, (ii) customary non-assignment
provisions, (iii) any encumbrances or restriction pertaining to an asset subject
to a Lien to the extent set forth in the security documentation governing such
Lien, (iv) any encumbrance or restriction applicable to a Restricted Subsidiary
at the time that it becomes a Restricted Subsidiary that is not created in
contemplation thereof, (v) any encumbrance or restriction existing under any
agreement that refinances or replaces an agreement containing a restriction
permitted by clause (iv) above; PROVIDED that the terms and conditions of any
such encumbrance or restriction are not materially less favorable to the holders
of Notes than those under or pursuant to the agreement being replaced or the
agreement evidencing the Indebtedness refinanced, (vi) any encumbrance or
restriction imposed upon a Restricted Subsidiary pursuant to an agreement which
has been entered into for the sale or disposition of all or substantially all of
the Capital Stock or assets of such Restricted Subsidiary or any Asset Sale to
the extent limited to the Capital Stock or assets in question, and (vii) any
customary encumbrance or restriction applicable to a Restricted Subsidiary that
is contained in an agreement or instrument governing or relating to Permitted
Indebtedness contained in any Debt Securities or Permitted Credit Facility;
provided that the terms and conditions of any such encumbrance or restriction
contained in any Debt Securities are no more restrictive than those contained in
the Indenture; PROVIDED FURTHER, that the provisions of such agreement or
instrument permit the payment of interest and principal and mandatory
repurchases pursuant to the terms of the Indenture and the Notes
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and other Indebtedness (other than Subordinated Indebtedness) that is solely an
obligation of the Company; and PROVIDED FURTHER that such agreement or
instrument may contain customary covenants regarding the merger of or sale of
all or any substantial part of the assets of the Company or any Restricted
Subsidiary, customary restrictions on transactions with affiliates and customary
subordination provisions governing indebtedness owed to the Company or any
Restricted Subsidiary.
DISPOSITION OF PROCEEDS OF ASSET SALES. The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, make any
Asset Sale unless (a) the Company or such Restricted Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value of the shares or assets sold or otherwise disposed of and (b)
at least 75% of such consideration consists of cash or Cash Equivalents;
PROVIDED that the following shall be treated as cash for purposes of this
covenant: (x) the amount of any Indebtedness (other than Subordinated
Indebtedness) of the Company or any Restricted Subsidiary that is actually
assumed by the transferee of assets disposed of in such Asset Sale and from
which Company and the Restricted Subsidiaries are fully released and (y) the
amount of any notes or other obligations that within 30 days of receipt are
converted into cash (to the extent of the cash (after payment of any costs of
disposition) so received). Notwithstanding the preceding sentence, the Company
and its Restricted Subsidiaries may consummate an Asset Sale without complying
with clause (b) of the immediately preceding sentence if at least 75% of the
consideration for such Asset Sale consists of any combination of cash, Cash
Equivalents and Permitted Business Assets (as defined below) (or in Capital
Stock of any Person that will become a Restricted Subsidiary as a result of such
investment if all or substantially all of the properties and assets of such
Person are Permitted Business Assets); provided that any non-cash consideration
(other than Permitted Business Assets received by the Company or any of its
Restricted Subsidiaries in connection with such Asset Sale) that is converted
into or sold or otherwise disposed of for cash or Cash Equivalents within 270
days after such Asset Sale and any Permitted Business Assets constituting cash
or Cash Equivalents received by the Company or any Restricted Subsidiary shall
constitute Net Cash Proceeds subject to the provisions set forth below. The
Company or the applicable Restricted Subsidiary, as the case may be, may (i)
apply the Net Cash Proceeds from such Asset Sale, within 270 days of the receipt
thereof, to the permanent reduction (whether by means of repayment, release
pursuant to clause (x) of the first sentence of this covenant or otherwise) of
(A) Indebtedness of any Restricted Subsidiary and/or (B) Indebtedness of the
Company ranking senior to or PARI PASSU with the Notes, and, in each case,
permanently reduce the amount of the commitments thereunder by the amount of the
Indebtedness so repaid, and/or (ii) apply such Net Cash Proceeds, within 270
days of the receipt thereof, to an investment in properties and assets that will
be used in the same or a related line of business as that being conducted by the
Company or any Restricted Subsidiary at the time of such Asset Sale
(collectively, "Permitted Business Assets") (or in Capital Stock of any Person
that will become a Restricted Subsidiary as a result of such investment if all
or substantially all of the properties and assets of such Person are Permitted
Business Assets).
To the extent all or part of the Net Cash Proceeds of any Asset Sale are not
applied within 270 days of such Asset Sale as described in clause (i) or (ii) of
the preceding paragraph (such Net Cash Proceeds, the "Unutilized Net Cash
Proceeds"), the Company shall, within 20 days after such 270th day, make an
offer to purchase (an "Asset Sale Offer") all outstanding Notes up to a maximum
Accreted Value (expressed as a multiple of $1,000) equal to the Note Pro Rata
Share of Unutilized Net Cash Proceeds, at a purchase price in cash equal to 100%
of the Accreted Value thereof as of any purchase date, plus accrued and unpaid
interest, if any, and liquidated damages, if any, to such purchase date;
provided, however, that an Asset Sale Offer may be deferred by the Company until
there are Unutilized Net Cash Proceeds equal to at least $5.0 million, at which
time the entire amount of such Unutilized Net Cash Proceeds (and not just the
amount in excess of $5.0 million) shall be applied as required pursuant to this
paragraph and the next following paragraph.
If any other Indebtedness of the Company which ranks PARI PASSU with the
Notes (the "Other Indebtedness") requires that an offer to repurchase such
Indebtedness be made upon the consummation
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of an Asset Sale, the Company may apply the Unutilized Net Cash Proceeds
otherwise required to be applied to an Asset Sale Offer to offer to purchase
such Other Indebtedness and to an Asset Sale Offer so long as the amount of such
Unutilized Net Cash Proceeds applied to repurchase the Notes is not less than
the Note Pro Rata Share of Unutilized Net Cash Proceeds. Any offer to purchase
such Other Indebtedness shall be made at the same time as the Asset Sale Offer,
and the purchase date in respect of any such offer to purchase and the Asset
Sale Offer shall occur on the same day.
For purposes of this covenant, "Note Pro Rata Share of Unutilized Net Cash
Proceeds" means the amount of the Unutilized Net Cash Proceeds equal to the
product of (x) the Unutilized Net Cash Proceeds and (y) a fraction, the
numerator of which is the aggregate Accreted Value of, and all accrued interest
thereon to the purchase date on, all Notes (or portions thereof) validly
tendered and not withdrawn pursuant to an Asset Sale Offer related to such
Unutilized Net Cash Proceeds (the "Note Amount") and the denominator of which is
the sum of the Note Amount and the lesser of (i) the aggregate principal face
amount, and all accrued interest thereon to the purchase date, or (ii) the
Accreted Value as of the purchase date of all Other Indebtedness (or portions
thereof) validly tendered and not withdrawn pursuant to a concurrent offer to
purchase such Other Indebtedness made at the time of such Asset Sale Offer.
Each Asset Sale Offer shall remain open for a period of 20 business days or
such longer period as may be required by law. To the extent that the Accreted
Value, plus accrued interest thereon, if any, to the payment date, of Notes
validly tendered and not withdrawn pursuant to an Asset Sale Offer is less than
the Unutilized Net Cash Proceeds or the Note Pro Rata Share of Unutilized Net
Cash Proceeds, as the case may be, the Company or any Restricted Subsidiary may
use such deficiency for general corporate purposes, including the repayment or
repurchase of Indebtedness. If the Accreted Value, plus accrued interest
thereon, if any, to the payment date, of Notes validly tendered and not
withdrawn by holders thereof exceeds the amount of Notes which can be purchased
with the Unutilized Net Cash Proceeds or the Note Pro Rata Share of Unutilized
Net Cash Proceeds, as the case may be, then the Notes to be purchased will be
selected on a pro rata basis. Upon completion of an Asset Sale Offer and offer
for any Other Indebtedness, the amount of Unutilized Net Cash Proceeds shall be
reset to zero.
If the Company is required to make an Asset Sale Offer, the Company shall
comply with all applicable tender offer rules, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable securities laws and regulations. To the extent that the provisions of
any such securities laws or regulations conflict with provisions of this
covenant, the Company will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under this
covenant solely by virtue of such compliance.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. The Indenture provides that the Company will not sell, and will
not permit any Restricted Subsidiary, directly or indirectly, to issue or sell,
any shares of Capital Stock (or any options, warrants or other rights to
purchase such CapitalStock) of a Restricted Subsidiary, except (i) any sale or
issuance of Capital Stock to the Company or a Wholly Owned Restricted
Subsidiary, (ii) any sale or issuance of Common Stock to directors as director
qualifying shares, but only to the extent required under applicable law, (iii)
any sale or other disposition of all, but not less than all, of the issued and
outstanding Capital Stock of any Restricted Subsidiary owned by the Company and
the Restricted Subsidiaries or (iv) any sale or issuance of Capital Stock of a
Restricted Subsidiary (other than pursuant to clauses (i) or (ii)) if such
Restricted Subsidiary would no longer be a Restricted Subsidiary immediately
after such transaction and any Investment in such Person remaining after giving
effect to such sale or issuance would have been permitted to be made under the
covenant described under "--LIMITATION ON RESTRICTED PAYMENTS," and, in the case
of both (iii) and (iv), in compliance with the covenant described under
"--DISPOSITION OF PROCEEDS OF ASSET SALES."
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Indenture provides that the
Company shall not, and shall not permit, cause or suffer any Restricted
Subsidiary to, directly or indirectly, conduct any business, sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or purchase
any property or
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assets from, or enter into any contract, agreement, loan, advance or Guarantee
or engage in any other transaction (or series of related transactions which are
similar or part of a common plan) with or for the benefit of any of their
respective Affiliates or any beneficial owner of 10% or more of the Common Stock
of the Company or any officer or director of the Company or any Subsidiary
(each, an "Affiliate Transaction"), unless the terms of the Affiliate
Transaction are set forth in writing and are no less favorable to the Company or
such Restricted Subsidiary, as the case may be, than would be available in a
comparable transaction with an unaffiliated third party. Each Affiliate
Transaction (or series of related Affiliate Transactions) involving aggregate
payments and/or other consideration having Fair Market Value (i) in excess of
$1.0 million shall be approved by a majority of the Board, such approval to be
evidenced by a Board Resolution stating that the Board has determined that such
transaction or transactions comply with the foregoing provisions, (ii) in excess
of $5.0 million shall further require the approval of a majority of the
Disinterested Directors and (iii) in excess of $10.0 million shall further
require that the Company obtain a written opinion from an Independent Financial
Advisor stating that the terms of such Affiliate Transaction (or series of
related Affiliate Transactions) are fair to the Company or the Restricted
Subsidiary, as the case may be, from a financial point of view; PROVIDED that
this clause (iii) shall not apply to purchases of goods and/or services in the
ordinary course of the Company's business, and on terms no less favorable to the
Company than those customarily granted to purchasers of such goods and/or
services, from Paradyne Corporation or Xylan Corporation. For purposes of this
covenant, any Affiliate Transaction approved by a majority of the Disinterested
Directors or as to which a written opinion has been obtained from an Independent
Financial Advisor, on the basis set forth in the preceding sentence, shall be
deemed to be on terms that are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than would be available in a
comparable transaction with an unaffiliated third party and, therefore, shall be
permitted under this covenant.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among, or solely for the benefit of,
the Company and/or any of the Restricted Subsidiaries, provided that in any such
case, no officer, director or beneficial owner of 10% or more of any class of
Capital Stock of the Company shall beneficially own any Capital Stock of any
such Restricted Subsidiary, (ii) transactions pursuant to agreements and
arrangements existing on the Issue Date and specified on a schedule to the
Indenture, (iii) any Restricted Payment made in compliance with the covenant
"--LIMITATION ON RESTRICTED PAYMENTS," (iv) the payment of reasonable and
customary regular fees to directors of the Company or any Restricted Subsidiary
who are not employees of the Company or any Restricted Subsidiary, (v)
employment agreements, stock option agreements and indemnification arrangements
entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business and consistent with industry practice, (vi) the
granting and performance of registration rights for securities of the Company,
(vii) loans and advances to officers, directors and employees of the Company or
any Restricted Subsidiary for travel, entertainment, moving and other relocation
expenses, in each case made in the ordinary course of business and consistent
with industry practice, and (viii) any Permitted Investment.
BUSINESS ACTIVITIES. Pursuant to the Indenture, the Company will not, and
will not permit any Restricted Subsidiary to, engage in any business other than
the Permitted Business.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES. The
Indenture prohibits the Company from permitting any Restricted Subsidiary,
directly or indirectly, to Guarantee the payment of any other Indebtedness of
the Company unless such Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture to the Indenture providing for the Guarantee
of the payment of the Notes by such Restricted Subsidiary, which Guarantee shall
be senior to or PARI PASSU with such Restricted Subsidiary's Guarantee of such
other Indebtedness; provided that this paragraph shall not apply to any
Guarantee of Indebtedness described in clause (h) of the definition of
"Permitted Indebtedness." Notwithstanding the foregoing, any such Guarantee by a
Restricted Subsidiary of the Notes shall provide by its terms that it shall be
automatically and unconditionally released and discharged upon (i) any sale,
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exchange or transfer, to any Person not an Affiliate of the Company, of all of
the Company's stock in, or all or substantially all the assets of, such
Restricted Subsidiary, which sale, exchange or transfer is made in compliance
with the applicable provisions of the Indenture, (ii) the Designation of such
Restricted Subsidiary as an Unrestricted Subsidiary in compliance with the
covenant described under "--LIMITATION ON DESIGNATIONS OF UNRESTRICTED
SUBSIDIARIES" or (iii) the release of such Restricted Subsidiary from all of its
obligations under all of its Guarantees of Indebtedness of the Company. A form
of such Guarantee is attached as an exhibit to the Indenture.
LIMITATION ON SALE/LEASEBACK TRANSACTIONS. The Indenture prohibits the
Company and its Restricted Subsidiaries from, directly or indirectly, entering
into, assuming, Guaranteeing or otherwise becoming liable with respect to any
Sale/Leaseback Transaction. However, the Company or any Restricted Subsidiary
may enter into any such transaction if (i) the Company or such Restricted
Subsidiary would be permitted under the covenants described above under
"--LIMITATION ON ADDITIONAL INDEBTEDNESS" and "--LIMITATION ON LIENS SECURING
CERTAIN INDEBTEDNESS" to incur secured Indebtedness in an amount equal to the
Attributable Debt with respect to such transaction; (ii) the consideration
received by the Company or such Restricted Subsidiary from such transaction is
at least equal to the Fair Market Value of the property being transferred, and
(iii) to the extent that such transaction constitutes an Asset Sale, the Net
Cash Proceeds received by the Company or such Restricted Subsidiary from such
transaction are applied in accordance with the covenant described above under
"--DISPOSITION OF PROCEEDS OF ASSET SALES."
REPORTS. The Indenture provides that, whether or not the Company is subject
to Section 13(a) or 15(d) of the Exchange Act or any successor provision of law,
the Company shall furnish without cost to each holder of Notes and file with the
Trustee (i) within 135 days after the end of each fiscal year of the Company,
financial information that would be required to be contained in an annual report
on Form 10-K for such year filed by the Company with the SEC (whether or not the
Company is then required to file such Form with the SEC), including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and audited financial statements of the Company, including a report
thereon by the Company's certified public accountants, (ii) within 60 days after
the end of each of the first three fiscal quarters of each fiscal year of the
Company, financial information that would be required to be contained in a
quarterly report on Form 10-Q filed by the Company with the SEC (whether or not
the Company is then required to file such Form with the SEC), including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and (iii) on a timely basis, any information concerning the Company
or any Restricted Subsidiary required to be contained in a current report on
Form 8-K (whether or not the Company is then required to file such Form with the
SEC). Until such time as the Company is otherwise required to file periodic
reports with the SEC under the Exchange Act (or any successor provision of law),
the Company will file with the SEC (if permitted by SEC practice and applicable
law and regulations), for public availability, a copy of the annual and
quarterly financial information and other information prepared by it for
distribution to holders of Notes and filing with the Trustee. In addition, for
so long as any Notes remain outstanding, the Company shall furnish to securities
analysts and prospective investors, upon their request, the information required
to be delivered pursuant to Rule 144A(d)(4) under the Securities Act, and, to
any beneficial holder of Notes, if not obtainable from the SEC, information of
the type that would be filed with the SEC pursuant to the foregoing provisions,
upon the request of any such holder.
LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Indenture
provides that the Company will not designate any Subsidiary of the Company
(other than a newly created Subsidiary in which the Company has made an
Investment of $1,000 or less) as an "Unrestricted Subsidiary" under the
Indenture (a "Designation") unless:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
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(b) the Company would be permitted under the Indenture to make an
Investment at the time of such Designation (assuming the effectiveness of
such Designation) in an amount (the "Designation Amount") equal to the Fair
Market Value of the interest of the Company and its Restricted Subsidiaries
in such Subsidiary on such date.
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
"--LIMITATION ON RESTRICTED PAYMENTS" for all purposes of the Indenture in an
amount equal to the Designation Amount. The Indenture will further provide that
neither the Company nor any Restricted Subsidiary shall at any time (x) provide
a Guarantee of, or similar credit support for, or subject any of its properties
or assets (other than the Capital Stock of any Unrestricted Subsidiary) to the
satisfaction of, any Indebtedness of any Unrestricted Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness), (y) be
directly or indirectly liable for any Indebtedness of any Unrestricted
Subsidiary or (z) be directly or indirectly liable for any other Indebtedness
which provides that the holder thereof may (upon notice, lapse of time or both)
declare a default thereon (or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity) upon the occurrence of a default
with respect to any other Indebtedness that is Indebtedness of an Unrestricted
Subsidiary (including any corresponding right to take enforcement action against
such Unrestricted Subsidiary), except in the case of clause (x) or (y) to the
extent otherwise permitted under the Indenture, including, without limitation,
under the covenant "--LIMITATION ON RESTRICTED PAYMENTS" above.
The Indenture further provides that the Company will not revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation")
unless:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at such
time, have been permitted to be incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by Board Resolutions and
officers' certificates delivered to the Trustee certifying compliance with the
foregoing provisions.
LIMITATION ON STATUS AS INVESTMENT COMPANY. The Indenture provides that the
Company will not, and will not permit any of its Subsidiaries or Affiliates to,
conduct its business in a fashion that would cause the Company to be required to
register as an "investment company" (as that term is defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act")), or otherwise
become subject to regulation under the Investment Company Act. For purposes of
establishing the Company's compliance with this provision, any exemption that is
or would become available under Section 3(c)(1) or Section 3(c)(7) of the
Investment Company Act will be disregarded.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Indenture provides that the Company will not (i) consolidate or combine
with or merge with or into or, directly or indirectly, sell, assign, convey,
lease, transfer or otherwise dispose of all or substantially all of its
properties and assets to any Person or Persons in a single transaction or
through a series of transactions, or (ii) permit any of the Restricted
Subsidiaries to enter into any such transaction or series of transactions if it
would result in the disposition of all or substantially all of the properties or
assets of the Company and the Restricted Subsidiaries on a consolidated basis,
unless, in the case of either (i) or (ii), (a) the Company shall be the
continuing Person or, if the Company is not the continuing Person, the
resulting, surviving or transferee Person (the "surviving entity") shall be a
company organized and existing under the laws of the United States or any State
or territory thereof; (b) the surviving entity (if other than the Company) shall
expressly assume all of the obligations of the Company under the Notes and the
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Indenture, and shall execute a supplemental indenture to effect such assumption
which supplemental indenture shall be delivered to the Trustee and shall be in
form and substance reasonably satisfactory to the Trustee; (c) immediately after
giving effect to such transaction or series of transactions on a pro forma basis
(including, without limitation, any Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction or series of
transactions), (I) the Company or the surviving entity (assuming such surviving
entity's assumption of the Company's obligations under the Notes and the
Indenture), as the case may be, would be able to incur $1.00 of Indebtedness
(other than Permitted Indebtedness) under the covenant described under
"--Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS" above, and (II) the
Company or the surviving entity, as the case may be, would have a Consolidated
Net Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction or series of transactions; (d) immediately
after giving effect to such transaction or series of transactions on a pro forma
basis (including, without limitation, any Indebtedness incurred or anticipated
to be incurred in connection with or in respect of such transaction or series of
transactions), no Default shall have occurred and be continuing; and (e) the
Company or the surviving entity, as the case may be, shall have delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel stating that such
transaction or series of transactions and, if a supplemental indenture is
required in connection with such transaction or series of transactions to
effectuate such assumption, such supplemental indenture, complies with this
covenant and that all conditions precedent in the Indenture relating to the
transaction or series of transactions have been satisfied.
Upon any consolidation or merger or any sale, assignment, conveyance, lease,
transfer or other disposition of all or substantially all of the assets of the
Company in accordance with the foregoing in which the Company or the Restricted
Subsidiary, as the case may be, is not the surviving corporation, then the
successor corporation formed by such a consolidation or into which the Company
or such Restricted Subsidiary is merged or to which such transfer is made, will
succeed to, and be substituted for, and may exercise every right and power of,
the Company or such Restricted Subsidiary, as the case may be, under the
Indenture with the same effect as if such successor corporation had been named
as the Company or such Restricted Subsidiary therein; and thereafter, except in
the case of (i) any lease or (ii) any sale, assignment, conveyance, transfer,
lease or other disposition to a Restricted Subsidiary of the Company, the
Company shall be discharged from all obligations and covenants under the
Indenture and the Notes.
The Indenture provides that, for all purposes of the Indenture (including
the provisions of this covenant and the covenants described under "--Certain
Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS," "--LIMITATION ON RESTRICTED
PAYMENTS" and "--LIMITATION ON LIENS SECURING CERTAIN INDEBTEDNESS") and the
Notes, Subsidiaries of any surviving entity will, upon such transaction or
series of related transactions, become Restricted Subsidiaries or Unrestricted
Subsidiaries as provided pursuant to the covenant "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries," and all
Indebtedness, and all Liens on property or assets, of the surviving entity and
the Restricted Subsidiaries (except Indebtedness, or Liens on property or
assets, of the Company and the Restricted Subsidiaries in existence immediately
prior to such transaction or series of related transactions) will be deemed to
have been incurred upon such transaction or series of related transactions.
The meaning of the phrase "all or substantially all" as used above varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances, there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of the Company, and
therefore it may be unclear whether the foregoing provisions are applicable.
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
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(i) default in the payment of interest on the Notes when it becomes due
and payable and continuance of such default for a period of 30 days or more;
or
(ii) default in the payment of the principal of, or premium, if any, on
the Notes when due at maturity, upon redemption or otherwise; or
(iii) default in the performance, or breach, of any covenant described
under "--Certain Covenants--CHANGE OF CONTROL," "--DISPOSITION OF PROCEEDS
OF ASSET SALES" OR "--CONSOLIDATION, MERGER, SALE OF ASSETS, ETC."; or
(iv) default in the performance, or breach, of any covenant in the
Indenture (other than defaults specified in clause (i), (ii) or (iii)
above), and continuance of such default or breach for a period of 30 days or
more after written notice to the Company by the Trustee or to the Company
and the Trustee by the holders of at least 25% in aggregate principal amount
at maturity of the outstanding Notes (in each case, when such notice is
deemed given in accordance with the Indenture); or
(v) (a) failure to pay, following any applicable grace period, any
installment of principal due (whether at maturity or otherwise) under one or
more classes or issues of Indebtedness in an aggregate principal amount of
$5.0 million or more under which the Company or any Restricted Subsidiary is
obligated or (b) failure by the Company or any Restricted Subsidiary to
perform any other term, covenant, condition or provision of one or more
classes or issues of Indebtedness in an aggregate principal amount of $5.0
million or more under which the Company or such Restricted Subsidiary is
obligated and, in the case of this clause (b), such failure results in an
acceleration of the maturity thereof; or
(vi) one or more judgments, orders or decrees for the payment of money
of $5.0 million or more, either individually or in the aggregate, shall be
entered against the Company or any Restricted Subsidiary or any of their
respective properties and shall not be paid or discharged and there shall
have been a period of 60 consecutive days or more during which a stay of
enforcement of such judgment or order, by reason of pending appeal or
otherwise, shall not be in effect; or
(vii) certain events of bankruptcy, insolvency, reorganization,
administration or similar proceedings with respect to the Company or any
Restricted Subsidiary shall have occurred; or
(viii) the Indenture or the Registration Rights Agreement ceases to be
in force and effect in all material respects (other than with respect to the
invalidity or alleged invalidity of any provision in the Registration Rights
Agreement regarding indemnification for matters arising under the federal
securities laws) or is declared null and void or the Company denies that it
has any further obligation or liability thereunder or gives notice to that
effect (other than by reason of termination or release in accordance with
the terms thereof).
If an Event of Default (other than an Event of Default specified in clause
(vii) above with respect to the Company or any Restricted Subsidiary) occurs and
is continuing, then the Trustee or the holders of at least 25% in principal
amount at maturity of the outstanding Notes may, by written notice, and the
Trustee upon the request of the holders of not less than 25% in principal amount
at maturity of the outstanding Notes shall, declare the Default Amount of all
outstanding Notes to be immediately due and payable and upon any such
declaration such amount shall become immediately due and payable. If an Event of
Default specified in clause (vii) above with respect to the Company or any
Restricted Subsidiary occurs and is continuing, then the Default Amount of all
outstanding Notes shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any holder.
After a declaration of acceleration, the holders of a majority in aggregate
principal amount at maturity of outstanding Notes may, by notice to the Trustee,
rescind such declaration of acceleration if all existing Events of Default,
other than nonpayment of the Default Amount of the Notes that has become due
solely as a result of such acceleration, have been cured or waived and if the
rescission of acceleration
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would not conflict with any judgment or decree. The holders of a majority in
principal amount at maturity of the outstanding Notes also have the right to
waive past defaults under the Indenture, except a default in the payment of
principal of, or any interest on, any outstanding Note, or in respect of certain
covenants or provisions that cannot be modified or amended without the consent
of all holders of Notes.
No holder of any of the Notes has any right to institute any proceeding with
respect to the Indenture or any remedy thereunder, unless (i) the holders of at
least 25% in principal amount at maturity of the outstanding Notes have made
written request, and offered reasonable security or indemnity, to the Trustee to
institute such proceeding as Trustee, (ii) the Trustee has failed to institute
such proceeding within 60 days after receipt of such notice, and (iii) the
Trustee has not within such 60-day period received directions inconsistent with
such written request by holders of a majority in principal amount at maturity of
the outstanding Notes. Such limitations do not apply, however, to a suit
instituted by a holder of a Note for the enforcement of the payment of the
principal of, or any accrued and unpaid interest on, such Note on or after the
respective due dates expressed in such Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default shall occur and be continuing, the Trustee is
not under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders unless such holders
shall have offered to such Trustee reasonable security or indemnity. Subject to
certain provisions concerning the rights of the Trustee, the holders of a
majority in principal amount at maturity of the outstanding Notes have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee.
The Indenture provides that the Trustee will, within 30 days after the
occurrence of any Default, give to the holders of the Notes notice of such
Default known to it, unless such Default shall have been cured or waived;
provided that the Trustee shall be protected in withholding such notice if it
determines in good faith that the withholding of such notice is in the interest
of such holders.
The Company is required to furnish to the Trustee annually a statement as to
its compliance with all conditions and covenants under the Indenture.
DEFEASANCE
The Company may at any time terminate all of its obligations with respect to
the Notes ("defeasance"), except for certain obligations, including those
regarding any trust established for a defeasance and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes as required by the Indenture and to maintain agencies in respect of
Notes. The Company may at any time terminate its obligations under certain
covenants set forth in the Indenture, some of which are described under
"--Certain Covenants"above, and any omission to comply with such obligations
shall not constitute a Default or an Event of Default with respect to the Notes
("covenant defeasance"). To exercise either defeasance or covenant defeasance,
the Company must irrevocably deposit in trust, for the benefit of the holders of
the Notes, with the Trustee money (in United States dollars) or U.S. government
obligations (denominated in United States dollars), or a combination thereof, in
such amounts as will be sufficient to pay the Accreted Value of and premium, if
any, and accrued but unpaid interest on the Notes to redemption or maturity and
comply with certain other conditions, including the delivery of a legal opinion
as to certain tax matters. The requirements for defeasance shall not be deemed
satisfied if a Default specified in clause (vii) of "--Events of Default" above
occurs on or prior to the 91st calendar day after the date of the deposit of
money or securities in the defeasance trust.
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SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of Notes)
as to all outstanding Notes when either (a) all such Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes that have
been replaced or paid and Notes for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from such trust) have been delivered to the
Trustee for cancellation; or (b) (i) all such Notes not theretofore delivered to
the Trustee for cancellation have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Trustee as trust funds
in trust for the purpose an amount of money sufficient to pay and discharge the
entire indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for principal amount, premium, if any, and accrued and unpaid
interest to the date of such deposit; (ii) the Company has paid all sums payable
by it under the Indenture; and (iii) the Company has delivered irrevocable
instructions to the Trustee to apply the deposited money toward the payment of
the Notes at maturity or on the redemption date, as the case may be. In
addition, the Company must deliver an Officers' Certificate and an Opinion of
Counsel stating that all conditions precedent to satisfaction and discharge have
been complied with.
AMENDMENT AND WAIVERS
From time to time, the Company, when authorized by resolutions of the Board,
and the Trustee, without the consent of the holders of the Notes, may amend,
waive or supplement the Indenture or the Notes for certain specified purposes,
including, among other things, curing ambiguities, defects or inconsistencies,
maintaining the qualification of the Indenture under the Trust Indenture Act or
making any change that does not adversely affect the rights of any holder. Other
amendments and modifications of the Indenture and the Notes may be made by the
Company and the Trustee by supplemental indenture with the consent of the
holders of not less than a majority of the aggregate principal amount at
maturity of the outstanding Notes; PROVIDED that no such modification or
amendment may, without the consent of the holder of each outstanding Note
affected thereby, (i) reduce the principal amount at maturity of, change the
fixed maturity of, or alter the redemption provisions of, the Notes or amend or
modify the calculation of the Accreted Value or the Default Amount so as to
reduce the amount of the Accreted Value or the Default Amount, (ii) change the
currency in which any Notes or amounts owing thereon is payable, (iii) reduce
the percentage of the aggregate principal amount at maturity of the outstanding
Notes which must consent to an amendment, supplement or waiver or consent to
take any action under the Indenture or the Notes, (iv) impair the right to
institute suit for the enforcement of any payment on or with respect to the
Notes, (v) waive a default in payment with respect to the Notes, except a
rescission of acceleration of the relevant Notes by the holders thereof as
provided in the Indenture and a waiver of the payment default that resulted from
such acceleration, (vi) reduce the rate or change the time for payment of
interest on the Notes, (vii) alter the Company's obligation to purchase the
Notes following the occurrence of a Change of Control or an Asset Sale in
accordance with the Indenture or waive any default in the performance thereof or
(viii) affect the ranking of the Notes in a manner adverse to the holder of the
Notes.
Holders of a majority in aggregate principal amount at maturity of the
outstanding Notes, on behalf of all holders of Notes, may waive compliance by
the Company with certain restrictive provisions of the Indenture. Subject to
certain rights of the Trustee as provided in the Indenture, the holders of a
majority in aggregate principal amount at maturity of the Notes, on behalf of
all holders, may waive any past Default under the Indenture (including any such
waiver obtained in connection with a tender offer or exchange offer for such
Notes), except a default in the payment of principal or interest or a Default
arising from failure to purchase any Notes tendered pursuant to an offer to
purchase required to be made by any provision of the Indenture, or a Default in
respect of a provision that under the Indenture cannot be modified or amended
without the consent of the holder of each Note that is affected.
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REGARDING THE TRUSTEE
State Street Bank and Trust Company of California, N.A. will serve as
Trustee under the Indenture.
GOVERNING LAW
The Indenture provides that the Indenture and the Notes, respectively, will
be governed by and construed in accordance with the laws of the State of New
York, without giving effect to principles of conflicts of law.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the Indenture.
Reference is made to the Indenture for the full definition of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"Accreted Value" means, as of any date (the "Specified Date"), with respect
to each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date is one of the following dates (each a
"Semi-Annual Accrual Date"), the amount set forth opposite such date below:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRETED
ACCRUAL DATE VALUE
- --------------------------------------------------------------------------------- ----------
<S> <C>
Issue Date....................................................................... $ 518.50
May 15, 1998..................................................................... $ 520.38
November 15, 1998................................................................ $ 555.51
May 15, 1999..................................................................... $ 593.00
November 15, 1999................................................................ $ 633.03
May 15, 2000..................................................................... $ 675.76
November 15, 2000................................................................ $ 721.37
May 15, 2001..................................................................... $ 770.07
November 15, 2001................................................................ $ 822.05
May 15, 2002..................................................................... $ 877.53
November 15, 2002................................................................ $ 936.77
May 15, 2003..................................................................... $ 1,000.00
</TABLE>
(ii) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the sum of (A) the Accreted Value for the Semi-Annual Accrual Date
immediately preceding the Specified Date and (B) an amount equal to the
product of (x) the Accreted Value for the Semi-Annual Accrual Date
immediately following the Specified Date less the Accreted Value for the
Semi-Annual Accrual Date immediately preceding the Specified Date and (y) a
fraction, the numerator of which is the number of days actually elapsed from
the immediately preceding Semi-Annual Accrual Date to the Specified Date,
using a 360-day year of twelve 30-day months, and the denominator of which
is 180; and
(iii) if the Specified Date is on or after May 15, 2003, $1,000.
"Acquired Indebtedness" means Indebtedness of a Person (i) assumed in
connection with an Asset Acquisition from such Person or (ii) existing at the
time such Person is merged or consolidated with or into the Company or any
Restricted Subsidiary or becomes a Restricted Subsidiary, in each case not
incurred in connection with, or in anticipation of, such Asset Acquisition or
merger or consolidation or such Person becoming a Restricted Subsidiary;
PROVIDED that Indebtedness of such Person which is redeemed, defeased, retired
or otherwise repaid at the time of or immediately upon consummation of such
Asset Acquisition or the transactions by which such Person is merged or
consolidated with or into the Company or any Restricted Subsidiary or becomes a
Restricted Subsidiary shall not constitute Acquired Indebtedness.
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"Affiliate" of any specified Person means (i) any other Person which,
directly or indirectly, controls, is controlled by or is under direct or
indirect common control with, the specified Person, (ii) any other Person that
owns, directly or indirectly, 10% or more of the specified Person's Voting Stock
or (iii) any executive officer or director of the specified Person; provided
that Donaldson, Lufkin & Jenrette, Inc. and its Affiliates shall not be deemed
to be Affiliates of the Company solely as a result of such entities holding the
Units, the Notes, the Warrants, the Series A Preferred Stock or the Series B
Preferred Stock (or any security which is convertible into or exchangeable for
any of the foregoing) or having the right to nominate and have elected one
member of the Board. For the purposes of this definition, "control" when used
with respect to any Person means the power to direct the management and policies
of such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise, and the terms "affiliated," "controlling"
and "controlled" have meanings correlative to the foregoing.
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Company or any
Restricted Subsidiary in any other Person, or any acquisition or purchase of
Capital Stock of any other Person by the Company or any Restricted Subsidiary,
in either case pursuant to which such Person shall (a) become a Restricted
Subsidiary or (b) shall be merged or consolidated with or into the Company or
any Restricted Subsidiary or (ii) any acquisition by the Company or any
Restricted Subsidiary of the assets of any Person which constitute substantially
all of an operating unit or line of business of such Person or which is
otherwise outside of the ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer or
lease (that has the effect of a disposition and is not for security purposes) or
other disposition (that is not for security purposes) (including by way of a
Sale/Leaseback Transaction) to any Person other than the Company or a Restricted
Subsidiary, in one transaction or a series of related transactions, of (i) any
Capital Stock of any Restricted Subsidiary, (ii) any assets of the Company or
any Restricted Subsidiary which constitute substantially all of an operating
unit or line of business of the Company and the Restricted Subsidiaries or (iii)
any other property or asset of the Company or any Restricted Subsidiary outside
of the ordinary course of business. For the purposes of this definition, the
term "Asset Sale" shall not include (i) any disposition of properties and assets
of the Company that is governed under "--Consolidation, Merger, Sale of Assets,
Etc." above, (ii) sales of property or equipment that have become worn out,
obsolete or damaged or otherwise unsuitable for use in connection with the
business of the Company or any Restricted Subsidiary, as the case may be, and
(iii) for purposes of the covenant "--Certain Covenants--DISPOSITION OF PROCEEDS
OF ASSET SALES," (a) sales, conveyances, transfers, leases or other dispositions
of property or assets, whether in one transaction or a series of related
transactions occurring within one year, involving assets with a Fair Market
Value not in excess of $500,000 in any 12 month period and (b) any asset of the
Company or a Restricted Subsidiary that is the subject of a Sale/Leaseback
Transaction with a Person (other than the Company or an Affiliate of the
Company) made in accordance with the covenant described under "--Certain
Covenants-- LIMITATION ON SALE/LEASEBACK TRANSACTIONS" and that was acquired by
the Company or such Restricted Subsidiary no more than 120 days prior to the
transfer to a third party in a Sale/Leaseback Transaction.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
implicit in the terms of the lease included in such Sale/Leaseback Transaction)
of the total obligations of the lessee for rental payments during the remaining
term of the lease included in such Sale/Leaseback Transaction (including any
period for which such lease has been extended).
"Average Life to Stated Maturity" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from such date to the date or dates
of each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness multiplied by (b) the amount
of each such principal payment by (ii) the sum of all such principal payments;
provided that, in the case of any
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Capitalized Lease Obligation, all calculations hereunder shall give effect to
any applicable options to renew in favor of the Company or any Restricted
Subsidiary.
"Board" means the Board of Directors of the Company.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the Board
and to be in full force and effect on the date of such certification, and
delivered to the Trustee.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of, such Person's capital stock, including
Preferred Stock, whether outstanding on the Issue Date or issued after the Issue
Date, and any and all rights (other than any evidence of Indebtedness), warrants
or options exchangeable for or convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed, immovable or movable) that is
required to be classified and accounted for as a capitalized lease obligation
under GAAP, and, for the purpose of the Indenture, the amount of such obligation
at any date shall be the capitalized amount thereof at such date, determined in
accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness which matures 365
days or less from the date of purchase or acquisition issued or directly and
fully guaranteed or insured by the United States Government or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States Government is pledged in support thereof or such Indebtedness constitutes
a general obligation of such country); (ii) deposits, certificates of deposit or
acceptances with a maturity of 365 days or less of any financial institution
that is a member of the Federal Reserve System, in each case having combined
capital and surplus and undivided profits (or any similar capital concept) of
not less than $500.0 million and whose senior unsecured debt is rated at least
"A-1" by S&P or "P-1" by Moody's; (iii) commercial paper with a maturity of 365
days or less issued by a corporation (other than an Affiliate of the Company)
organized under the laws of the United States or any State thereof and rated at
least "A-1" by S&P or "P-1" by Moody's; (iv) repurchase agreements and reverse
repurchase agreements relating to marketable direct obligations issued or
unconditionally guaranteed by the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States
Government maturing within 365 days from the date of acquisition; and (v) money
market funds in the United States which invest substantially all of their assets
in securities of the type described in any of the preceding clauses (i) through
(iv).
"Change of Control" means the occurrence of any of the following events: (a)
any "person" or "group" (as such terms are used in Sections 13(d) or 14(d) of
the Exchange Act, provided that no "group" shall be deemed to result solely from
the Investors' Rights Agreement (as defined herein), the Voting Agreement (as
defined herein) or the Voting Trust Agreement (as defined herein) or the
transactions contemplated thereby), excluding Permitted Holders, is or becomes
the "beneficial owner" (as defined in Rules 13d-3 or 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has or acquires the right to acquire, whether such
right is exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total voting power of all Voting Stock of
the Company (except that the person or group shall not be deemed the "beneficial
owner" of shares tendered pursuant to a tender or exchange offer made by that
person or group or any of their Affiliates until the tendered shares are
accepted for purchase or exchange) or has, directly or indirectly, the right to
elect or designate a majority of the Board or (b) the Company consolidates with,
or merges with or into, another person or sells, assigns, conveys, transfers,
leases or otherwise disposes of all or substantially all of its assets to any
person, or any person consolidates with, or merges with or into, the Company, in
any such event pursuant to a transaction in which the outstanding Voting Stock
of the Company is converted into or exchanged for cash, securities or other
property, other than any such transaction where (i) the outstanding Voting Stock
of the Company is converted into or
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exchanged for (1) Voting Stock (other than Disqualified Stock) of the surviving
or transferee corporation or its parent corporation and/or (2) cash, securities
and other property in any amount which could be paid by the Company as a
Restricted Payment under the Indenture, (ii) the "beneficial owners" (as so
defined) of the Voting Stock of the Company immediately before such transaction
own, directly or indirectly, immediately after such transaction, at least a
majority of the voting power of all Voting Stock of the surviving or transferee
corporation or its parent corporation immediately after such transaction, as
applicable, or (iii) immediately after such transaction, no "person" or "group"
(as such terms are defined above), excluding the Permitted Holders, is the
"beneficial owner" (as defined above), directly or indirectly, of more than 50%
of the Voting Stock of such surviving or transferee corporation or its parent
corporation, as applicable, or has, directly or indirectly, the right to elect
or designate a majority of the board of directors of the surviving or transferee
corporation or its parent corporation, as applicable, or (c) during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board (together with any new directors whose election by the
Board or whose nomination for election by the stockholders of the Company was
approved by a vote of a majority of the directors then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute a
majority of the Board then in office. The good faith determination by the Board,
based upon advice of outside counsel, of the beneficial ownership of securities
of the Company within the meaning of Rules 13d-3 and 13d-5 under the Exchange
Act shall be conclusive, absent contrary controlling precedent or contrary
written interpretation published by the SEC. No inference shall be created that
officers or employees of the Company are acting as a "person" or "group" (as
such terms are used in Sections 13(d) or 14(d) of the Exchange Act) with the
power to designate a majority of the members of the Board solely because such
officers or employees constitute a majority of the members of the Board.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or rights in, or other equivalents (however designated
and whether voting and/or nonvoting) of, such Person's common stock and
includes, without limitation, all series and classes of such common stock.
"Consolidated Income Tax Expense" means, with respect to any period, the
provision for federal, state, local, foreign and other income taxes of the
Company and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any period, without
duplication, the sum of (i) the interest expense of the Company and the
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Obligations (including any
amortization of discounts), (c) the interest portion of any deferred payment
obligation, (d) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing and similar
transactions and (e) all capitalized interest and accrued interest, (ii) the
interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid or accrued by the Company and the Restricted Subsidiaries
during such period as determined on a consolidated basis in accordance with
GAAP, (iii) the portion of any rental obligation in respect of any
Sale/Leaseback Transaction allocable to interest expense (determined as if such
were treated as a Capital Lease Obligation), and (iv) the amount of dividends
and distributions in respect of Preferred Stock or Disqualified Stock paid by
the Restricted Subsidiaries to a Person other than the Company or a Restricted
Subsidiary or by the Company during such period.
"Consolidated Net Income" means, with respect to any period, the net income
(or loss) of the Company and the Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, adjusted, to the
extent included in calculating such consolidated net income (or loss), by
excluding, without duplication, (i) all extraordinary, unusual or nonrecurring
gains or losses and all gains or losses from sales or other dispositions of
assets (including Asset Sales) out of the ordinary course of business (net of
taxes, fees and expenses relating to the transaction giving rise thereto) for
such period, (ii) that portion of such net income (or loss) derived from or in
respect of Investments in Persons other
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than Restricted Subsidiaries, except to the extent of any cash dividends
actually received by the Company or any Restricted Subsidiary (subject, in the
case of any Restricted Subsidiary, to the provisions of clause (vi) of this
definition); (iii) any gain or loss, net of taxes, realized upon the termination
of any employee pension benefit plan during such period, (iv) that portion of
such net income (or loss) allocable to minority interests in any Restricted
Subsidiary for such period, (v) net income (or loss) of any other Person
combined with the Company or any Restricted Subsidiary on a "pooling of
interests" basis attributable to any period prior to the date of combination and
(vi) the net income of any Restricted Subsidiary for such period to the extent
that the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time permitted, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
"Consolidated Net Worth" means, with respect to any Person, the consolidated
stockholders' or partners' equity of such Person reflected on the most recent
balance sheet of such Person, determined in accordance with GAAP, less any
amounts attributable to redeemable capital stock (as determined under applicable
accounting standards promulgated by the SEC) of such Person.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period (a) increased (without duplication), to
the extent deducted in arriving at such Consolidated Net Income, by the sum of
(i) Consolidated Income Tax Expense for such period; (ii) Consolidated Interest
Expense for such period; and (iii) depreciation, amortization and any other
non-cash items for such period of the Company and the Restricted Subsidiaries
(other than any non-cash item which requires the accrual of, or a reserve for,
cash charges for any future period), including, without limitation, amortization
of capitalized debt issuance costs for such period, all determined on a
consolidated basis in accordance with GAAP, and (b) decreased by any non-cash
items (including non-recurring gains and non-recurring items of income) to the
extent they increased Consolidated Net Income for such period (including any
partial or complete reversal of reserves taken in a prior period).
"Debt Securities" means any debt securities issued by the Company in a
public offering or in a private placement to institutional "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act).
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Default Amount" means (i) as of any date prior to May 15, 2003, the
Accreted Value of the Notes (and any applicable premium thereon) as of such date
and (ii) as of any date on and after May 15, 2003, the principal amount at
maturity of the Notes (and any applicable premium thereon) and any accrued and
unpaid interest thereon.
"Designation" and "Designation Amount" have the meanings set forth under
"--Certain Covenants--LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES."
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"Disinterested Director" means, with respect to any transaction or series of
related transactions, a member of the Board other than a director who (i) has
any material direct or indirect financial interest in or with respect to such
transaction or series of related transactions or (ii) is an employee or officer
of the Company or an Affiliate that is itself a party to such transaction or
series of transactions or an Affiliate of a party to such transaction or series
of related transactions.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or becomes exchangeable for Indebtedness at the option
of the holder thereof, or becomes redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final maturity date of the
Notes; PROVIDED that any Capital Stock that would not constitute Disqualified
Stock but for provisions thereof giving holders thereof the right to require
such Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the final maturity date
of the Notes will not constitute Disqualified Stock so long as the "asset sale"
or "change of control" provisions applicable to such Capital Stock are no more
favorable to the holders thereof than the provisions described in "--Certain
Covenants--CHANGE OF CONTROL" and "--DISPOSITION OF PROCEEDS OF ASSET SALES" and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
provisions described in "-- Certain Covenants--CHANGE OF CONTROL" and
"--DISPOSITION OF PROCEEDS OF ASSET SALES."
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"Fair Market Value" means, with respect to any asset or property, the price
(after taking into account any liabilities relating to such asset or property)
that could be negotiated in an arms-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under pressure
or compulsion to complete the transaction. Unless otherwise specified in the
Indenture, Fair Market Value shall be determined by the Board acting in good
faith and shall be evidenced by a Board Resolution.
"GAAP" means, as of any date of determination, generally accepted accounting
principles set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board, the
SEC or in such other statements by such other entity as may be approved by a
significant segment of the accounting profession of the United States, which are
in effect as of such date of determination and which are consistently applied
for all applicable periods.
"Guarantee" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or performance
(or payment of damages in the event of non-performance) of all or any part of
such obligation, including, without limiting the foregoing, any obligation (A)
to pay amounts drawn down by letters of credit, (B) to purchase or pay (or
advance or supply funds for the purchase or payment of) such obligation (whether
arising by virtue of partnership arrangement, agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (C) entered into for purposes of
assuring in any other manner the obligee of such obligation of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); PROVIDED that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Indebtedness" means, with respect to any Person, without duplication
(whether or not the recourse of the lender is to the whole of the assets of such
Person or only to a portion thereof), (i) every liability of
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such Person, whether or not contingent, (A) for borrowed money, (B) evidenced by
notes, bonds, debenture or other similar instruments (whether or not
negotiable), (C) for reimbursement of amounts expended under letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person, (D) issued or assumed as the deferred purchase price of property or
services, (E) relating to a Capitalized Lease Obligation and all Attributable
Debt in respect of Sale/Leaseback Transactions of such Person and (F) in respect
of an Interest Rate Obligation of such Person; (ii) every liability of others of
the kind described in the preceding clause (i) which such Person has Guaranteed
or which is otherwise its legal liability; or (iii) every obligation secured by
a Lien (other than (x) Permitted Liens of the types described in clauses (b),
(d) or (e) of the definition of Permitted Liens; provided that the obligations
secured would not constitute Indebtedness under clauses (i) or (ii) or (iii) of
this definition, and (y) Liens on Capital Stock or Indebtedness of any
Unrestricted Subsidiary) to which the property or assets of such Person are
subject, whether or not the obligations secured thereby shall have been assumed
by or shall otherwise be such Person's legal liability (the amount of such
obligation being deemed to be the lesser of the Fair Market Value of such
property or asset or the amount of the obligation so secured); (iv) all
Disqualified Stock of such Person, valued at the greater of its voluntary or
involuntary maximum fixed repurchase or redemption price (plus accrued and
unpaid dividends to the date of determination); and (v) any and all deferrals,
renewals, extensions and refundings of, or amendments, modifications or
supplements to, any liability of the kind described in any of the preceding
clauses (i), (ii), (iii) or (iv). In no event shall "Indebtedness" include trade
payables and accrued liabilities that are current liabilities incurred in the
ordinary course of business, excluding the current maturity of any obligation
which would otherwise constitute Indebtedness. For purposes of the covenants
described under "-- Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS"
and "LIMITATION ON RESTRICTED PAYMENTS" and the definition of "Events of
Default," in determining the principal amount of any Indebtedness to be incurred
by the Company or a Restricted Subsidiary or which is outstanding at any date,
(i) the principal amount of any Indebtedness which provides that an amount less
than the principal amount at maturity thereof shall be due upon any declaration
of acceleration thereof shall be the accreted value thereof at the date of
determination; (ii) the principal amount of any Indebtedness shall be reduced by
any amount of cash or Cash Equivalent collateral securing on a perfected basis,
and dedicated for disbursement exclusively to the payment of principal of and
interest on, such Indebtedness; and (iii) the amount of Indebtedness of any
Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability of any
Guarantees at such date.
"Indebtedness to EBITDA Ratio" means, as at any date of determination (the
"Transaction Date"), the ratio of (i) Total Consolidated Indebtedness (including
all Permitted Indebtedness) as at the Transaction Date to (ii) Consolidated
Operating Cash Flow for the four full fiscal quarters immediately preceding the
Transaction Date for which financial statements are available (such four full
fiscal quarter period being referred to herein as the "Measurement Period"). For
purposes of calculating Consolidated Operating Cash Flow for the relevant
Measurement Period prior to a Transaction Date, (A) any Person that is a
Restricted Subsidiary on the Transaction Date (or would become a Restricted
Subsidiary on such Transaction Date in connection with the transaction that
requires the calculation of such Consolidated Operating Cash Flow) shall be
deemed to have been a Restricted Subsidiary at all times during the Measurement
Period, (B) any Person that is not a Restricted Subsidiary on such Transaction
Date (or would cease to be a Restricted Subsidiary on such Transaction Date in
connection with the transaction that requires the calculation of Consolidated
Operating Cash Flow) will be deemed not to have been a Restricted Subsidiary at
any time during the Measurement Period, and (C) if the Company or any Restricted
Subsidiary shall have in any manner (x) acquired through an Asset Acquisition or
(y) disposed of (including by way of an Asset Sale or the termination or
discontinuance of activities constituting such operating business) any operating
business during such Measurement Period or after the end of such period and on
or prior to the Transaction Date, such calculation will be made on a pro forma
basis in accordance with GAAP as if, in the case of an Asset Acquisition, such
transaction had been consummated on the first day of the Measurement Period and,
in the case of an Asset Sale or other disposition,
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termination or discontinuance of activities constituting such an operating
business, such transaction had been consummated prior to the first day of the
Measurement Period; PROVIDED, HOWEVER that such PRO FORMA adjustment shall not
give effect to the operating cash flow of any Person that would become a
Restricted Subsidiary on the Transaction Date in connection with the transaction
that requires the calculation of Consolidated Operating Cash Flow to the extent
that such Person's net income would be excluded from the calculation of
Consolidated Net Income pursuant to clause (vi) of the definition of
Consolidated Net Income.
"Independent Financial Advisor" means a United States investment banking
firm of national or regional standing in the United States (i) which does not,
and whose directors, officers and employees or Affiliates do not have, a direct
or indirect financial interest in the Company and (ii) which, in the judgment of
the Board, is otherwise independent and qualified to perform the task for which
it is to be engaged.
"Interest Rate Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount and shall include, without limitation, interest rate swaps, caps, floors,
collars, forward interest rate agreements and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan, account receivable (other than an account receivable arising in
the ordinary course of business), or other extension of credit (including,
without limitation, by means of any Guarantee) or any capital contribution to
(by means of transfers of cash or other property or assets to others, payments
for property or services for the account or use of others, or otherwise), or any
purchase or acquisition of capital stock, bonds, notes, debentures or other
securities or evidences of Indebtedness of any other Person. The amount of any
Investment shall be the original cost of such Investment, PLUS the cost of all
additions thereto, and MINUS the amount of any portion of such Investment repaid
to such Person in cash as a repayment of principal or a return of capital, as
the case may be, but without any other adjustments for increases or decreases in
value, or write-ups, write-downs or write-offs with respect to such Investment.
In determining the amount of any Investment involving a transfer of any property
or assets other than cash, such property shall be valued at its Fair Market
Value at the time of transfer.
"Issue Date" means the original date of issuance of the Old Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). A
Person shall be deemed to own subject to a Lien any property which such Person
has acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement.
"Market Capitalization" of any Person means, as of any day of determination,
the product of (i) the average Closing Price of a share of such Person's Common
Stock over the 20 consecutive trading days immediately preceding such date and
(ii) the number of shares of such Common Stock issued and outstanding on such
date. "Closing Price" on any trading day with respect to the per share price of
any shares of Common Stock means the last reported sale price regular way or, in
case no such reported sale takes place on such day, the average of the reported
closing bid and asked prices regular way, in either case on the New York Stock
Exchange or, if such shares of Common Stock are not listed or admitted to
trading on such exchange, on the principal national securities exchange on which
such shares are listed or admitted to trading or, if not listed or admitted to
trading on any national securities exchange, on the Nasdaq National Market or,
if such shares are not listed or admitted to trading on any national securities
exchange
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or quoted on the Nasdaq National Market but such Person is a "Foreign Issuer"
(as defined in Rule 3b-4(b) under the Exchange Act) and the principal securities
exchange on which such shares are listed or admitted to trading is a "designated
offshore securities market" (as defined in Rule 902(b) under the Securities
Act), the average of the reported closing bid and asked prices regular way on
such principal exchange or, if such shares are not listed or admitted to trading
on any national securities exchange or quoted on the Nasdaq National Market and
such Person and any securities markets in which such Person's Common Stock
trades does not meet any of the foregoing such requirements, the average of the
closing bid and asked prices in the over-the-counter market as furnished by any
New York Stock Exchange member firm that is selected from time to time by the
Company for the purpose and is reasonably acceptable to the Trustee.
"Maturity Date" means, with respect to any Note, the date specified in such
Note as the fixed date on which the principal of such Note is due and payable.
"Moody's" means Moody's Investors Service, Inc. (and any successor).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof received by the Company or any Restricted Subsidiary in the form of cash
(including assumed Indebtedness (other than Subordinated Indebtedness) and other
items deemed to be cash under the proviso to the first sentence of the covenant
described under "--Certain Covenants--DISPOSITION OF PROCEEDS OF ASSET SALES")
or Cash Equivalents including payments in respect of deferred payment
obligations when received in the form of cash or Cash Equivalents (except to the
extent that such obligations are financed or sold with recourse to the Company
or any Restricted Subsidiary) net of (i) brokerage commissions and other fees,
costs and expenses (including fees and expenses of legal counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes paid or
payable as a result of such Asset Sale, (iii) amounts required to be paid to any
Person (other than the Company or any Restricted Subsidiary) owning a beneficial
interest in or having a Lien on the assets subject to the Asset Sale, (iv) with
respect to Asset Sales by Restricted Subsidiaries, the portion of such cash and
Cash Equivalents attributable to any Persons holding a minority interest in such
Restricted Subsidiary and (v) appropriate amounts to be provided by the Company
or any Restricted Subsidiary, as the case may be, as a reserve required in
accordance with GAAP against any liabilities associated with such Asset Sale and
retained by the Company or any Restricted Subsidiary, as the case may be, after
such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as reflected in an Officers' Certificate delivered to the
Trustee.
"Permitted Business" means any of the following: (i) transmitting, providing
services relating to or developing network and software applications for the
transmission and management of voice, data, video or other information through
owned or leased wireline or wireless transmission facilities or over the
internet; (ii) creating, developing, constructing, installing, integrating,
repairing, maintaining or marketing communications-related systems, network
equipment and wireless and wireline transmission facilities, software and other
related products; and (iii) evaluating, owning, operating, participating in or
pursuing any other business that is primarily related to those identified in the
foregoing clauses (i) and (ii).
"Permitted Business Assets" has the meaning set forth in the covenant
described under "--Certain Covenants--DISPOSITION OF PROCEEDS OF ASSET SALES."
"Permitted Business Investments" means an Investment in any Person the
primary business of which consists of a Permitted Business.
"Permitted Credit Facility" means any senior secured or unsecured commercial
term loan and/or revolving credit facilities (including any letter of credit
subfacility) entered into principally with commercial banks and/or other
financial institutions.
"Permitted Holders" means Brentwood Venture Capital, Enterprise Partners,
Kleiner Perkins Caulfield & Byers, The Sprout Group and Catherine M. Hapka, and
their respective Affiliates.
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"Permitted Indebtedness" means the following Indebtedness (each of which
shall be given independent effect):
(a) Indebtedness under the Notes and the Indenture;
(b) Indebtedness (including Disqualified Stock) of the Company and/or
any Restricted Subsidiary outstanding, or committed but undrawn, on the
Issue Date and identified on a schedule to the Indenture;
(c) (i) Indebtedness of any Restricted Subsidiary owed to and held by
the Company or a Wholly Owned Restricted Subsidiary and (ii) Indebtedness of
the Company, which is not secured by any Lien and is subordinated to the
Company's obligations with respect to the Notes, owed to and held by any
Restricted Subsidiary; PROVIDED that an incurrence of Indebtedness shall be
deemed to have occurred upon (x) any sale or other disposition of any
Indebtedness of the Company or a Restricted Subsidiary referred to in this
clause (c) to a Person other than the Company or a Restricted Subsidiary,
(y) any sale or other disposition of Capital Stock of a Restricted
Subsidiary which holds Indebtedness of the Company or another Restricted
Subsidiary such that such Restricted Subsidiary ceases to be a Restricted
Subsidiary or (z) the Designation of a Restricted Subsidiary which holds
Indebtedness of the Company or another Restricted Subsidiary as an
Unrestricted Subsidiary;
(d) Interest Rate Obligations of the Company and/or any Restricted
Subsidiary relating to Indebtedness of the Company and/or such Restricted
Subsidiary, as the case may be (which Indebtedness (i) bears interest at
fluctuating interest rates and (ii) is otherwise permitted to be incurred
under the "Limitation on Additional Indebtedness" covenant), but only to the
extent that the notional amount of such Interest Rate Obligations does not
exceed the principal amount of the Indebtedness (and/or Indebtedness subject
to commitments) to which such Interest Rate Obligations relate;
(e) Indebtedness of the Company and/or any Restricted Subsidiary in
respect of performance bonds of the Company or any Restricted Subsidiary or
surety bonds provided by the Company or any Restricted Subsidiary, in each
case incurred in the ordinary course of business;
(f) Indebtedness of the Company and/or any Restricted Subsidiary to the
extent it represents a replacement, renewal, refinancing or extension (a
"refinancing") of the Notes (during the periods for which redemption is
permitted under the terms of the Indenture) or other outstanding
Indebtedness of the Company and/or of any Restricted Subsidiary incurred or
outstanding pursuant to clause (a), (b), (g) or (h) of this definition or
the proviso in the first paragraph of the covenant described under
"--Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS"; PROVIDED that
(i) no Restricted Subsidiary may incur Indebtedness to refinance
Indebtedness of the Company (except for Guarantees issued in accordance with
the covenant described under "--Certain Covenants--LIMITATION ON ISSUANCES
OF GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES"); (ii) if such
Indebtedness being refinanced has an Average Life to Stated Maturity equal
to or longer than the Average Life to Stated Maturity of the Notes, any such
refinancing shall have an Average Life to Stated Maturity longer than the
Average Life to Stated Maturity of the Notes and a final stated maturity for
the payment of principal thereof later than the final stated maturity of the
Notes; (iii) if such Indebtedness being refinanced has an Average Life to
Stated Maturity shorter than the Average Life to Stated Maturity of the
Notes, any such refinancing shall have an Average Life to Stated Maturity
longer than, and a final stated maturity later than, the Indebtedness being
refinanced; (iv) any such refinancing shall not exceed the sum of the
principal amount (or, if such Indebtedness provides for a lesser amount to
be due and payable upon a declaration of acceleration thereof, an amount no
greater than such lesser amount) of the Indebtedness being refinanced, PLUS
the amount of accrued and unpaid interest thereon, PLUS the amount of any
reasonably determined prepayment premium necessary to accomplish such
refinancing and such reasonable fees and expenses incurred in connection
therewith; (v) the Notes and Indebtedness that ranks PARI PASSU with the
Notes may be refinanced only with Indebtedness that is made PARI PASSU with
or subordinate in right of payment to the Notes, and Subordinated
Indebtedness may only
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be refinanced with Subordinated Indebtedness; and (vi) the refinancing
Indebtedness shall be incurred by the obligor of the Indebtedness being
refinanced or by the Company;
(g) Indebtedness of the Company such that, after giving effect to the
incurrence thereof, (i) the total aggregate principal amount of Indebtedness
incurred under this clause (g) and any refinancings thereof otherwise
incurred in compliance with the Indenture would not exceed 200% of Total
Incremental Equity, and (ii) such Indebtedness does not mature prior to the
final stated maturity of the Notes and has an Average Life to Stated
Maturity longer than the Notes;
(h) Indebtedness of the Company or any Restricted Subsidiary incurred
under any Permitted Credit Facility and/or Indebtedness of the Company
represented by Debt Securities, and any refinancings of the foregoing
otherwise incurred in compliance with the Indenture, in an aggregate
principal amount not to exceed $40.0 million at any time outstanding;
(i) Indebtedness of the Company or any Restricted Subsidiary that is
Purchase Money Indebtedness;
(j) Indebtedness in respect of (i) letters of credit, bankers'
acceptances or other similar instruments or obligations, issued in
connection with liabilities incurred in the ordinary course of business or
(ii) surety, judgment, appeal, performance and other similar bonds,
instruments or obligations provided in the ordinary course of business; and
(k) in addition to the items referred to in clauses (a) through (j)
above, Indebtedness of the Company having an aggregate principal amount not
to exceed $5.0 million at any time outstanding.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary of the Company or in a Person as a result of
which such Person becomes a Wholly Owned Restricted Subsidiary; (b) Investments
constituting Permitted Business Investments, the sum of which does not exceed
$25.0 million at any one time outstanding; (c) Cash Equivalents; (d) Investments
in prepaid expenses, negotiable instruments held for collection and lease,
utility and workers' compensation, performance and other similar deposits; (e)
Interest Rate Obligations incurred in compliance with the covenant described
under "--Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS"; (f) loans
and advances to employees made in the ordinary course of business not to exceed
$500,000 in the aggregate at any one time outstanding; (g) bonds, notes,
debentures or other securities (other than Capital Stock of any Restricted
Subsidiary that is not a Wholly Owned Restricted Subsidiary) received as a
result of Asset Sales permitted under "--Certain Covenants--DISPOSITION OF
PROCEEDS OF ASSET SALES"; (h) any Investment to the extent that the
consideration therefor consists of Capital Stock (other than Disqualified Stock)
of the Company; and (i) the extension by the Company of (x) trade credit to
Subsidiaries of the Company represented by accounts receivable, extended on
usual and customary terms in the ordinary course of business or (y) Guarantees
of commitments for the purchase of goods or services incurred in the ordinary
course of business so long as such Guarantees, to the extent constituting
Indebtedness, are permitted to be incurred under the covenant described under
"--Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS."
"Permitted Liens" means (a) Liens on property of a Person existing at the
time such Person is merged into or consolidated with the Company or any
Restricted Subsidiary or becomes a Restricted Subsidiary; PROVIDED that such
Liens were in existence prior to the contemplation of such merger, consolidation
or acquisition and do not secure any property or assets of the Company or any
Restricted Subsidiary other than the property or assets subject to the Liens
prior to such merger or consolidation or acquisition; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens and other similar Liens
arising in the ordinary course of business that secure payment of obligations
not more than 60 days past due or that are being contested in good faith and by
appropriate proceedings; (c) Liens existing on the Issue Date (including Liens
securing Indebtedness permitted under clause (b) of the definition of Permitted
Indebtedness); (d) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted; PROVIDED
that any reserve or other appropriate provision as shall be required in
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conformity with GAAP shall have been made therefor; (e) easements, rights of
way, restrictions and other similar easements, licenses, restrictions on the use
of properties, or minor imperfections of title that, in the aggregate, are not
material in amount and do not in any case materially detract from the properties
subject thereto or interfere with the ordinary conduct of the business of the
Company or the Restricted Subsidiaries; (f) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (g) Liens securing
Indebtedness incurred under a Permitted Credit Facility; PROVIDED, HOWEVER, that
the incurrence of such Indebtedness is permitted by the covenant described under
"--Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS" above; (h) Liens to
secure any refinancing of any Indebtedness secured by Liens permitted by the
Indenture, but only to the extent that such Liens do not extend to any other
property or assets (other than improvements thereto); (i) Liens to secure the
Notes and Liens created under the Indenture; (j) Liens securing Purchase Money
Indebtedness; (k) Liens on and pledges of Capital Stock of any Unrestricted
Subsidiary securing any Indebtedness of such Unrestricted Subsidiary; (l) Liens
securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof; (m) Liens to secure Capitalized Lease Obligations
permitted to be incurred under the Indenture; (n) Liens that do not materially
detract from the value of the property subject to such Liens, that do not
materially interfere with the ordinary conduct of the business of the Company or
any of its Restricted Subsidiaries, and that are made on customary and usual
terms applicable to similar assets; (o) pledges or deposits by such Person under
workmen's compensation laws, unemployment insurance laws or similar legislation,
or good faith deposits in connection with bids, tenders, contracts (other than
for the payment of Indebtedness) or leases to which such Person is a party, or
deposits to secure public or statutory obligations of such Person, or deposits
or cash or United States government bonds to secure surety or appeal bonds to
which such Person is a party, or deposits as security for contested taxes or
import duties or for the payment of rent, in each case incurred in the ordinary
course of business; (p) Liens customary in the industry and incurred in the
ordinary course of business securing Interest Rate Obligations so long as the
related Indebtedness is, and is permitted to be under the Indenture, secured by
a Lien on the same property securing such Interest Rate Obligations; and (q)
Liens held by the Company on the assets or property of a Restricted Subsidiary
of the Company to secure Indebtedness of such Restricted Subsidiary owing to and
held by the Company.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock whether now outstanding or issued after
the Issue Date, and including, without limitation, all classes and series of
preferred or preference stock of such Person.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company for cash pursuant to an effective registration
statement filed under the Securities Act.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary (including Acquired Indebtedness and Indebtedness
represented by Capitalized Lease Obligations, Attributable Debt in respect of
Sale/Leaseback Transactions, mortgage financings and purchase money obligations)
incurred at any time within 180 days of and for the purpose of financing all or
any part of the cost of, the construction, expansion, installation, acquisition
or improvement by the Company or any Restricted Subsidiary of any Permitted
Business Assets or not less than 66 2/3 percent of the outstanding Voting Stock
of a Person that becomes a Restricted Subsidiary the assets of which consist
primarily of Permitted Business Assets; PROVIDED that the proceeds of such
Indebtedness are expended for such purposes within such 180-day period; and
PROVIDED FURTHER that the amount of such Indebtedness does not exceed, as of the
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date of incurrence of such Indebtedness, 100 percent of the lesser of the cost
or the Fair Market Value of such Permitted Business Assets.
"Refinancing" has the meaning set forth in clause (f) of the definition of
"Permitted Indebtedness."
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution on any Capital Stock of the
Company or any Restricted Subsidiary or any other payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of the Company
or any Restricted Subsidiary (other than any dividends, distributions or
payments made to the Company or any Restricted Subsidiary and dividends or
distributions payable solely in Capital Stock (other than Disqualified Stock) of
the Company or in options, warrants or other rights to purchase Capital Stock
(other than Disqualified Stock) of the Company); (ii) the purchase, redemption
or other acquisition or retirement for value of any Capital Stock of the Company
or any Restricted Subsidiary (other than any such Capital Stock owned by the
Company or a Restricted Subsidiary); (iii) the purchase, redemption, defeasance
or other acquisition or retirement for value, or the making of any principal
payment on, prior to any scheduled repayment, scheduled sinking fund payment or
scheduled maturity, of any Subordinated Indebtedness (other than any
Subordinated Indebtedness held by a Wholly Owned Restricted Subsidiary); or (iv)
the making by the Company or any Restricted Subsidiary of any Investment (other
than a Permitted Investment) in any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board, by a Board Resolution delivered to the Trustee, as
an Unrestricted Subsidiary pursuant to and in compliance with the covenant
described under "--Certain Covenants--LIMITATION ON DESIGNATIONS OF UNRESTRICTED
SUBSIDIARIES." Any such designation may be revoked by a Board Resolution
delivered to the Trustee, subject to the provisions of such covenant.
"Revocation" has the meaning set forth under "--Certain
Covenants--LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES."
"S&P" means Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies (and any successor).
"Sale/Leaseback Transaction" of any Person means an arrangement with any
lender or investor or to which such lender or investor is a party providing for
the leasing by such Person of any property or assets of such Person which has
been or is being sold or transferred by such Person after its acquisition
thereof or the completion of construction or commencement of operations thereof
to such lender or investor or to any other Person to whom funds have been or are
to be advanced by such lender or investor on the security of such property or
asset.
"Strategic Equity Investor" means any Person that, as of the date of
determination, has a Market Capitalization or Consolidated Net Worth of at least
$2.0 billion and that derives a substantial portion of its revenues from a
business related to the Permitted Business.
"Subordinated Indebtedness" means any Indebtedness of the Company which is
expressly subordinated in right of payment to any other Indebtedness of the
Company.
"Subsidiary" means, with respect to any Person, (a) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors shall at the time be owned, directly or
indirectly, by such Person, or (b) any other Person of which at least a majority
of voting interest is at the time, directly or indirectly, owned by such Person.
"Total Consolidated Indebtedness" means, at any date of determination, an
amount equal to the aggregate amount of all Indebtedness of the Company and the
Restricted Subsidiaries outstanding as of such date of determination.
"Total Incremental Equity" means, at any time of determination, the sum of,
without duplication, (a) the aggregate net cash proceeds received by the Company
from capital contributions in respect of
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existing Capital Stock (other than Disqualified Stock) or the issuance and sale
of Capital Stock (other than Disqualified Stock but including Capital Stock
issued upon the conversion of convertible Indebtedness or from the exercise of
options, warrants or rights to purchase Capital Stock (other than Disqualified
Stock)) subsequent to the Issue Date, other than to a Subsidiary of the Company,
PLUS (b) 80 percent of the Fair Market Value of property (other than cash and
Cash Equivalents) received by the Company after the Issue Date as a contribution
of capital or from the sale of its Capital Stock (other than Disqualified Stock)
to a Person that is not a Subsidiary of the Company, MINUS (c) any amounts
included in clause (a) above to the extent used to make a Restricted Payment
pursuant to clauses (2) or (3)(A)(x) of the covenant described under "--Certain
Covenants--LIMITATION ON RESTRICTED PAYMENTS."
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "--Certain
Covenants--LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES." Any such
designation may be revoked by a Board Resolution delivered to the Trustee,
subject to the provisions of such covenant.
"U.S. Government Securities" means securities that are direct obligations of
the United States of America for the payment of which its full faith and credit
is pledged.
"Voting Stock" means, with respect to any Person, the Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors
or other members of the governing body of such Person.
"Voting power" means, with respect to the Capital Stock of any Person,
relative voting power in any general election of directors or other members of
the governing body of such Person.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which 100% of the outstanding Capital Stock is owned by the Company or another
Wholly Owned Restricted Subsidiary. For the purposes of this definition, any
directors' qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a Restricted
Subsidiary.
NOTE REGISTRATION RIGHTS
The Company entered into a registration rights agreement with the Initial
Purchasers (the "Registration Rights Agreement"), a copy of the form of which is
available to prospective purchasers upon request, pursuant to which the Company
agreed to file with the Securities and Exchange Commission (the "Commission")
the Exchange Offer Registration Statement on an appropriate form under the
Securities Act with respect to an offer to exchange the Old Notes for the New
Notes. Upon the effectiveness of the Exchange Offer Registration Statement, the
Company will offer to the holders of Notes who are able to make certain
representations the opportunity to exchange their Old Notes for New Notes. If
(i) the Company is not permitted to file the Exchange Offer Registration
Statement or to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy, (ii) the Exchange Offer is not
for any other reason consummated within 180 days after the Issue Date, (iii) any
holder of Notes notifies the Company within a specified time period that (a) due
to a change in law or policy it is not entitled to participate in the Exchange
Offer, (b) due to a change in law or policy it may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and (x) the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales by such holder and
(y) such prospectus is not promptly amended or modified in order to be suitable
for use in connection with such resales for such holder and all similarly
situated holders or (c) it is a broker-dealer and owns Notes acquired directly
from the Company or an affiliate of the Company or (iv) the holders of a
majority of the Notes may not resell the Exchange Notes acquired by them in the
New Offer to the public without restriction under the Securities Act and without
restriction under applicable blue sky or state securities laws, the Company will
file with the Commission the Shelf Registration Statement to cover resales of
the Transfer Restricted Notes (as defined below) by the holders thereof. The
Company will use its best efforts to cause the applicable registration statement
to
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be declared effective as promptly as possible by the Commission. For purposes of
the foregoing, "Transfer Restricted Notes" means each Note until (i) the date on
which such Note has been exchanged by a person other than a broker-dealer for an
New Note in the Exchange Offer, (ii) following the exchange by a broker-dealer
in the Exchange Offer of a Note for an New Note, the date on which such New Note
is sold to a purchaser who receives from such broker-dealer on or prior to the
date of such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Note has been effectively
registered under the Securities Act and disposed of in accordance with the Shelf
Registration Statement, (iv) the date on which such Note is distributed to the
public pursuant to Rule 144(k) under the Securities Act (or any similar
provision then in force, but not Rule 144A under the Securities Act), (v) such
Note shall have been otherwise transferred by the holder thereof and a new Note
not bearing a legend restricting further transfer shall have been delivered by
the Company and subsequent disposition of such Note shall not require
registration or qualification under the Securities Act or any similar state law
then in force or (vi) such Note ceases to be outstanding.
Under existing Commission interpretations, the New Notes would, in general,
be freely transferable after the Exchange Offer without further registration
under the Securities Act; provided that in the case of broker-dealers
participating in the Exchange Offer, a prospectus meeting the requirements of
the Securities Act must be delivered upon resale by such broker-dealers in
connection with resales of the New Notes. The Company has agreed, for a period
of 180 days after consummation of the Exchange Offer, to make available a
prospectus meeting the requirements of the Securities Act to any such
broker-dealer for use in connection with any resale of any New Notes acquired in
the Exchange Offer. A broker-dealer which delivers such a prospectus to
purchasers in connection with such resales will be subject to certain of the
civil liability provisions under the Securities Act and will be bound by the
provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations).
Each holder of Notes that wishes to exchange such Notes for Exchange Notes
in the New Offer will be required to make certain representations, including
representations that (i) any New Notes to be received by it will be acquired in
the ordinary course of its business, (ii) it has no arrangement with any person
to participate in the distribution of the New Notes and (iii) it is not an
"affiliate," as defined in Rule 405 of the Securities Act, of the Company, or if
it is an affiliate, it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
New Notes. If the holder is a broker-dealer that will receive New Notes for its
own account in exchange for Notes that were acquired as a result of
market-making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes.
The Company has agreed to pay all expenses incident to the Exchange Offer
and will indemnify the Initial Purchasers against certain liabilities, including
liabilities under the Securities Act.
The Registration Rights Agreement provides that: (i) unless the Exchange
Offer would not be permitted by applicable law or Commission policy, the Company
will file the Exchange Offer Registration Statement with the Commission on or
prior to the 90th day after the Issue Date, (ii) unless the Exchange Offer would
not be permitted by applicable law or Commission policy, the Company will use
its best efforts to have the Exchange Offer Registration Statement declared
effective by the Commission on or prior to the 150th day after the Issue Date
(the "Target Effectiveness Date"), (iii) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, the Company will commence the
Exchange Offer and use its best efforts to issue, on or prior to the date which
is 30 days after the date on which the Exchange Offer Registration Statement was
declared effective by the Commission, New Notes in Exchange for all Notes
tendered prior thereto in the Exchange Offer and (iv) if obligated to file the
Shelf Registration Statement, the Company will use its best efforts to file
prior to the later of (a) the 90th day after the Issue Date or (b) the 30th day
after such filing obligation arises and will use its best efforts to cause the
Shelf Registration Statement to be declared effective by the Commission on or
prior to the 60th
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day after such obligation arises; provided that if the Company has not
consummated the Exchange Offer within the date which is 180 days after the Issue
Date, then the Company will file the Shelf Registration Statement with the
Commission on or prior to the 30th day after such date. The Company shall use
its best efforts to keep such Shelf Registration Statement continuously
effective, supplemented and amended until the earlier of (i) the second
anniversary of the effective date of the Shelf Registration Statement and (ii)
such time as all of the Transfer Restricted Notes covered by the Shelf
Registration Statement have been sold thereunder or otherwise cease to be
Transfer Restricted Notes.
During any 365-day period, if any event occurs as a result of which the
Board determines in good faith that it is necessary to amend a Shelf
Registration Statement or amend or supplement any prospectus or prospectus
supplement thereunder to ensure that each of those documents does not include
any untrue statement of fact or omit to state a material fact necessary to make
the statements therein not misleading, then the Company will have the ability to
suspend the availability of the Shelf Registration Statement and the use of the
related prospectus for up to 60 consecutive days (except for the consecutive
60-day period immediately prior to maturity of the Notes).
If (i) the Company fails to file any of the registration statements required
by the Registration Rights Agreement on or before the date specified for such
filing, (ii) any of such registration statements is not declared effective by
the Commission on or prior to the Target Effectiveness Date (subject to certain
limited exceptions), (iii) the Company fails to consummate the Exchange Offer
within 30 days of the Target Effectiveness Date with respect to the Exchange
Offer Registration Statement, or (iv) the Shelf Registration Statement or the
Exchange Offer Registration Statement is declared effective but thereafter,
subject to certain limited exceptions, ceases to be effective or usable in
connection with the Exchange Offer or resales of Transfer Restricted Notes, as
the case may be, during the periods specified in the Registration Rights
Agreement (each such event referred to in clauses (i) through (iv) above, a
"Registration Default"), then the Company shall pay as liquidated damages
interest on the Transfer Restricted Notes as to which any Registration Default
exists. If a Registration Default exists with respect to Transfer Restricted
Notes, the Company will, with respect to the first 90-day period (or portion
thereof) while such Registration Default is continuing immediately following the
occurrence of such Registration Default, make cash payments at a rate of .50%
per annum multiplied by the Accreted Value of the Transfer Restricted Notes as
of the date such payment is required to be made. The rate of such cash payment
shall increase by an additional .50% per annum at the beginning of each
subsequent 90-day period (or portion thereof) while such Registration Default is
continuing until such Registration Default is cured, up to a maximum rate of
1.5% per annum. Following the cure of all Registration Defaults, the making of
cash payments with respect to the Notes will cease and the interest rate on the
Notes will revert to zero.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement.
DESCRIPTION OF THE NEW NOTES
The terms of the New Notes will be identical in all material respects to
those of the Old Notes, except that the New Notes (i) shall accrue interest from
the last date on which interest was paid on the Old Notes, (ii) will have been
registered under the Securities Act and therefore will not be subject to certain
restrictions on transfer applicable to the Old Notes, and (iii) will not be
entitled to certain registration rights under the Registration Rights Agreement,
including the provision for Additional Interest of up to 1.5% on the Old Notes.
Holders of Old Notes should review the information set forth under "Summary--
Certain Consequences of a Failure to Exchange Old Notes" and "--Terms of New
Notes."
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DESCRIPTION OF THE WARRANTS
In connection with the Old Notes Issuance, the Company issued Warrants to
purchase 1,972,000 shares of Common Stock. Upon the effectiveness of the
Registration Statement of which this Prospectus is a part, the Notes and the
Warrants will be separately transferable, in accordance with any applicable
restrictions on transferability thereof as provided by the respective terms
thereof. The following is a description of the Warrants.
GENERAL
The Warrants were issued pursuant to the Warrant Agreement between the
Company and State Street Bank and Trust Company of California, N.A. (the
"Warrant Agent"). The following summary of certain provisions of the Warrant
Agreement does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the Warrant Agreement, including
the definitions of certain terms therein. Wherever particular defined terms of
the Warrant Agreement, not otherwise defined herein, are referred to, such
defined terms have the meanings set forth in the Warrant Agreement, which
definitions are incorporated herein by reference. A copy of the Warrant
Agreement is available upon request from the Company at 7337 South Revere
Parkway, Englewood, Colorado 80112-3931. For purposes of this "Description of
the Warrants" section, the term "Company" refers to Rhythms NetConnections Inc.
only and not its subsidiaries.
Each Warrant is evidenced by a Warrant Certificate which entities the holder
thereof to purchase 1.70 shares of Common Stock from the Company at a price (the
"Exercise Price") of $0.01 per share, subject to adjustment as provided in the
Warrant Agreement. The Warrants may be exercised at any time beginning one year
after the Closing Date and prior to the maturity date of the Notes. Warrants
that are not exercised by such date will expire. The Warrants will become
separately transferable from the Notes on the Separation Date. Notwithstanding
the foregoing, Warrants may not be exercised or transferred, and Warrant Shares
may not be transferred, during the 180-day period commencing on the date of an
initial public offering of the Common Stock (subject to certain exceptions).
The aggregate number of Warrant Shares is equal to approximately 8.0% of the
outstanding shares of Common Stock, on an as converted, fully diluted basis, as
of the date of this Prospectus.
CERTAIN DEFINITIONS
The Warrant Agreement contains, among others, the following definitions:
A "Financial Expert" is one of the persons listed in Appendix A to the
Warrant Agreement, all of which are nationally recognized investment banking
firms.
An "Independent Financial Expert" is a Financial Expert that does not (and
whose directors, executive officers and 5% stockholders do not) have a direct or
indirect financial interest in the Company or any of its subsidiaries or
affiliates, which has not been for at least five years and, at the time that it
is called upon to give independent financial advice to the Company, is not (and
none of its directors, executive officers or 5% stockholders is) a promoter,
director or officer of the Company or any of its subsidiaries or affiliates.
A "Repurchase Event" occurs on any date when the Company (i) consolidates
with or merges into or with another person (but only where the holders of Common
Stock receive consideration in exchange for all or part of such Common Stock),
if the Common Stock (or other securities) thereafter issuable upon exercise of
the Warrants is not registered under the Exchange Act or (ii) sells all or
substantially all of its assets to another person, if the Common Stock (or other
securities) thereafter issuable upon exercise of the Warrants is not registered
under the Exchange Act; provided, that in each case a "Repurchase Event" shall
not be deemed to have occurred if the consideration for such transaction
consists solely of cash.
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CERTAIN TERMS
REPURCHASE. Following the occurrence of a Repurchase Event, the Company
must make an offer to repurchase for cash all outstanding Warrants (a
"Repurchase Offer"). The holders of the Warrants may, until 5:00 p.m. (New York
City time) on the date (the "Final Surrender Time") at least 30 but not more
than 60 days following the date on which the Company gives notice of such
Repurchase Offer to such holders, surrender all or part of their Warrants for
repurchase by the Company. Except as otherwise provided in the Warrant
Agreement, Warrants received by the Warrant Agent in proper form for purchase
during a Repurchase Offer prior to the Final Surrender Time are to be
repurchased by the Company at a price in cash (the "Repurchase Price") equal to
the value (the "Relevant Value") on the Valuation Date (as defined in the
Warrant Agreement) relating thereto of the Warrant Shares (and other securities
issuable upon exercise of the Warrants), had the Warrants then been exercised,
less the Exercise Price therefor. The "Relevant Value" of the Common Stock (or
other securities) shall be determined (without giving effect to any discount for
lack of liquidity, the fact that the Company has no class of equity securities
registered under the Exchange Act, the fact that there may be no public market
for the Common Stock or the fact that the Common Stock (or other securities)
issuable upon exercise of the Warrants represents a minority interest in the
Company) by an Independent Financial Expert.
The Board of Directors of the Company is required to select an Independent
Financial Expert not more than five business days following a Repurchase Event.
Within two days after its selection of the Independent Financial Expert, the
Company must deliver to the Warrant Agent a notice setting forth the name of
such Independent Financial Expert. The Company must use its best efforts
(including by selecting another Independent Financial Expert) to cause the
Independent Financial Expert to deliver to the Company, with a copy to the
Warrant Agent, a value report (a "Value Report") which states the Relevant Value
of the Common Stock (or other securities) as of the Valuation Date and contains
a brief statement as to the nature and scope of the methodologies upon which the
determination was made. The Warrant Agent will have no duty with respect to the
Value Report of any Independent Financial Expert, except to keep it on file and
available for inspection by the holders of the Warrants. The determination of
the Independent Financial Expert as to the Relevant Value in accordance with the
provisions of the Warrant Agreement shall be conclusive on all persons.
The requirement that the Company make a Repurchase Offer will, unless
appropriate consents or waivers are obtained, require the Company to repay all
indebtedness of the Company then outstanding which by its terms would prohibit
such Repurchase Offer. There can be no assurance that the Company will have
sufficient funds available at the time of any Repurchase Event to repurchase the
Warrants and repay any such indebtedness, as well as to repurchase any other
securities of the Company that by their terms require the Company to repurchase
such securities upon the occurrence of such an event.
EXERCISE. In order to exercise all or any of the Warrants represented by a
Warrant Certificate, the holder thereof is required to surrender to the Warrant
Agent the Warrant Certificate, a duly executed copy of the subscription form set
forth in the Warrant Certificate and payment in full of the Exercise Price for
each share of Common Stock or other security issuable upon exercise of such
Warrants, which payment may be made in cash or by certified or official bank or
bank cashier's check payable to the order of the Company or through the
surrender of an appropriate amount of unexercised Warrant Certificates. Upon the
exercise of any Warrant in accordance with the Warrant Agreement, the Warrant
Agent will instruct the Company to transfer promptly to or upon the written
order of the holder of such Warrant Certificate appropriate evidence of
ownership of any shares of Common Stock or other security or property to which
it is entitled as a result of such exercise, registered or otherwise placed in
such name or names as it may direct in writing, and will deliver such evidence
of ownership to the person or persons entitled to receive the same and
fractional shares, if any, or an amount in cash, in lieu of any fractional
shares, if any. All shares of Common Stock or other securities issuable by the
Company upon the exercise of the Warrants must be validly issued, fully paid and
nonassessable. The Warrant Agreement provides that, if the Company conducts an
initial public offering of equity securities other than Common Stock, the
Company
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will give holders of Warrants and Warrant Shares the opportunity to convert such
Warrants into warrants to purchase such equity securities and the opportunity to
convert such Warrant Shares into such equity securities. Such conversion
opportunity will be on terms and conditions determined to be fair and reasonable
by the Company's Board of Directors in its sole discretion.
In the event of a taxable distribution to holders of Common Stock that
results in an adjustment to the number of shares of Common Stock or other
consideration for which a Warrant may be exercised, the holders of the Warrants
may, in certain circumstances, be deemed to have received a distribution subject
to United States federal income tax as a dividend. See "Certain Federal Income
Tax Considerations Warrants."
ANTI-DILUTION PROVISIONS. The Warrant Agreement contains provisions
adjusting the number of shares of Common Stock or other securities issuable upon
exercise of a Warrant in the event of (i) a division, consolidation or
reclassification of the shares of Common Stock, (ii) the issuance of rights,
options, warrants or convertible or exchangeable securities to all holders of
shares of Common Stock entitling such holders to subscribe for or purchase
shares of Common Stock at a price per share which is lower than the then current
value per share of Common Stock, subject to certain exceptions, (iii) the
issuance of shares of Common Stock at a price per share that is lower than the
then current value of such shares, except for issuances in connection with an
acquisition, merger or similar transaction with a third party and (iv) certain
distributions to all holders of shares of Common Stock of evidences of
indebtedness or assets.
NO RIGHTS AS STOCKHOLDERS. The holders of Warrants are not entitled, as
such, to receive dividends or other distributions, receive notice of any meeting
of the stockholders, consent to any action of the stockholders, receive notice
of any other stockholder proceedings or to any other rights as stockholders of
the Company. The holders of Warrants will not be entitled to share in the assets
of the Company in the event of liquidation, dissolution or the winding up of the
Company. In the event a bankruptcy or reorganization is commenced by or against
the Company, a bankruptcy court may hold that unexercised Warrants are executory
contracts which may be subject to rejection by the Company with approval of the
bankruptcy court, and the holders of the Warrants may, even if sufficient funds
are available, receive nothing or a lesser amount as a result of any such
bankruptcy case than they would be entitled to if they had exercised their
Warrants prior to the commencement of any such case.
MERGERS, CONSOLIDATIONS OR SALES OF ASSETS. Except as provided below, in
the event that the Company consolidates with, merges with or into, or sells all
or substantially all of its property and assets to another person, each Warrant
thereafter shall entitle the holder thereof to receive upon exercise thereof the
number of shares of capital stock or other securities or property which the
holder would have been entitled as a result of such consolidation, merger or
sale had the Warrant been exercised immediately prior thereto. If the Company
merges or consolidates with, or sells all or substantially all of the property
and assets of the Company to, another person and, in connection therewith,
consideration to the holders of Common Stock in exchange for their shares is
payable solely in cash, or in the event of the dissolution, liquidation or
winding-up of the Company, then the holders of the Warrants will be entitled to
receive distributions on an equal basis with the holders of Common Stock or
other securities issuable upon exercise of the Warrants assuming the Warrants
had been exercised immediately prior to such event, less the Exercise Price.
Upon receipt of such payment, if any, the Warrants will expire and the rights of
the holders thereof will cease. If the Company has made a Repurchase Offer that
has not expired at the time of such transaction, the holders of the Warrants
will be entitled to receive the higher of (i) the amount payable to the holders
of the Warrants described above and (ii) the Repurchase Price payable to the
holders of the Warrants pursuant to such Repurchase Offer. In case of any such
merger, consolidation or sale of assets, the surviving or acquiring person and,
in the event of any dissolution, liquidation or winding-up of the Company, the
Company must deposit promptly with the Warrant Agent the funds, if any,
necessary to pay to the holders of the Warrants. After such funds and the
surrendered Warrant Certificate are received, the Warrant Agent must make
payment by delivering a check in such amount as is appropriate (or, in the case
of consideration
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other than cash, such other consideration as is appropriate) to such person or
persons as it may be directed in writing by the holders surrendering such
Warrants.
REGISTRATION REQUIREMENTS. The holders of the Warrants are entitled to
piggyback registration rights for the issuance and (if available) resale of
Warrant Shares in connection with (i) an initial public offering of the Common
Stock (or other securities issuable upon exercise of the Warrants) if any
stockholder of the Company participates in such public offering or (ii) certain
public offerings of shares of Common Stock (or other securities issuable upon
exercise of the Warrants) issuable upon exercise of the Warrants conducted
subsequent to the initial public offering of such stock, subject to pro rata
cut-back provisions in the event that the managing underwriter in any
underwritten offering determines that inclusion of the Warrant Shares would
materially and adversely affect the success of the offering. If only the Company
sells shares in the initial public offering or all of the Warrant Shares (or
other securities issuable upon exercise of the Warrants) are not sold in the
initial public offering or any subsequent public offering, the Company will be
required to use its best efforts to cause to be declared effective, no later
than the later of (i) 180 days after the closing date of the initial public
offering (provided that, if a "lock up" or "black out" period is imposed on the
Company pursuant to or in connection with any underwriting or purchase agreement
relating to an underwritten Rule 144A or registered public offering of Common
Stock or securities convertible into or exchangeable or exercisable for Common
Stock, then the Company shall not be required to file such registration
statement until the end of such "lock up" or "black out" period, in which case
the Company shall be required to use its best efforts to be declared effective
no later than 30 days after the end of the "lock up" or "black out" period, but
in no event later than 210 days after the closing date of the initial public
offering) or (ii) the first anniversary of the Closing Date, a shelf
registration statement (the "Warrant Shelf Registration Statement") with respect
to the issuance (if available) of Warrant Shares (or other securities issuable
upon exercise of the Warrants). The Company is required to use reasonable
efforts to maintain the effectiveness of the Warrant Shelf Registration
Statement until the earlier of (i) such time as all Warrants have been exercised
and the Warrant Shares sold and (ii) 120 days after the date of effectiveness of
the Warrant Shelf Registration Statement. During any consecutive 365-day period
while the Warrants are exercisable, the Company will have the ability to
postpone or suspend the filing, effectiveness or use of such registration
statement for up to 60 days (except during the 60 days immediately prior to the
expiration of the Warrants) if the Company's Board of Directors determines in
good faith that there is a valid purpose for the postponement or suspension and
provides notice of such determination to the holders at their addresses
appearing in the register of Warrants maintained by the Warrant Agent. The
holders of Warrants shall have the right (i) in the case of a postponement of
the filing or effectiveness of such registration statement by a majority vote,
to withdraw the request for registration, or (ii) in the case of a suspension of
the right to make sales, to receive an extension of the registration period.
Holders of Warrants will not be named as selling security holders in the Warrant
Shelf Registration Statement. The Warrant Agreement requires the Company to pay
the expenses associated with such registration.
RESTRICTIONS ON EXERCISE. Warrants may not be exercised or transferred, and
Warrant Shares may not be transferred, during the 180-day period commencing on
the date of an initial public offering of the Common Stock (subject to certain
exceptions). Holders of Warrants will be able to exercise their Warrants only if
a registration statement relating to the Common Stock underlying the Warrants is
then effective and available, or the exercise of such Warrants is exempt from
the registration requirements of the Securities Act, and such securities are
qualified for sale or exempt from qualification under the applicable securities
laws of the states or other jurisdictions in which the various holders of the
Warrants reside.
RESERVATION OF SHARES. The Company has authorized and will reserve for
issuance such number of shares of Common Stock as will be issuable upon the
exercise of all outstanding Warrants. Such shares of Common Stock, when issued
and paid for in accordance with the Warrant Agreement, will be duly and validly
issued, fully paid and nonassessable, free of preemptive rights and free from
all taxes, liens, charges and security interests.
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REPORTS. At all times from and after the earlier of (i) the date of
effectiveness of a registration statement with respect to the Notes and (ii) the
date that is one year after the Closing Date, in either case, whether or not the
Company is then required to file reports with the Commission, the Company shall
file with the Commission all such reports and other information as it would be
required to file with the Commission by Sections 13(a) or 15(d) under the
Exchange Act if it were subject thereto. The Company shall supply the Warrant
Agent and each holder of a Warrant or shall supply to the Warrant Agent for
forwarding to each such holder, without cost to such holder, copies of such
reports and other information. In addition, at all times prior to the earlier of
the date that any registration statement related to the Warrants is declared
effective and one year after the Closing Date, the Company shall, at its cost,
deliver to each Warrant holder quarterly and annual reports substantially
equivalent to those which would be required by the Exchange Act if the Company
was subject thereto. In addition, at all times prior to the date that any
registration statement related to the Warrants is declared effective, upon the
request of any Warrant holder or any prospective purchaser of the Warrants
designated by a Warrant holder, the Company shall supply to such holder or such
prospective purchaser the information required under Rule 144A under the
Securities Act.
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the Company's capital stock does not
purport to be complete and is qualified in its entirety by reference to the
actual terms of the capital stock contained in the Company's Amended and
Restated Certificate of Incorporation and other agreements referenced below.
The Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") authorizes the issuance of 24,881,650 shares of Common Stock and
16,944,943 shares of Preferred Stock, of which 12,900,000 shares are designated
as Series A Preferred Stock and 4,044,943 shares are designated as Series B
Preferred Stock. The Series A Preferred Stock and Series B Preferred Stock are
collectively referred to herein as the "Preferred Stock." As of June 15, 1998,
there were approximately 25 holders of record of Common Stock and approximately
29 holders of record of Preferred Stock. The following table sets forth, with
respect to each series of Preferred Stock and Common stock as of June 15, 1998,
the number of shares designated, the number of shares outstanding, the number of
shares subject to outstanding options and warrants and the total fully diluted
capitalization of the Company (excluding shares of Common Stock issuable upon
exercise of the Warrants):
<TABLE>
<CAPTION>
SHARES
ISSUABLE COMMON STOCK OUTSTANDING
AUTHORIZED OUTSTANDING UNDER OPTIONS ON A FULLY DILUTED, AS
SHARES SHARES AND WARRANTS (#)(1) CONVERTED BASIS (#)(2)
------------ ------------ ------------------- -------------------------
<S> <C> <C> <C> <C>
Preferred Stock
Series A Preferred Stock........... 12,900,000 12,855,094 -- 12,855,094
Series B Preferred Stock........... 4,044,943 4,044,943 -- 4,044,943
------------ ------------ ------------------- -----------
Total Preferred Stock.............. 16,944,943 16,900,037 16,900,037
Common Stock......................... 24,881,650 3,322,804 4,653,227 7,976,031
------------ ------------ ------------------- -----------
Total.............................. 41,826,593 20,222,841 4,653,227 24,876,068
------------ ------------ ------------------- -----------
------------ ------------ ------------------- -----------
</TABLE>
- ------------------------
(1) Includes shares issuable in connection with options outstanding or available
for future grant under the 1997 Stock Plan and shares issuable in connection
with warrants outstanding.
(2) All shares of Preferred Stock are convertible, at any time at the holder's
option, into Common Stock. The ratio for converting Preferred Stock into
Common Stock is currently one to one, subject to anti-dilution protection on
a broad-based weighted-average basis.
COMMON STOCK
Subject to the preferences that may be applicable to any then outstanding
Preferred Stock, the holders of the Company's Common Stock are entitled to
receive dividends, if any, when and if declared by the Board of Directors out of
funds legally available therefor. Upon liquidation, dissolution, merger or sale
of all or substantially all of the assets of the Company (collectively, a
"Liquidation"), after paying in full the preferential amounts due the holders of
Preferred Stock, all remaining assets will be distributed ratably among the
holders of Common Stock based upon the number of shares of Common Stock then
held by each. The holders of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders. The
Common Stock has no preemptive or other subscription rights, and there are no
redemption or sinking fund provisions applicable to the Common Stock. No Common
Stock has conversion rights. All outstanding shares of Common Stock are fully
paid and non-assessable.
PREFERRED STOCK
The holders of Series A Preferred Stock and Series B Preferred Stock are
entitled to receive dividends in preference to the Common Stock at a rate of
$0.08 and $0.356 per share, respectively, per annum when and if declared by the
Company's Board of Directors. Dividends on the Preferred stock are not
cumulative. Upon a Liquidation, the holders of Series A Preferred Stock and
Series B Preferred Stock are entitled to
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receive in preference to the holders of Common Stock an amount equal to $1.00
and $4.45 per share, respectively, plus any declared but unpaid dividends.
Thereafter, any remaining assets shall be distributed ratably among the holders
of Common Stock based upon the number of shares of Common Stock then held by
each.
The Preferred Stock is convertible by the holder at any time into Common
Stock at the rate of its initial conversion price divided by the conversion
price then in effect. The initial conversion prices of the Series A Preferred
Stock and Series B Preferred Stock are $1.00 and $4.45 per share, respectively.
The conversion price of the Preferred Stock is subject to adjustment for stock
splits, stock dividends, consolidations, combinations, reclassifications and
other like events. The conversion prices of the Series A Preferred Stock and
Series B Preferred Stock may also be subject to adjustment for certain dilutive
issues of stock at a price per share below the applicable conversion price of
such respective series of Preferred Stock, based on the weighted average
dilution to such series. The Series A Preferred Stock and Series B Preferred
Stock are automatically convertible into Common Stock upon the earlier of (i)
the closing of a registered public offering of Common Stock, the public offering
price of which is not less than $20,000,000 in the aggregate or (ii) the date
upon which the Company obtains the consent of the holders of 66 2/3% of the then
outstanding shares of Preferred Stock.
The holders of Preferred Stock are entitled to notice of any stockholders'
meeting in accordance with the Bylaws of the Company and are entitled to vote
together with the holders of Common stock as a class. The holders of Preferred
Stock are entitled to the number of votes equal to the number of shares of
Common Stock into which such shares are convertible. Notwithstanding the general
voting rights described above, (i) so long as any shares of Series A Preferred
Stock are outstanding, the holders of a majority of the then outstanding shares
of Series A Preferred Stock, voting as a separate class on an as-converted
basis, are entitled to elect four directors and the holders of Common Stock and
Series A Preferred Stock, voting as a single class on an as-converted basis, are
entitled to elect one director; (ii) so long as any shares of Series B Preferred
Stock are outstanding, the holders of a majority of the then outstanding shares
of Series B Preferred Stock, voting as a separate class on an as-converted
basis, are entitled to elect one director; and (iii) all remaining directors are
elected by the holders of the Preferred Stock and Common Stock voting together
on an as-converted basis.
So long as any shares of Series B Preferred Stock are outstanding, the
Company may not, without first obtaining the approval of the holders of at least
a majority of the then-outstanding shares of Series B Preferred Stock, voting
together as a separate series on an as-converted basis, (i) take any action that
would materially and adversely alter the rights, preferences or privileges of
the Series B Preferred Stock as a separate series in a manner that is dissimilar
and disproportionate relative to the manner in which the rights, preferences or
privileges of the Series A Preferred Stock are altered; (ii) authorize
additional shares of Series B Preferred Stock; (iii) take any action that would
cause the Company to become a "public utility" or a "holding company" as those
terms are defined under the Public Utility Holding Company Act of 1935; (iv)
take any action that would alter the right of the holders of the then
outstanding shares of Series B Preferred Stock to elect one director of the
Company; or (v) amend certain sections of the Certificate of Incorporation as
set forth more fully therein. So long as any shares of Series A Preferred Stock
and/or Series B Preferred Stock are outstanding, the Company may not, without
first obtaining the approval of the holders of at least 55% or more of the then
outstanding shares of Preferred Stock, voting together as a single class on an
as-converted basis, (i) sell, convey, or otherwise dispose of or encumber all or
substantially all of its property or business or merge into or consolidate with
any other corporation (other than a wholly owned subsidiary corporation) or
effect any transaction or series of related transactions in which more than 50%
of the voting power of the Company is disposed of; (ii) create any new class or
series of stock or any other securities convertible into equity securities of
the Company having a preference over, or being on a parity with, the Series A
Preferred Stock or Series B Preferred Stock with respect to voting, dividends or
upon liquidation; or (iii) authorize additional shares of Series A Preferred
Stock.
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The Certificate of Incorporation does not contain any restriction on the
purchase or redemption of shares by the Company while there is an arrearage in
the payment of dividends. There are no sinking fund provisions applicable to the
Preferred Stock.
In connection with the issuance of Warrants pursuant to this Offering, the
holders of Preferred Stock have agreed to waive their rights to anti-dilution
adjustments under the Certificate of Incorporation.
BOARD REPRESENTATION RIGHTS AND VOTING
CERTIFICATE OF INCORPORATION. In any election of directors, the Certificate
of Incorporation provides that (i) so long as any shares of Series A Preferred
Stock are outstanding, the holders of a majority of the shares of the Series A
Preferred Stock, voting as a separate class on an as-converted basis, shall be
entitled to elect four directors (the "Series A Directors") and the holders of a
majority of the Common Stock and Series A Preferred Stock, voting as a single
class on an as-converted basis, shall be entitled to elect one director (the
"Common/Series A Director"); (ii) so long as any shares of Series B Preferred
Stock are outstanding, the holders of a majority of the shares of the Series B
Preferred Stock, voting as a separate class on an as-converted basis, shall be
entitled to elect one director (the "Series B Director"); and (iii) all
remaining directors will be elected by the holders of Preferred Stock and Common
Stock voting together as one class on an as-converted basis.
At any meeting held for the purpose of electing or nominating directors, the
presence in person or by proxy of the holders of a majority of the Series A
Preferred Stock then outstanding shall constitute a quorum of the Series A
Preferred Stock for the election or nomination of the Series A Directors, the
presence in person or by proxy of the holders of a majority of the shares of
Series B Preferred Stock then outstanding, shall constitute a quorum of the
Series B Preferred Stock for the election or nomination of the Series B
Director, the presence in person or by proxy of the holders of a majority of the
Common Stock and Series A Preferred Stock, on an as-converted basis, then
outstanding shall constitute a quorum of the Common Stock and Series A Preferred
Stock for the election or nomination of the Common/ Series A Director, and the
presence in person or by proxy of the holders of a majority of the Preferred
Stock and Common Stock, on an as-converted basis, then outstanding shall
constitute a quorum of the Preferred Stock and Common Stock for the election or
nomination of all remaining directors.
A vacancy in any directorship elected solely by the holders of Series A
Preferred Stock shall be filled only by vote of the holders of Series A
Preferred Stock, a vacancy in the directorship elected solely by the holders of
the Series B Preferred Stock shall be filled only by vote of the Series B
Preferred Stock, a vacancy in the directorship elected by the holders of the
Common Stock and Series A Preferred Stock shall be filled only by vote of the
Common Stock and Series A Preferred Stock, voting together as one class on an
as-converted basis, and a vacancy in any directorship elected by the holders of
Preferred Stock and Common Stock shall be filled only by the vote of the holders
of Preferred Stock and Common Stock voting together as one class on an
as-converted basis.
Any director elected by the holders of Series A Preferred Stock may be
removed during such director's term of office, either for or without cause, by
and only by the affirmative vote of the holders of a majority of the outstanding
shares of Series A Preferred Stock, any director elected by the holders of
Series B Preferred Stock may be removed during such director's term of office,
either for or without cause, by and only by the affirmative vote of the holders
of a majority of the outstanding shares of Series B Preferred Stock, any
director elected by the holders of Common Stock and Series A Preferred Stock may
be removed during such director's term of office, either for or without cause,
by and only by the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock and Series A Preferred Stock, voting together
as one class on an as-converted basis, and any director elected by the holders
of Preferred Stock and Common Stock may be removed during such director's term
of office, either for or without cause, by and only by the affirmative vote of
the holders of a majority of the outstanding shares of Preferred Stock and
Common Stock, voting together as one class on an as-converted basis.
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VOTING AGREEMENT. Pursuant to an Amended and Restated Voting Agreement (the
"Voting Agreement") among the Company and certain of its stockholders dated
March 12, 1998, the parties thereto agreed to certain provisions with respect to
the voting of their shares. For so long as any of the Brentwood Entities, the
Enterprise Entities, the KPCB Entities or the Sprout Entities own at least
1,000,000 shares of Series A Preferred Stock, each of the holders of Series A
Preferred Stock shall vote all of its shares of Series A Preferred Stock to
elect as Series A Directors one nominee designated by Brentwood, one nominee
designated by Enterprise, one nominee designated by KPCB and one nominee
designated by Sprout. During the term of the Voting Agreement, each of the
holders of Series A Preferred Stock and Series B Preferred Stock shall vote all
of its Series A Preferred Stock or Common Stock to elect as the Common/Series A
Director the Company's Chief Executive Officer, or a replacement nominee as
described more fully therein. Shares held by the Sprout Trustee (as hereinafter
defined) pursuant to the Sprout Voting Trust (as hereinafter defined) are deemed
shares held by the Sprout Entities. For so long as Enron owns at least 750,000
shares of Series B Preferred Stock, each of the holders of Series B Preferred
Stock shall vote all of its shares of Series B Preferred Stock to elect as the
Series B Director a nominee designated by Enron (the "Enron Nominee"). All of
the parties to the Voting Agreement also agreed that in the event the size of
the Board of Directors is increased (the "Board Increase"), then each of the
parties shall vote all of its shares of Preferred Stock or Common Stock to amend
the Certificate of Incorporation and the Voting Agreement such that the number
of directors to be elected by the holders of Series B Preferred Stock and the
number of Enron Nominees shall be increased so that (i) the proportion of the
total number of directors elected by the holders of Series B Preferred Stock and
the number of Enron Nominees to the total size of the Board is approximately
equal (rounding to the nearest whole number of directors) to (ii) the proportion
of shares of Common Stock issued or issuable upon conversion of the Series B
Preferred Stock owned by Enron to the total outstanding capital stock of the
Company as of the time of the applicable Board Increase. At such time as the
number of Enron Nominees is increased as described above (the "Additional Enron
Nominee"), each of the holders of Series B Preferred Stock shall vote all of its
shares of Series B Preferred Stock to elect the Enron Nominees to the Board.
SPROUT VOTING TRUST. Pursuant to a Voting Trust Agreement (the "Sprout
Voting Trust") dated as of May 5, 1998, Sprout Capital VII, L.P. ("Sprout
Capital") transfer its 2,609,686 shares of Series A Preferred Stock and its
390,966 shares of Series B Preferred Stock to First Union Trust Company
Association, as voting trustee (the "Sprout Trustee") in trust for the purpose
of voting on certain stockholder matters. Except as provided below, with respect
to any proposal submitted for a stockholder vote (a "Stockholder Proposal"),
including without limitation any matters on which the Preferred Stock has class
or series voting rights, the Sprout Trustee shall vote the shares held in trust
for or against such Stockholder Proposal in its sole and absolute discretion as
advised by an adviser and subject to the Voting Agreement. The adviser shall be
selected by the Sprout Trustee and shall not be an affiliate of Sprout Capital
or DLJSC (as hereinafter defined). Subject to certain provisions regarding
extending its term, the Sprout Voting Trust terminates on the earlier to occur
of (i) ten years from its date of execution, (ii) the sale of all of the shares
subject to the Sprout Voting Trust, (iii) a merger or sale of the Company or
(iv) the effective date of a liquidation or dissolution of the Company. The
address of the Sprout Trustee is: First Union Trust Company, National
Association, One Rodney Square, First Floor, 920 King Street, Wilmington, DE
19801, Attention: Corporate Trust Administrator.
ENRON VOTING TRUST. Pursuant to a Voting Trust Agreement dated March 12,
1998 (the "Voting Trust Agreement"), Enron transferred its shares of Series B
Preferred Stock to the Company as voting trustee (the "Trustee") in trust for
the purpose of voting on certain stockholder matters. Except as provided below,
with respect to any Stockholder Proposal, including without limitation any
matters on which the Preferred Stock or Series B Preferred Stock has class or
series voting rights, the Trustee shall vote the shares held in trust for or
against such Stockholder Proposal, in the same proportion as a majority of the
then outstanding shares of Series A Preferred Stock, voting as a separate class,
are voted or abstain. Notwithstanding the above, with respect to any proposal
submitted for stockholder vote with respect to the election of the Series B
Director or with respect to the protective provisions of the Series B Preferred
Stock, the
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Trustee shall vote the shares held in trust in the manner directed by Enron.
Subject to certain provisions regarding extending its term, the Voting Trust
terminates on the earlier to occur of (i) March 11, 2008, (ii) the Company's
initial public offering, (iii) a merger or sale of the Company or (iv) the
effective date of a liquidation or dissolution of the Company. The address of
the Company, as Trustee, is Rhythms NetConnections Inc., 7337 South Revere
Parkway, Englewood, Colorado 80112-3931, Attention: Chief Financial Officer.
REGISTRATION RIGHTS
Pursuant to the terms of the Investors' Rights Agreement, the current
holders of Common Stock, Series A Preferred Stock and Series B Preferred Stock
(together, the "Investors") acquired certain registration rights with respect to
the Company. At any time after the earlier of (i) March 11, 2002, or (ii) six
months after the effective date of the first registration statement filed by the
Company under the Securities Act, holders of 60% or more of the Registrable
Securities (as defined in the Investors' Rights Agreement) or Enron may require
the Issuer to effect registration under the Securities Act covering at least 20%
of the Registrable Securities then outstanding, or, if initiated by Enron,
covering at least 20% of the Registrable Securities then held by Enron, subject
in either case to the Board of Directors' right to defer such registration for a
period up to 120 days; provided, however, that Rhythms is obligated to effect
only (A) two such registrations pursuant to the request of holders of 60% or
more of the Registrable Securities, and (B) one such registration pursuant to
the request of Enron. In addition, if Rhythms proposes to register securities
under the Securities Act (other than a registration relating either to the sale
of securities to employees pursuant to a stock option, stock purchase or similar
plan or a registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), then any of the Investors has
a right (subject to quantity limitations determined by underwriters if the
offering involves an underwriting) to request that the Company register such
holder's Registrable Securities. All registration expenses incurred in
connection with the registrations described in (A) and (B) above and all
piggyback registrations will be borne by the Issuer. The participating Investors
will pay for underwriting discounts and commissions incurred in connection with
any such registrations. Further, the holders of 40% or more of the Registrable
Securities may require the Company to register all or a portion of their
Registrable Securities on Form S-3 (a "Form S-3 Registration") when such form
becomes available to the Company, provided that the aggregate proceeds of each
such registration is at least $5,000,000 and subject to certain other conditions
and limitations, including the Company's ability to defer the filing of the Form
S-3 Registration for a period of not more than 120 days in certain
circumstances. All expenses incurred in connection with such a Form S-3
Registration shall be borne pro rata by the Investor or Investors participating
in the Form S-3 Registration. All registration rights will terminate no later
than after five years following the Company's initial public offering. Rhythms
has agreed to indemnify the Investors against certain liabilities in connection
with any registration effected pursuant to the foregoing Investors' Rights
Agreement, including liabilities under the Securities Act.
RIGHT OF FIRST OFFER
Under the Investors' Rights Agreement, each Major Investor (as defined
below) has the right of first refusal to purchase its pro rata portion each time
the Company proposes to offer any shares of, or securities convertible into or
exercisable for any shares of, any class of its capital stock, on the same terms
and conditions as the Company offers such securities to other investors subject
to certain conditions and limitations. For purposes of this right of first
offer, a "Major Investor" is defined as (i) any investor who holds at least 50%
of such investor's originally acquired shares of Series A Preferred Stock or
Series B Preferred Stock issued pursuant to (A) that certain Series A Preferred
Stock Purchase Agreement dated July 3, 1997 (the "Series A Agreement") or (B)
that certain Series B Preferred Stock Purchase Agreement dated March 12, 1998,
(the "Series B Agreement"), as applicable, and (ii) any person who acquires at
least (A) 10% of the Series A Preferred Stock (or the Common Stock issued upon
conversion thereof) issued
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pursuant to the Series A Agreement or (B) 10% of the Series B Preferred Stock
(or the Common Stock issued upon conversion thereof) issued pursuant to the
Series B Agreement.
The right of first offer of all holders terminates upon the closing of a
registered public offering of the Common Stock.
In connection with the issuance of Warrants pursuant to this Offering, the
Major Investors have agreed to waive their rights of first offer under the
Investors' Rights Agreement.
OTHER RIGHTS
Each holder of at least 500,000 Registrable Securities (as defined in the
Investors' Rights Agreement) is entitled to certain annual, quarterly and
monthly financial information from the Company, and also has certain rights of
access and inspection. The information and inspection rights terminate upon the
earlier of (i) a registered public offering of the Company's securities raising
at least $20,000,000 or (ii) when the Company first becomes subject to the
periodic reporting requirements of Sections 12(g) or 15(d) of the 1934 Act.
TRANSFER AGENT
The Company acts as the transfer agent and registrar for its Common and
Preferred Stock.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material United States federal
income tax (and in the case of Non-U.S. Holders, as defined below, estate tax)
considerations relevant to the Exchange Offer and the purchase, ownership and
disposition of the New Notes, but does not purport to be a complete analysis of
all the potential tax effects thereof. Except as specifically discussed below
with regard to Non-U.S. Holders (as defined below), this summary applies only to
initial investors who held the Old Notes and will hold the New Notes as capital
assets and who, for United States federal income tax purposes, are (i)
individual citizens or residents of the United States, (ii) corporations,
partnerships or other entities created or organized in or under the laws of the
United States or of any political subdivision thereof (unless, in the case of a
partnership, Treasury Regulations otherwise provide), (iii) estates, the income
of which are subject to United States federal income taxation regardless of the
source of such income or (iv) trusts subject to the primary supervision of a
United States court and the control of one or more United States persons ("U.S.
Holders"). Persons other than U.S. Holders ("Non-U.S. Holders") are subject to
special United States federal income and estate tax considerations that are
discussed below. There can be no assurance that the Internal Revenue Service
(the "Service") will agree with the following discussion. Further, the
discussion does not address all aspects of taxation that may be relevant to
particular holders in light of their personal circumstances (including the
effect of any foreign, state or local tax laws) or to certain types of holders
(including dealers in securities, insurance companies, foreign persons,
financial institutions, tax-exempt entities and persons holding the Old Notes or
the New Notes as part of a straddle, hedge or conversion transaction) subject to
special treatment under the United States federal income tax laws. Moreover, the
effect of any applicable state, local or foreign tax laws is not discussed.
The discussion of the United States federal income tax (and, in the case of
Non-U.S. Holders, United States federal estate tax) consequences set forth below
is based upon currently existing provisions of the Internal Revenue Code of
1986, as amended (the "Code"), judicial decisions, and administrative
interpretations including, but not limited to, Treasury regulations relating to
original issue discount ("OID Regulations"), all of which are subject to change,
possibly with retroactive effect. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER,
EACH PROSPECTIVE PARTICIPANT IN THE EXCHANGE OFFER SHOULD CONSULT HIS OWN TAX
ADVISOR WITH RESPECT TO HIS PARTICULAR TAX SITUATION AND THE PARTICULAR TAX
EFFECTS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS AND POSSIBLE CHANGES IN
THE TAX LAWS.
EXCHANGE OF NOTES
The exchange of New Notes for Old Notes pursuant to the Exchange Offer will
not be treated as a significant modification of the Old Notes under applicable
U.S. Treasury Regulations. As a result, the exchange will be treated for U.S.
federal income tax purposes as merely a registration and continuation of the Old
Notes. As a result, no gain or loss will be recognized by any holder of the Old
Notes by reason of their participation in the Exchange Offer (each such holder,
a "Participant"). Each Participant's adjusted basis and holding period in the
New Notes will be the same as such Participant's adjusted basis and holding
period in the Old Notes. Similarly, since the New Notes and the Old Notes are
treated as one and the same for U.S. federal income tax purposes, any original
issue discount, acquisition premium, market discount or other tax attributes
associated with the Old Notes will continue to apply to the New Notes.
SALE OR OTHER DISPOSITION OF NOTES. In general, upon the sale, exchange or
redemption of a New Note, a U.S. Holder will recognize taxable gain or loss
equal to the difference between (i) the amount of cash proceeds and the fair
market value of any property received on the sale, exchange or redemption (not
including any amount attributable to accrued but unpaid interest) and (ii) the
U.S. Holder's adjusted tax basis in the New Note. An initial U.S. Holder's
adjusted tax basis in a New Note generally will be equal to the cost of the Note
to such U.S. Holder (i.e., the portion of the Unit purchase price allocated to
such Old Note), increased by the amount of any market discount or OID previously
included in income by the U.S.
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Holder with respect to such Old Note or the New Note received in exchange
therefor and reduced by the amount of any principal received by the U.S. Holder.
Subject to the market discount rules, gain or loss realized on the sale,
exchange or redemption of a New Note will be capital gain or loss. Capital gain
recognized by individual U.S. Holders generally will be subject to a maximum
United States federal income tax rate of (i) 39.6% if the U.S. Holder held the
New Note for not more than one year, (ii) 28% if the U.S. Holder held the New
Note for more than one year but not more than eighteen months, and (iii) 20% if
the U.S. Holder held the New Note for more than eighteen months. Beginning in
2001, the rate of tax on gains from certain property held more than five years
will be further reduced to 18%. A holder's holding period with respect to the
Old Notes surrendered in the Exchange Offer shall be included in the holder's
holding period with respect to the New Notes received in such exchange. The
characterization of income as capital gain or loss is also relevant for purposes
of, among other things, limitations with respect to the deductibility of capital
losses.
NON-U.S. HOLDERS
In general, subject to the discussion below concerning backup withholding:
a. payments of principal or interest (including OID) on the New Notes by
the Company or any paying agent to a beneficial owner of a New Note that is
a Non-U.S. Holder will not be subject to United States withholding tax,
provided that, in the case of interest or accrued OID, (i) such Non-U.S.
Holder does not own, actually or constructively, 10% or more of the total
combined voting power of all classes of stock of the Company entitled to
vote, within the meaning of Section 871(h)(3) of the Code, (ii) such
Non-U.S. Holder is not a "controlled foreign corporation" (within the
meaning of the Code) that is related, directly or indirectly, to the Company
through stock ownership, (iii) such Non-U.S. Holder is not a bank receiving
interest described in Section 881(c)(3)(A) of the Code, and (iv) the
certification requirements under Section 871(h) or Section 881(c) of the
Code and Treasury Regulations thereunder (summarized below) are satisfied.
b. Non-U.S. Holder of a New Note will not be subject to United States
income tax on gains realized on the sale, exchange or other disposition of
such New Note, unless (i) such Non-U.S. Holder is an individual who is
present in the United States for 183 days or more in the taxable year of
sale, exchange or other disposition, and certain conditions are met, (ii)
such gain is effectively connected with the conduct by the Non-U.S. Holder
of a trade or business in the United States and, if certain tax treaties
apply, is attributable to a United States permanent establishment maintained
by the Non-U.S. Holder, or (iii) the Non-U.S. Holder is subject to Code
provisions applicable to certain United States expatriate.
c. a New Note held by an individual who is not a citizen or resident of
the United States at the time or his death will not be subject to United
States estate tax as a result of such individual's death, provided that, at
the time of such individual's death, the individual does not own, actually
or constructively, 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote and payments with respect
to such New Note would not have been effectively connected with the conduct
by such individual of a trade or business in the United States.
To satisfy the certification requirements referred to in (a)(iv) above,
Sections 871(h) and 881(c) of the Code and currently effective Treasury
Regulations thereunder require that either (i) the beneficial owner of a New
Note must certify, under penalties of perjury, to the Company or its paying
agent, as the case may be, that such owner is a Non-U.S. Holder and must provide
such owner's name and address, and United States taxpayer identification number
("TIN"), if any, or (ii) a securities clearing organization, bank or other
financial institution that holds customer securities in the ordinary course of
its trade or business (a "Financial Institution") and holds the New Note on
behalf of the beneficial owner thereof must certify, under penalties of perjury,
to the Company or its paying agent, as the case may be, that such certificate
has been received from the beneficial owner and must furnish the payor with a
copy thereof. A certificate
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described in this paragraph is effective only with respect to payments of
interest made to the certifying Non-U.S. Holder after delivery of the
certificate in the calendar year of its delivery and the two immediately
succeeding calendar years. Under temporary Treasury Regulations, such
requirement will be fulfilled if the beneficial owner of a New Note certifies on
IRS Form W-8, under penalties of perjury, that it is a Non-U.S. Holder and
provides its name and address, and any Financial Institution holding the New
Note on behalf of the beneficial owner files a statement with the withholding
agent to the effect that it has received such a statement from the beneficial
owner (and furnishes the withholding agent with a copy thereof).
Treasury Regulations released on October 6, 1997 (the "New Regulations") and
effective for payments made after December 31, 1998, will provide alternative
methods for satisfying the certification requirements described above. The New
Regulations also would require, in the case of New Notes held by a foreign
partnership, that (i) the certification be provided by the partners rather than
by the foreign partnership and (ii) the partnership provide certain information,
including a TIN. A look-through rule would apply in the case of tiered
partnerships.
If a Non-U.S. Holder of a New Note is engaged in a trade or business in the
United States and if interest (including OID) on the New Note, or gain realized
on the sale, exchange or other disposition of the New Note, is effectively
connected with the conduct of such trade or business (and, if certain tax
treaties apply, is attributable to a United States permanent establishment
maintained by the Non-U.S. Holder in the United States), the Non-U.S. Holder,
although exempt from United States withholding tax (provided that the
certification requirements discussed in the next sentence are met), will
generally be subject to regular United States federal income tax on such
interest or gain in the same manner as if it were a U.S. Holder. In lieu of the
certificate described above, such a Non-U.S. Holder will be required, under
currently effective Treasury Regulations, to provide the Company with a properly
executed Internal Revenue Service Form4224 in order to claim an exemption from
withholding tax. In addition, if such Non-U.S. Holder is a foreign corporation,
it may be subject to a branch profits tax equal to 30% (or such lower rate
provided by an applicable treaty) of its effectively connected earnings and
profits for the taxable year, subject to certain adjustments. For purposes of
the branch profits tax, interest (including OID) on a New Note and any gain
recognized on the sale, exchange or other disposition of a New Note will be
included in the earnings and profits of such Non-U.S. Holder if such interest or
gain is effectively connected with the conduct by a Non-U.S. Holder of a trade
or business in the United States. The New Regulations will change certain of the
withholding reporting and certification requirements described above, effective
for payments made after December 31, 1998, subject to certain grandfathering
provisions.
Compliance with the above discussed certification requirements in respect of
the Old Notes will continue as compliance with such certification requirements
in respect of the New Notes.
Non-U.S. Holders should consult with their tax advisors regarding United
States and foreign tax consequences with respect to the New Notes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding of United States federal income tax at a rate of 31% may
apply to payments made in respect of a New Note to a holder that is not an
"exempt recipient" and that fails to provide certain identifying information
(such as the holder's TIN) in the manner required. Generally, individuals are
not exempt recipients, whereas corporations and certain other entities are
exempt recipients. Payments made in respect of a New Note must be reported to
the Service, unless the holder is an exempt recipient or otherwise establishes
an exemption.
In the case of payments of interest on a New Note to a Non-U.S. Holder,
Treasury Regulations provide that backup withholding and information reporting
will not apply to payments with respect to which either requisite certification
has been received or an exemption has otherwise been established
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(provided that neither the Company nor a paying agent has actual knowledge that
the holder is a U.S. Holder or that the conditions of any other exemption are
not in fact satisfied).
Payments of the proceeds of the sale of a New Note to or through a foreign
office of a broker that is a United States person, a "controlled foreign
corporation" (within the meaning of the Code) or a foreign person, 50% or more
of whose gross income from all sources for the three-year period ending with the
close of its taxable year preceding the payment was effectively connected with
the conduct of a trade or business within the United States, are currently
subject to certain information reporting requirements, unless the payee is an
exempt recipient or such broker has evidence in its records that the payee is a
Non-U.S. Holder and no actual knowledge that such evidence is false and certain
other conditions are met. Temporary Treasury Regulations indicate that such
payments are not currently subject to backup withholding. Under current Treasury
Regulations, payments of the proceeds of a sale of a New Note to or through the
United States office of a broker will be subject to information reporting and
backup withholding unless the payee certifies under penalties of perjury as to
his or her status as a Non-U.S. Holder and satisfies certain other
qualifications (and no agent or broker who is responsible for receiving or
reviewing such statement has actual knowledge that it is incorrect) and provides
his or her name and address or the payee otherwise establishes an exemption.
If in connection with the acquisition and ownership of the Old Notes a
holder provided identifying information (such as the holder's TIN) in the manner
required or otherwise established an exemption from backup withholding, such
compliance with the backup withholding and information reporting rules will
continue in respect of the New Notes.
Any amounts withheld under the backup withholding rules from a payment to a
holder of a New Note will be allowed as a refund or credit against such holder's
United States federal income tax, provided that the required information is
furnished to the Service.
As noted above, the Treasury Department recently issued the New Regulations.
In general, the New Regulations do not significantly alter the substantive
withholding and information reporting requirements but unify current
certification procedures and forms and clarify reliance standards. Under the New
Regulations, special rules apply which permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. A holder of a New Note should consult with its tax
advisor regarding the application of the backup withholding rules to its
particular situation, the availability of an exemption therefrom, the procedure
for obtaining such an exemption, if available, and the impact of the New
Regulations on payments made with respect to New Notes after December 31, 1998.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NEW NOTES IN
LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. PROSPECTIVE
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES
TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NEW NOTES, INCLUDING
THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN UNITED STATES OR OTHER TAX LAWS.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Notes for its own account
in connection with the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus may
be used by Participating Broker-Dealers during the period referred to below in
connection with resales of the New Notes received in exchange for Old Notes if
such Old Notes were acquired by such Participating Broker-Dealers for their own
accounts. The Company has agreed that this Prospectus may be used by a
Participating Broker-Dealer in connection with resales of such New Notes
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for a period ending 180 days after the effective date of the Registration
Statement (subject to extension under certain limited circumstances described
herein) or, if earlier, when all such New Notes have been disposed of by such
Participating Broker-Dealer. See "The Exchange Offer--Terms of the Exchange
Offer."
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. New Notes received by Participating Broker-Dealers for
their own accounts in connection with the Exchange Offer may be sold from time
to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such New
Notes. Any Participating Broker-Dealer that resells New Notes that were received
by it for its own account in connection with the Exchange Offer and any broker
or dealer that participates in a distribution of such New Notes may be deemed to
be an "underwriter" within the meaning of the Securities Act, and any profit on
any such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a Participating Broker-Dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Certain associates of Donaldson, Lufkin & Jenrette Securities Corporation
("DLJSC"), an Initial Purchaser, beneficially own an aggregate of 3,000,000
shares of Series A Preferred Stock and 449,438 shares of Series B Preferred
Stock of the Company, which represent in the aggregate approximately 17.1% of
the outstanding equity of the Company. Of these, Sprout Capital beneficially
owns 2,609,686 shares of Series A Preferred Stock and 390,966 shares of Series B
Preferred Stock, which represent in the aggregate approximately 14.9% of the
outstanding equity of the Company. All of the shares of the Company beneficially
owned by Sprout Capital are subject to the Sprout Voting Trust and are by the
Sprout Trustee, an independent third party. The Sprout Trustee will vote such
shares in its sole and absolute discretion as advised by an independent adviser
who is not affiliated with Sprout Capital and DLJSC and subject to the Voting
Agreement. Also, pursuant to the Voting Agreement, Sprout Capital VII, L.P., The
Sprout CEO Fund, L.P., DLJ Capital Corporation and DLJ First ESC L.L.C. (all of
which are affiliates of DLJSC) collectively have the right to designate one
member of the Board of Directors. Their current designee is Keith B. Geeslin.
Mr. Geeslin is a Divisional Senior Vice President of DLJ Capital Corporation, a
wholly owned subsidiary of Donaldson, Lufkin & Jenrette, Inc., the parent of
DLJSC. Mr. Geeslin is also one of several individuals who serve as general
partners of DLJ Associates VII, L.P., which is a general partner of Sprout
Capital VII, L.P. DLJ Capital Corporation is the managing general partner of
each of Sprout Capital VII, L.P. and the Sprout CEO Fund, L.P. See "Description
of Capital Stock--Board Representation Rights and Voting--SPROUT VOTING TRUST."
LEGAL MATTERS
The validity of the New Notes will be passed upon for the Company by
Brobeck, Phleger & Harrison LLP ("BPH"), San Diego, California. The BPH
investment fund and certain BPH attorneys hold in the aggregate 30,000 shares of
Series A Preferred Stock.
EXPERTS
The financial statements of the Company as of December 31, 1997 and for the
period from February 27, 1997 (inception) through December 31, 1997, included in
this Prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
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GLOSSARY OF TERMS
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ATM.......................................... ASYNCHRONOUS TRANSFER MODE. High bandwidth,
low- delay, connection-oriented, packet-like
switching and multiplexing technique
requiring 53-byte, fixed- sized cells.
Backbone..................................... An element of the network infrastructure that
provides high-speed, high capacity
connections among the network's physical
points of presence, i.e., RCPs and RMSCs. The
backbone is used to transport end user
traffic across the metropolitan area and
across the United States.
Bandwidth.................................... Refers to the maximum amount of data that can
be transferred through a computer's backbone
or communication channel in a given time. It
is usually measured in Hertz (cycles per
second) for analog communications and bits
per second for digital communications.
CAP.......................................... COMPETITIVE ACCESS PROVIDER. A company that
provides its customers with an alternative to
the local telephone company for local and
interstate transport of private line, special
access and switched access telecommunications
services.
Channel Partners............................. Service Providers with retail customers to
whom Rhythms will co-market its services.
CLEC......................................... COMPETITIVE LOCAL EXCHANGE CARRIER. Category
of telephone service provider (carrier) that
offers local exchange and other services
similar to (and in competition with) those of
the ILEC, as allowed by recent changes in
telecommunications law and regulation. A CLEC
may also provide other types of services such
as long distance telephone, data
communications, Internet access and video.
CO........................................... CENTRAL OFFICE. A building used by ILECs to
connect circuits to communications equipment.
The usual location of a Rhythms Connection
Point.
Collocation.................................. A location where a CLEC network interconnects
with the network of an ILEC inside an ILEC
CO.
Copper Loop.................................. A pair of traditional copper telephone lines
using electric current to carry signals.
CPE.......................................... CUSTOMER PREMISE EQUIPMENT.
Telecommunications equipment, such as
interface equipment and modems, that is
installed on the customer premises.
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DNS Registration............................. DOMAIN NAME SERVICES (DNS) REGISTRATION. The
process of recording domain names so they are
accessible to users of the Internet.
Downstream................................... Refers to the transmission speed of a
connection between the Rhythms Connection
Point and the end user.
DS-0......................................... Standard telecommunications industry digital
signal format, which is distinguishable by
bit rate (the number of binary digits (0 and
1) transmitted per second). DS-0 service has
a bit rate of 64 kilobits per second.
DSL.......................................... DIGITAL SUBSCRIBER LINE. A transmission
technology enabling high-speed access in the
local copper loop, often referred to as the
last mile between the network service
provider (i.e., an ILEC, CLEC or an ISP) and
end user.
E-Commerce................................... ELECTRONIC COMMERCE. An Internet service that
supports electronic transactions between
customers and vendors to purchase goods and
services.
Ethernet..................................... A standard packet protocol used in Local Area
Networks that can work at megabit and gigabit
speeds.
FCC.......................................... FEDERAL COMMUNICATIONS COMMISSION. The United
States federal regulatory agency responsible
for regulating interstate and international
communications, among other things.
Firewall..................................... A computer device that separates a LAN from a
WAN and prevents unauthorized access to the
LAN through the use of electronic security
mechanisms.
Frames....................................... Information represented as bytes grouped
together that exists only on the link between
two communication nodes.
Frame Relay.................................. A form of packet switching with variable
length frames that may be used with a variety
of communications protocols.
FTP.......................................... FILE TRANSFER PROTOCOL. Internet tool for
transferring and accessing files.
GHz.......................................... GIGAHERTZ. Billions of hertz or cycles per
second; a measure used to characterize the
frequency or amount of bandwidth of a radio
frequency signal.
ILEC......................................... INCUMBENT LOCAL EXCHANGE CARRIER. A company
providing local exchange services on the date
of enactment of the Telecommunications Act of
1996. These companies consist of the RBOCs,
GTE, and numerous independent telephone
companies.
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Interconnection Agreement.................... A contract between an ILEC and a CLEC for the
connection of a CLEC network to the PSTN, as
well as CLEC access to ILEC UNEs, e.g.,
copper loops. This agreement sets out the
financial agreement and operational aspects
of such interconnection and access.
Inter-LATA................................... Inter-LATA long distance calls are calls that
pass from one LATA to another. Typically,
these calls are simply referred to as
long-distance calls, although calls within a
single LATA can also be long distance calls.
Internet..................................... An array of interconnected networks using a
common set of protocols defining the
information coding and processing
requirements that can communicate across
hardware platforms and over many links; now
operated by a consortium of
telecommunications service providers and
others.
IP........................................... INTERNET PROTOCOL. A standard for software
that keeps track of the inter-network
addresses for different nodes, routes
outgoing messages and recognizes incoming
messages.
ISDN......................................... INTEGRATED SERVICES DIGITAL NETWORK. A
transmission method that provides
circuit-switched access to the public network
at speeds of 64 Kbps [or Nx64] for voice,
data and video transmission.
ISP.......................................... INTERNET SERVICE PROVIDER. A company who
provides direct access to the Internet.
IXC.......................................... INTEREXCHANGE CARRIER. Usually referred to as
a long-distance service provider. There are
many IXCs, including AT&T, MCI, WorldCom,
Sprint and Qwest.
Kbps......................................... KILOBITS PER SECOND. 1,000 bits per second.
LAN.......................................... LOCAL AREA NETWORK. A privately owned and
administered network for data communications.
Usually provides high bandwidth
communications between attached devices over
a limited geographical area.
LATA......................................... LOCAL ACCESS AND TRANSPORT AREA. A geographic
area inside of which an RBOC can offer
switched telecommunications services,
including long distance (known as toll).
RBOCs are currently not allowed to provide
long distance service between these regions.
There are 196 LATAs in the United States
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LEC.......................................... LOCAL EXCHANGE CARRIER. A company that
provides local exchange services; this term
includes ILECs and CLECs.
LMDS......................................... LOCAL MULTIPOINT DISTRIBUTION SERVICE.
Digital wireless service in the 28-30 GHz
frequency band.
Mbps......................................... MEGABITS PER SECOND. Millions of bits per
second.
MHz.......................................... MEGAHERTZ. Millions of hertz or cycles per
second; a measure used to characterize the
frequency or amount of bandwidth of a radio
frequency signal.
MMDS......................................... MULTICHANNEL MULTIPOINT DISTRIBUTION SERVICE.
Wireless transmission systems licensed by the
FCC originally for wireless cable services,
that may be permitted to offer two-way
services in the future.
Multiplexing................................. An electronic or optical process that
combines several lower speed transmission
signals into one higher speed signal. There
are various techniques for multiplexing,
including frequency division (splitting the
total available frequency bandwidth into
smaller frequency slices), time division
(slicing a channel into timeslots and placing
each signal into its assigned timeslot) and
statistical (combining signals in the same
channel, but allowing each signal to transmit
only when it has data to send).
NAP.......................................... NETWORK ACCESS PROVIDER. A service provider
that connects subscribers to either ILECs,
CLECs or ISPs. The NAP is typically the
network provider that has access to the
copper loops over which DSL-based service
operates.
Node......................................... A node on a network is usually formed by the
presence of a router and user access
equipment (such as a modem or an Ethernet
card). Often, several leased lines are joined
together at a network node.
OSS.......................................... OPERATIONAL SUPPORT SYSTEMS. The
computer-based systems for ordering and
servicing services and facilities between
CLECs and ILECs.
Packets...................................... Information represented as bytes grouped
together through a communication node with a
common destination address and other
attribute information.
Packet/Cell Networks......................... Networks that transport packet protocols such
as X25, frame relay and IP, and cell
technologies such as ATM.
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POP.......................................... POINTS OF PRESENCE. Locations in a service
area where a carrier has installed
transmission equipment that serves as, or
relays calls to, a network switching center
of that carrier.
Protocol..................................... The rules or procedures that control how data
are organized and transmitted from one
computer to another.
PSTN......................................... PUBLIC SWITCHED TELEPHONE NETWORK. The
existing interconnected circuit switched
networks of the ILECs and the IXCs.
RBOC......................................... REGIONAL BELL OPERATING COMPANY. One of the
ILECs created by AT&T's divestiture of its
local exchange business. The current RBOCs
are BellSouth, Bell Atlantic Corporation,
Ameritech Corporation, U S WEST, Inc. and SBC
Communications, Inc.
RCP.......................................... RHYTHMS CONNECTION POINT. A physical point of
presence in the Rhythms Network that connects
a copper line extending from a customer
premises to a DSL multiplexer and utilizes a
broadband and redundant backbone to transport
customer traffic to the Rhythms Metro Service
Center (RMSC).
RMSC......................................... RHYTHMS METRO SERVICE CENTER. The physical
point of presence in a market to which the
RCPs are connected. The RMSCs will be
connected together over a backbone network.
RNOC......................................... RHYTHMS NETWORK OPERATIONS CENTER.
Router....................................... A device that accepts the IP protocol from a
LAN or another WAN device and switches/routes
IP packets across a network backbone.
Router's also provide protocol conversion
services to transfer IP packets over Frame
Relay, ATM, and other backbone network
services.
SNA.......................................... SYSTEMS NETWORK ARCHITECTURE. IBM's
proprietary connection-oriented, virtual
circuit network architecture for
terminal/host communication.
SNMP......................................... SIMPLE NETWORK MANAGEMENT PROTOCOL. The
network management protocol used with
TCP/IP-based Internets.
SONET........................................ SYNCHRONOUS OPTICAL NETWORK TECHNOLOGY. A
technology and network architecture that
enables signals to be transported
simultaneously along two different paths so
that if one pathway is cut, traffic can
continue in the other direction without
interruption to its destination. This is also
referred to as diverse routing.
</TABLE>
A-5
<PAGE>
<TABLE>
<S> <C>
TCP/IP....................................... TRANSMISSION CONTROL PROTOCOL/INTERNET
PROTOCOL. A set of network protocols that
allow computers with different architectures
and operating system software to communicate
with other computers on the Internet.
UNE.......................................... UNBUNDLED NETWORK ELEMENTS. The various
components of an ILEC's network that a CLEC
can lease for purposes of building a
facilities-based competitive network,
including copper lines, CO collocation space,
inter-office transport, operational support
systems and local switching.
Upstream..................................... Refers to the transmission speed of a
connection between the end user and the
Rhythms Connection Point.
VARs......................................... VALUE ADDED RESELLERS.
WAN.......................................... WIDE AREA NETWORK. A computer or
communication network that covers a
geographic area that is larger than a city.
</TABLE>
A-6
<PAGE>
RHYTHMS NETCONNECTIONS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants..................................................... F-2
Financial Statements:
Balance Sheet....................................................................... F-3
Statement of Operations............................................................. F-4
Statement of Cash Flows............................................................. F-5
Statement of Stockholders' Equity................................................... F-6
Notes to Financial Statements....................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Rhythms NetConnections Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of cash flows, and of stockholders' equity present fairly, in all
material respects, the financial position of Rhythms NetConnections Inc. at
December 31, 1997, and the results of its operations and its cash flows for the
period from February 27, 1997 (inception) through December 31, 1997 in
conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards 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 audit provides a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
March 13, 1998
F-2
<PAGE>
RHYTHMS NETCONNECTIONS INC.
BALANCE SHEET
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, MARCH 31,
1997 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 10,166,000 $ 26,519,000
Accounts and loans receivable.................................................... -- 214,000
Receivable from leasing company.................................................. 1,449,000 1,669,000
Inventory........................................................................ -- 226,000
Prepaid expenses................................................................. 95,000 93,000
------------- -------------
Total current assets............................................................. 11,710,000 28,721,000
Equipment, net..................................................................... 172,000 124,000
Collocation fees, net.............................................................. 327,000 797,000
Other assets....................................................................... 32,000 28,000
------------- -------------
$ 12,241,000 $ 29,670,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 992,000 $ 2,253,000
Accrued expenses................................................................. 335,000 270,000
Current portion of long-term debt................................................ 126,000 174,000
------------- -------------
Total current liabilities........................................................ 1,453,000 2,697,000
Long-term debt..................................................................... 442,000 394,000
------------- -------------
Total liabilities.............................................................. 1,895,000 3,091,000
------------- -------------
Commitments (Note 9)
Stockholders' equity:
Series A Convertible Preferred Stock, $0.001 par value; 17,000,000 shares
authorized in 1997, 12,900,000 shares in 1998; 12,490,000 shares issued and
outstanding in 1997, 12,855,094 in 1998........................................ 12,000 13,000
Series B Convertible Preferred Stock, $0.001 par value; no shares authorized in
1997, 4,044,943 shares in 1998; no shares issued and outstanding in 1997,
4,044,943 shares in 1998....................................................... -- 4,000
Common Stock, $0.001 par value; 22,764,706 shares authorized in 1997, 22,909,650
in 1998; 1,034,259 shares issued and outstanding in 1997, 3,302,804 shares in
1998........................................................................... 1,000 3,000
Additional paid-in capital....................................................... 12,563,000 31,075,000
Accumulated deficit.............................................................. (2,230,000) (4,516,000)
------------- -------------
Total stockholders' equity..................................................... 10,346,000 26,579,000
------------- -------------
$ 12,241,000 $ 29,670,000
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
RHYTHMS NETCONNECTIONS INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
PERIOD FROM PERIOD FROM
FEBRUARY 27, FEBRUARY 27,
1997 1997 (UNAUDITED)
(INCEPTION) (INCEPTION) THREE MONTHS
THROUGH THROUGH ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1997 1997 1998
--------------- --------------- -------------
<S> <C> <C> <C>
REVENUE:
Service and installation....................................... $ -- $ -- $ 10,000
--------------- --------------- -------------
OPERATING EXPENSES:
Network and service costs...................................... -- -- 198,000
Selling, general and administrative............................ 2,342,000 3,000 2,228,000
Depreciation and amortization.................................. 1,000 -- 16,000
--------------- --------------- -------------
Total operating expenses..................................... 2,343,000 3,000 2,442,000
--------------- --------------- -------------
LOSS FROM OPERATIONS............................................. (2,343,000) (3,000) (2,432,000)
--------------- --------------- -------------
OTHER INCOME AND EXPENSE:
Interest Income................................................ 114,000 -- 158,000
Interest Expense............................................... (1,000) -- (12,000)
--------------- --------------- -------------
NET LOSS......................................................... $ (2,230,000) $ (3,000) $(2,286,000)
--------------- --------------- -------------
--------------- --------------- -------------
NET LOSS PER SHARE:
Basic.......................................................... $ (2.48) $ -- $ (2.54)
--------------- --------------- -------------
--------------- --------------- -------------
Diluted........................................................ $ (2.48) $ -- $ (2.54)
--------------- --------------- -------------
--------------- --------------- -------------
SHARES USED IN COMPUTING NET LOSS PER SHARE:
Basic.......................................................... 900,735 900,735 900,735
--------------- --------------- -------------
--------------- --------------- -------------
Diluted........................................................ 900,735 900,735 900,735
--------------- --------------- -------------
--------------- --------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
RHYTHMS NETCONNECTIONS INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
PERIOD FROM PERIOD FROM
FEBRUARY 27, FEBRUARY 27,
1997 1997 (UNAUDITED)
(INCEPTION) (INCEPTION) THREE MONTHS
THROUGH THROUGH ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1997 1997 1998
--------------- --------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................... $ (2,230,000) $ (3,000) $ (2,286,000)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization................................ 1,000 -- 16,000
Compensation expense from stock option issued to employee.... 73,000 -- --
Changes in assets and liabilities:
Increase in accounts and loans receivable.................. -- -- (214,000)
Increase in inventory...................................... -- -- (226,000)
Decrease (increase) in prepaid expenses.................... (95,000) -- 2,000
Decrease (increase) in other assets........................ (32,000) (8,000) 4,000
Increase in accounts payable............................... 388,000 3,000 1,261,000
Increase (decrease) in accrued expenses.................... 335,000 -- (65,000)
--------------- --------------- -------------
Net cash used for operating activities..................... (1,560,000) (8,000) (1,508,000)
--------------- --------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchases) of equipment................................. (173,000) -- 37,000
Payments of collocation fees................................... (327,000) -- (475,000)
--------------- --------------- -------------
Net cash used for investing activities....................... (500,000) -- (438,000)
--------------- --------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of equipment to be reimbursed by leasing company..... (845,000) -- (220,000)
Proceeds from borrowings on long-term debt..................... 568,000 -- --
Proceeds from issuance of Common Stock......................... 13,000 1,000 227,000
Proceeds from issuance of Preferred Stock...................... 12,490,000 199,000 18,292,000
--------------- --------------- -------------
Net cash provided by financing activities.................... 12,226,000 200,000 18,299,000
--------------- --------------- -------------
Net increase in cash and cash equivalents........................ 10,166,000 192,000 16,353,000
Cash and cash equivalents at beginning of period................. -- -- 10,166,000
--------------- --------------- -------------
Cash and cash equivalents at end of period....................... $ 10,166,000 $ 192,000 $ 26,519,000
--------------- --------------- -------------
--------------- --------------- -------------
Supplemental schedule of cash flow information:
Cash paid for interest......................................... $ 3,000 $ -- $ 8,000
--------------- --------------- -------------
Supplemental schedule of non-cash financing activities:
Equipment purchases payable, to be financed through operating
leases....................................................... $ 604,000 $ -- $ 1,576,000
--------------- --------------- -------------
--------------- --------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
RHYTHMS NETCONNECTIONS INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
$0.001 PAR VALUE $0.001 PAR VALUE $0.001 PAR VALUE ADDITIONAL
---------------------- ------------------------ ------------------------ PAID-IN ACCUMULATED
# SHARES AMOUNT # SHARES AMOUNT # SHARES AMOUNT CAPITAL DEFICIT
--------- ----------- ----------- ----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock to
Founders (at inception).. -- $ -- -- $ -- 900,735 $ 1,000 $ -- $ --
Issuance of Series A
Preferred Stock for cash
($1.00 per share)........ 12,490,000 12,000 -- -- -- -- 12,477,000 --
Issuance of Common Stock
upon exercise of options
($0.10 per share exercise
price)................... -- -- -- -- 133,524 -- 13,000 --
Grant of options to
purchase Series A
Preferred Stock ($0.80
per share exercise
price)................... -- -- -- -- -- -- 73,000 --
Net loss for 1997.......... -- -- -- -- -- -- -- (2,230,000)
--------- ----------- ----------- ----------- ----------- ----------- ---------- ------------
Balance at December 31,
1997..................... 12,490,000 12,000 -- -- 1,034,259 1,000 12,563,000 (2,230,000)
Issuance of Common Stock
upon exercise of options
($0.10 per share exercise
price) (unaudited)....... -- -- -- -- 2,268,545 2,000 225,000 --
Issuance of Series A
Preferred Stock for cash
($0.80 per share) in
February 1998
(unaudited).............. 365,094 1,000 -- -- -- -- 291,000 --
Issuance of Series B
Preferred Stock for cash
($4.45 per share) in
March 1998 (unaudited)... -- -- 4,044,943 4,000 -- -- 17,996,000 --
Net loss for first quarter
1998 (unaudited)......... -- -- -- -- -- -- -- (2,286,000)
--------- ----------- ----------- ----------- ----------- ----------- ---------- ------------
Balance at March 31, 1998
(unaudited).............. 12,855,094 $ 13,000 4,044,943 $ 4,000 3,302,804 $ 3,000 $31,075,000 $(4,516,000)
--------- ----------- ----------- ----------- ----------- ----------- ---------- ------------
--------- ----------- ----------- ----------- ----------- ----------- ---------- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Issuance of Common Stock to
Founders (at inception).. $ 1,000
Issuance of Series A
Preferred Stock for cash
($1.00 per share)........ 12,489,000
Issuance of Common Stock
upon exercise of options
($0.10 per share exercise
price)................... 13,000
Grant of options to
purchase Series A
Preferred Stock ($0.80
per share exercise
price)................... 73,000
Net loss for 1997.......... (2,230,000)
------------
Balance at December 31,
1997..................... 10,346,000
Issuance of Common Stock
upon exercise of options
($0.10 per share exercise
price) (unaudited)....... 227,000
Issuance of Series A
Preferred Stock for cash
($0.80 per share) in
February 1998
(unaudited).............. 292,000
Issuance of Series B
Preferred Stock for cash
($4.45 per share) in
March 1998 (unaudited)... 18,000,000
Net loss for first quarter
1998 (unaudited)......... (2,286,000)
------------
Balance at March 31, 1998
(unaudited).............. $26,579,000
------------
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
THE COMPANY: Rhythms NetConnections Inc. (the "Company"), a Delaware
corporation, was organized under the name Accelerated Connections Inc. effective
February 27, 1997. The Company's name was changed to Rhythms NetConnections Inc.
as of August 15, 1997. The Company is in the business of providing high-speed
data communications services on an end-to end basis to business customers and
end users. The Company began service trials in the San Diego, California, market
in December 1997 and began commercial operations in San Diego effective April 1,
1998.
The Company's ultimate success depends upon, among other factors, rapidly
expanding the geographic coverage of its network services; entering into
interconnection agreements with incumbent local exchange carriers, some of which
are competitors or potential competitors of the Company; deploying network
infrastructure; attracting and retaining customers; accurately assessing
potential markets; continuing to develop and integrate its operational support
system and other back office systems; obtaining any required governmental
authorizations; responding to competitive developments; continuing to attract,
retain and motivate qualified personnel; and continuing to upgrade its
technologies and commercialize its network services incorporating such
technologies. There can be no assurance that the Company will be successful in
addressing these matters and failure to do so could have a material adverse
effect on the Company's business, prospects, operating results and financial
condition. As the Company continues the development of its business, it will
seek additional sources of financing to fund its development. If unsuccessful in
obtaining such financing, the Company will continue expansion of its operations
on a reduced scale based on its existing capital resources.
INTERIM RESULTS (UNAUDITED): The accompanying balance sheet at March 31,
1998, the related statements of operations and cash flows for the month ended
March 31, 1997 and the quarter ended March 31, 1998, and the related statement
of stockholders' equity for the quarter ended March 31, 1998 have been prepared
in accordance with generally accepted accounting principles for interim
financial information and, therefore, do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring accruals, that are necessary
for the fair statement of results for the unaudited interim periods. The data
disclosed in these notes to financial statements at such date and for such
periods are also unaudited. The operating results for the interim periods are
not necessarily indicative of the results to be expected for a full fiscal year
or for any future periods.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
financial statement date, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents includes cash on hand,
money market funds and certificates of deposit with a maturity of 90 days or
less at the time of purchase.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of the Company's
financial instruments as presented are reasonable estimates of those
instruments' fair values.
F-7
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECEIVABLE FROM LEASING COMPANY: Receivable from leasing company represents
property and equipment purchased by the Company to be reimbursed by a leasing
company in a subsequent period under a previously executed sale/leaseback
agreement. Upon reimbursement of these purchases, the Company will account for
these leases as operating.
INVENTORY: Inventory consists of communications equipment that will be
installed at customer locations. Inventory is accounted for on a FIFO basis.
EQUIPMENT: Equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years.
COLLOCATION FEES: Collocation fees represent nonrecurring fees paid to
secure Central Office space for location of certain Company equipment. The fees
are amortized over their estimated useful lives of ten years.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company investigates potential
impairments of its long-lived assets on an exception basis when evidence exists
that events or changes in circumstances may have made recovery of an asset's
carrying value unlikely. An impairment loss is recognized when the sum of the
expected undiscounted future net cash flows is less than the carrying amount of
the asset. No such losses have been identified.
CONCENTRATIONS OF CREDIT RISK: Credit risk is primarily concentrated in
cash equivalents and the receivable from leasing company. Cash in excess of
operating requirements is conservatively invested in money market funds and
certificates of deposit with high-quality financial institutions to minimize
risk. The receivable from leasing company is collateralized by property and
equipment and, therefore, not considered to be subject to credit risk loss.
INCOME TAXES: The Company provides for income taxes utilizing the liability
method. Under the liability method, current income tax expense or benefit
represents income taxes expected to be payable or refundable for the current
period. Deferred income tax assets and liabilities are established for both the
impact of differences between the financial reporting bases and tax bases of
assets and liabilities and for the expected future tax benefit to be derived
from tax credits and tax loss carryforwards. Deferred income tax expense or
benefit represents the change during the reporting period in the net deferred
income tax assets and liabilities. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
NET LOSS PER SHARE: The Company has adopted Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings Per Share." Basic earnings per
share ("EPS") is calculated by dividing the income or loss available to common
stockholders by the weighted average number of common shares outstanding for the
period, without consideration for common stock equivalents. Diluted EPS is
computed by dividing the income or loss available to common stockholders by the
weighted average number of common shares outstanding for the period in addition
to the weighted average number of common stock equivalents outstanding for the
period. Shares subject to repurchase by the Company are considered common stock
equivalents for purposes of this calculation. Shares issuable upon conversion of
the Series A Preferred Stock, upon the exercise of outstanding stock options and
shares issued subject to repurchase by
F-8
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the Company totaling 15,272,475 at December 31, 1997 have been excluded from the
computation since their effect would be antidilutive.
NET LOSS PER SHARE FOR INTERIM PERIODS (UNAUDITED): As of March 31, 1998,
the diluted net loss per share computation excludes 19,302,106 shares subject to
conversion or repurchase by the Company, since the effect of these shares would
be antidilutive.
STOCK-BASED COMPENSATION: The Company measures compensation expense for its
employee stock-based compensation using the intrinsic value method and provides
pro forma disclosures of net loss as if the fair value method had been applied
in measuring compensation expense (Note 6). Under the intrinsic value method of
accounting for stock-based compensation, if the exercise price of options
granted to employees equals the fair value of the underlying stock on the date
of grant, no compensation expense is to be recognized.
NEW ACCOUNTING PRONOUNCEMENT: In June 1997, SFAS No. 130, "Reporting
Comprehensive Income," was issued. The Company adopted SFAS No. 130 as required
in 1998. This statement establishes standards for reporting and presenting
comprehensive income and its components in the financial statements.
Comprehensive income is defined as "the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners or distributions to
owners." The adoption had no impact on the Company's statement of operations.
NOTE 3--COMPOSITION OF CERTAIN BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
Equipment, net, consists of the following:
Computer software........................................................ $ 173,000
Less accumulated depreciation............................................ (1,000)
--------
$ 172,000
--------
--------
</TABLE>
NOTE 4--DEBT
As of December 31, 1997, the Company had borrowed $568,000 from a financial
institution, with an additional $432,000 available to be drawn under the note at
any time through April 29, 1998. Terms of the note payable include an interest
rate of prime plus 0.25 percent (8.75 percent at December 31, 1997). The note is
secured by assets of the Company. Through April 29, 1998, interest only is due
monthly on the outstanding principal. As of April 29, 1998, the outstanding
principal will be amortized over a 36-month repayment period; the outstanding
principal will continue to bear interest.
NOTE 5--STOCKHOLDERS' EQUITY
The Company was initially capitalized in February 1997 with Common Stock. In
July 1997, the Company was granted authority to issue two classes of stock
consisting of up to 17,000,000 shares of Series A Preferred Stock and 22,764,706
shares of Common Stock, both with a $0.001 par value per share.
F-9
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--STOCKHOLDERS' EQUITY (CONTINUED)
The Company's Series A Preferred Stock may be converted, at the option of
the holder, into the Company's Common Stock on a one-for-one basis, subject to
antidilution protection on a broad-based weighted-average basis. The Series A
Preferred Stock will also be automatically converted upon certain closings of
registered public offerings of Common Stock. The holders of the Series A
Preferred Stock are entitled to receive non-cumulative dividends in the amount
equal to $0.08 per share per annum, as and if declared by the Board of
Directors, or an amount equal to that paid on any other outstanding shares of
the Company, payable quarterly, as and if declared by the Board of Directors. In
the event of a liquidation of the Company, the holders of the Series A Preferred
Stock will be entitled, in preference to the holders of Common Stock, to an
amount equal to $1.00 per share, plus all declared and unpaid dividends. The
Preferred shares entitle holders to one vote per share, on an "as-converted"
basis.
NOTE 6--STOCK OPTIONS
The Company has established the 1997 Stock Option/Stock Issuance Plan (the
"Plan"), which provides for the grant of options to employees, directors and
outside consultants for purchase of up to an aggregate of 4,863,971 shares of
Common Stock. The options are immediately exercisable and expire within ten
years after the date of grant. Shares acquired upon exercise are subject to
repurchase by the Company ratably over a four-year period from the date of
grant, at the option of the Company and at the exercise price. The Plan provides
for both incentive option and non-statutory option grants and for accelerated
vesting in the event of a 50 percent or more change in control of the Company.
Plan activity through December 31, 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES FAIR VALUE
---------------- -----------------
<S> <C> <C>
Granted.................................................. 2,417,381 $ 0.10
Exercised................................................ (133,524) $ 0.10
Canceled................................................. -- --
----------------
Outstanding at December 31, 1997......................... 2,283,857 $ 0.10
----------------
----------------
</TABLE>
The following summarizes the outstanding and exercisable options under the
Plan at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -----------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING REMAINING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.10 2,283,857 9.63 years $ 0.10 2,283,857 $ 0.10
</TABLE>
During 1997, all options were granted to employees at fair value on the date
of grant, in accordance with the provisions of the Plan. Therefore, no
compensation expense related to these options was recorded for the period ended
December 31, 1997.
An option to purchase 365,094 shares of Series A Preferred Stock at $0.80
per share was granted to an employee during 1997. The Company recorded $73,000
in compensation expense during 1997 related to this grant.
F-10
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCK OPTIONS (CONTINUED)
Had compensation expense for the Company's 1997 Stock Option/Stock Issuance
Plan and the Preferred Stock option been determined based on the fair value
method of accounting for stock-based compensation, the Company's net loss and
net loss per share for the period ended December 31, 1997 would have been
increased by $84,000 and $0.10 per share, respectively. For purposes of
determining this compensation expense, the fair value of each option grant is
estimated on the grant date using the Black Scholes option pricing model with
the following weighted average assumptions used for grants during the period
ended December 31, 1997: no dividend yield, risk free interest rate of 5.3
percent, expected volatility of nil, and expected term of four years for Common
options and six months for the Preferred option.
NOTE 7--INCOME TAXES
As of December 31, 1997, the Company had net operating loss carryforwards of
approximately $2,117,000, which are available to offset future taxable income
through 2016 for federal taxes and 2005 for state taxes, subject to the
limitations of Internal Revenue Code Section 382 relating to changes in
ownership of the Company. The deferred tax asset arising from the loss
carryforwards has been fully offset by a valuation allowance since it is more
likely than not that it will not be realized.
Components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards......................................... $ 908,000
Accrued vacation and other............................................... 13,000
--------
Gross deferred tax asset................................................... 921,000
Valuation allowance........................................................ (921,000)
--------
Net deferred income taxes.................................................. $ --
--------
--------
</TABLE>
The provision for (benefit from) income taxes reconciles to the statutory
federal tax rate as follows:
<TABLE>
<S> <C>
Statutory federal tax rate........................................... 34.0%
State income tax..................................................... 8.4
Other................................................................ (1.1)
Deferred tax asset valuation allowance............................... (41.3)
---------
--%
---------
---------
</TABLE>
NOTE 8--RELATED PARTY TRANSACTIONS
The Company's in-house counsel is also a partner in a law firm used
externally by the Company. During 1997, the Company incurred legal fees and
expenses of approximately $92,000 to the external firm, in addition to the
salary paid to the in-house counsel.
Two members of the Company's Board of Directors serve as directors to a
company that supplies equipment to the Company. The total amount purchased
during 1997 from the equipment supplier was approximately $419,000.
F-11
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--RELATED PARTY TRANSACTIONS (CONTINUED)
INTERIM TRANSACTIONS (UNAUDITED): During the first quarter of 1998, the
Company extended three loans to an employee. These loans total $201,000, bear
interest at approximately 5.6 percent, are secured by certain assets, and are
generally repayable to the Company during 1998.
NOTE 9--COMMITMENTS
The Company leases office space and certain office equipment under
non-cancelable operating lease agreements. The leases range in term from 24
months to 60 months and, in certain instances, provide for options to extend.
Rent expense under the operating leases for 1997 totaled $46,000. Future minimum
rental payments under the leases are $270,000 in 1998, $250,000 in 1999,
$110,000 in 2000, $30,000 in 2001, and $30,000 in 2002.
NOTE 10--SUBSEQUENT EVENTS
During January and February 1998, a total of 2,268,545 shares of Common
Stock was issued upon the exercise of stock options; proceeds to the Company
were $227,000. During February 1998, 365,094 shares of Series A Preferred Stock
were issued to an employee for proceeds of $292,000 upon the exercise of an
option.
Effective March 6, 1998, the Company amended its Certificate of
Incorporation to increase the number of authorized Common shares to 22,909,650,
to decrease the number of authorized Preferred shares to 16,944,943, and to
designate 12,900,000 of the Preferred shares as Series A and 4,044,943 shares as
Series B.
During March 1998, the Company issued 4,044,943 shares of its Series B
Preferred Stock to new and existing investors at a price of $4.45 per share.
Proceeds to the Company were $18,000,000.
NOTE 11--SUBSEQUENT EVENTS (UNAUDITED)
Effective May 5, 1998, the Company issued senior discount notes and warrants
for net cash proceeds of $144,102,000 after estimated expenses. This debt was
issued in the form of 290,000 units with each unit consisting of $1,000
principal amount at maturity of 13.5 percent senior discount notes due 2008 and
four warrants that initially entitle holders to purchase 1.70 shares of Common
Stock of the Company at an exercise price of $0.01 per share.
During May 1998, the Company entered into a lease line that provides for
$24.5 million in equipment on an operating lease basis. In connection with this
lease agreement, the Company issued 239,325 warrants to purchase Common Stock at
a price of $4.45 per share, exercisable immediately.
F-12
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR BY THE INITIAL PURCHASERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL, IN ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
NOTICE TO INVESTORS............................. ii
AVAILABLE INFORMATION........................... vi
ADDITIONAL INFORMATION.......................... vi
PROSPECTUS SUMMARY.............................. 1
THE EXCHANGE OFFER.............................. 6
TERMS OF NEW NOTES.............................. 10
RISK FACTORS.................................... 14
USE OF PROCEEDS................................. 28
DIVIDENDS....................................... 28
CAPITALIZATION.................................. 29
SELECTED FINANCIAL DATA......................... 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATION..................................... 31
BUSINESS........................................ 37
MANAGEMENT...................................... 49
CERTAIN TRANSACTIONS............................ 56
PRINCIPAL STOCKHOLDERS.......................... 59
THE EXCHANGE OFFER.............................. 61
DESCRIPTION OF THE NOTES........................ 70
DESCRIPTION OF THE NEW NOTES.................... 100
DESCRIPTION OF THE WARRANTS..................... 101
DESCRIPTION OF CAPITAL STOCK.................... 106
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS....... 112
PLAN OF DISTRIBUTION............................ 115
LEGAL MATTERS................................... 116
EXPERTS......................................... 116
GLOSSARY OF TERMS............................... A-1
INDEX TO FINANCIAL STATEMENTS................... F-1
</TABLE>
--------------------------
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES,
WHETHER OR NOT PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER
A PROSPECTUS.
[LOGO]
RHYTHMS
NETCONNECTIONS INC.
OFFER TO EXCHANGE ITS
13 1/2% SERIES B
SENIOR DISCOUNT NOTES DUE 2008
FOR ANY AND ALL OF ITS OUTSTANDING
13 1/2% SERIES A SENIOR
DISCOUNT NOTES DUE 2008
---------------------
PROSPECTUS
---------------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers and directors of the Company under certain conditions and subject to
certain limitations. Section 145 of the Delaware General Corporation Law also
provides that a corporation has the power to purchase and maintain insurance on
behalf of its officers and directors against any liability asserted against such
person and incurred by him or her in such capacity, or arising out of his or her
status as such, whether or not the corporation would have the power to indemnify
him or her against such liability under the provisions of Section 145 of the
Delaware General Corporation Law.
Article VII, Section 6 of the Bylaws, as amended, of the Company provides
that the Company shall indemnify its officers, directors, employees and agents
to the full extent permitted by the Delaware General Corporation Law.
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
Article V, Section (A) of the Company's Restated Certificate of Incorporation
provides that a director of the Company shall not be personally liable for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law, or (iv) for any transaction from which the
director derived any improper personal benefit.
The Company has entered into indemnification agreements with each of its
directors and executive officers. Generally, the indemnification agreements
attempt to provide the maximum protection permitted by Delaware law as it may be
amended from time to time. Moreover, the indemnification agreements provide for
certain additional indemnification. Under such additional indemnification
provisions, however, an individual will not receive indemnification for
judgments, settlements or expenses if he or she is found liable to the Company
(except to the extent the court determines he or she is fairly and reasonably
entitled to indemnity for expenses), for settlements not approved by the Company
or for settlements and expenses if the settlement is not approved by the court.
The indemnification agreements provide for the Company to advance to the
individual any and all reasonable expenses (including legal fees and expenses)
incurred in investigating or defending any such action, suit or proceeding. In
order to receive an advance of expenses, the individual must submit to the
Company copies of invoices presented to him or her for such expenses. Also, the
individual must repay such advances upon a final judicial decision that he or
she is not entitled to indemnification.
The Company intends to enter into additional indemnification agreements with
each of its directors and executive officers to effectuate these indemnity
provisions and to purchase directors' and officers' liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<S> <C>
3.1 Restated Certificate of Incorporation filed with the Delaware Secretary of State on
March 6, 1998 and Certificate of Amendment thereto filed with the Delaware Secretary
of State on April 28, 1998.
3.2 Bylaws of the Company and amendments thereto dated as of July 1, 1997 and March 6,
1998, respectively.
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
4.1 Purchase Agreement, dated April 28, 1998, by and among the Registrant and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson, Lufkin
& Jenrette Securities Corporation.
4.2 Indenture, dated as of May 5, 1998, by and between the Registrant and State Street
Bank and Trust Company of California, N.A., as trustee, including form of the
Company's 13 1/2% Senior Discount Notes due 2008, Series A and form of the Company's
13 1/2% Senior Discount Notes due 2008, Series B.
4.3 Notes Registration Rights Agreement, dated as of May 5, 1998, among the Registrant
and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and
Donaldson, Lufkin & Jenrette Securities Corporation.
4.4 Warrant Agreement, dated as of May 5, 1998, by and between the Registrant and State
Street Bank and Trust Company of California, N.A.
4.5 Warrant Registration Rights Agreement, dated as of May 5, 1998, by and among the
Registrant and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, and Donaldson, Lufkin & Jenrette Securities Corporation.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
9.1 Voting Trust Agreement, dated as of May 5, 1998, by and among Sprout Capital VII,
L.P., Donaldson Lufkin & Jenrette Securities Corporation, and First Union Trust
Company, National Association, as trustee.
9.2 Voting Trust Agreement, dated as of March 12, 1998, by and between Enron
Communications Group, Inc. and the Registrant, as trustee.
9.3 Amended and Restated Voting Agreement, dated March 12, 1998, by and among the
Registrant and the parties listed on the Schedule of Investors attached thereto as
Schedule A.
9.4 Amendment to Amended and Restated Voting Agreement, dated as of May 5, 1998, by and
among the Registrant and the parties listed on the signature pages attached thereto.
10.1 Series A Preferred Stock Purchase Agreement, dated July 3, 1997, by and among the
Registrant and the Investors listed on Schedule A thereto.
10.2 Subsequent Closing Purchase Agreement, dated December 23, 1997, by and among the
Registrant and the Investors listed on Schedule A thereto.
10.3 Series B Preferred Stock Purchase Agreement, dated March 12, 1998, by and among the
Registrant and the Investors listed on Schedule A thereto.
10.4 Amended and Restated Investors' Rights Agreement, dated March 12, 1998, by and among
the Registrant and the Investors listed on Schedule A thereto.
10.5 Employment Agreement between the Registrant and Catherine M. Hapka, dated June 10,
1997.
10.6 Employment Agreement between the Registrant and Jeffrey Blumenfeld, dated August 10,
1997.
10.7 Employment Agreement between the Registrant and James A. Greenberg, dated July 14,
1997.
10.8 Employment Agreement between the Registrant and Rand A. Kennedy, dated August 22,
1997.
10.9 Form of Indemnification Agreement between the Registrant and each of its directors.
10.10 Form of Indemnification Agreement between the Registrant and each of its officers.
10.11 QuickStart Loan and Security Agreement, dated October 29, 1997, between the
Registrant and Silicon Valley Bank.
10.12 Master Lease Agreement No. 1642 and Addendum thereto, each dated November 19, 1997,
and Second Addendum thereto, dated as of May 19, 1998, between the Registrant and Sun
Financial Group, Inc.
10.13 Interconnection Agreement, dated July 1997, between the Registrant and Pacific Bell.
10.14 Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of
1996, dated as of June 5, 1998, between the Registrant and Bell Atlantic
--Pennsylvania, Inc.
10.15 Interconnection Agreement, dated as of June 3, 1998, between the Registrant and U S
WEST for Washington.
10.16 1997 Stock Option/Stock Issuance Plan.
21.1 Subsidiaries of the Registrant.
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Brobeck, Phleger & Harrison LLP.
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility of Trustee on Form T-1.
27 Financial Data Schedule
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of section 310 of the Trust Indenture Act ("Act") in accordance
with the rules and regulations prescribed by the SEC under section 305(b)(2) of
the Act.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Englewood, State of
Colorado, on the day of , 1998.
RHYTHMS NETCONNECTIONS INC.
BY:
-----------------------------------------
Catherine M. Hapka
PRESIDENT AND CHIEF EXECUTIVE OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Catherine M. Hapka and Scott C. Chandler, or
either of them, as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and any
registration statement related to this Registration Statement and filed pursuant
to Rule 462 under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
President, Chief Executive
- ------------------------------ Officer and Director , 1998
Catherine M. Hapka
Chief Financial Officer
- ------------------------------ , 1998
Scott C. Chandler
Director
- ------------------------------ , 1998
Kevin R. Compton
Director
- ------------------------------ , 1998
Keith B. Geeslin
Director
- ------------------------------ , 1998
Ken L. Harrison
Director
- ------------------------------ , 1998
William R. Stensrud
Director
- ------------------------------ , 1998
John L. Walecka
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- ----------- ---------
<C> <S> <C>
3.1 Restated Certificate of Incorporation filed with the Delaware Secretary of State on March 6,
1998 and Certificate of Amendment thereto filed with the Delaware Secretary of State on April
28, 1998.
3.2 Bylaws of the Company and amendments thereto dated as of July 1, 1997 and March 6, 1998,
respectively.
4.1 Purchase Agreement, dated April 28, 1998, by and among the Registrant and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson, Lufkin & Jenrette Securities
Corporation.
4.2 Indenture, dated as of May 5, 1998, by and between the Registrant and State Street Bank and
Trust Company of California, N.A., as trustee, including form of the Company's 13 1/2% Senior
Discount Notes due 2008, Series A and form of the Company's 13 1/2% Senior Discount Notes due
2008, Series B.
4.3 Notes Registration Rights Agreement, dated as of May 5, 1998, among the Registrant and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Donaldson, Lufkin &
Jenrette Securities Corporation.
4.4 Warrant Agreement, dated as of May 5, 1998, by and between the Registrant and State Street Bank
and Trust Company of California, N.A.
4.5 Warrant Registration Rights Agreement, dated as of May 5, 1998, by and among the Registrant and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Donaldson, Lufkin
& Jenrette Securities Corporation.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
9.1 Voting Trust Agreement, dated as of May 5, 1998, by and among Sprout Capital VII, L.P.,
Donaldson Lufkin & Jenrette Securities Corporation, and First Union Trust Company, National
Association, as trustee.
9.2 Voting Trust Agreement, dated as of March 12, 1998, by and between Enron Communications Group,
Inc. and the Registrant, as trustee.
9.3 Amended and Restated Voting Agreement, dated March 12, 1998, by and among the Registrant and the
parties listed on the Schedule of Investors attached thereto as Schedule A.
9.4 Amendment to Amended and Restated Voting Agreement, dated as of May 5, 1998, by and among the
Registrant and the parties listed on the signature pages attached thereto.
10.1 Series A Preferred Stock Purchase Agreement, dated July 3, 1997, by and among the Registrant and
the Investors listed on Schedule A thereto.
10.2 Subsequent Closing Purchase Agreement, dated December 23, 1997, by and among the Registrant and
the Investors listed on Schedule A thereto.
10.3 Series B Preferred Stock Purchase Agreement, dated March 12, 1998, by and among the Registrant
and the Investors listed on Schedule A thereto.
10.4 Amended and Restated Investors' Rights Agreement, dated March 12, 1998, by and among the
Registrant and the Investors listed on Schedule A thereto.
10.5 Employment Agreement between the Registrant and Catherine M. Hapka, dated June 10, 1997.
10.6 Employment Agreement between the Registrant and Jeffrey Blumenfeld, dated August 10, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
- ----------- ---------
<C> <S> <C>
10.7 Employment Agreement between the Registrant and James A. Greenberg, dated July 14, 1997.
10.8 Employment Agreement between the Registrant and Rand A. Kennedy, dated August 22, 1997.
10.9 Form of Indemnification Agreement between the Registrant and each of its directors.
10.10 Form of Indemnification Agreement between the Registrant and each of its officers.
10.11 QuickStart Loan and Security Agreement, dated October 29, 1997, between the Registrant and
Silicon Valley Bank.
10.12 Master Lease Agreement No. 1642 and Addendum thereto, each dated November 19, 1997, and Second
Addendum thereto, dated as of May 19, 1998, between the Registrant and Sun Financial Group,
Inc.
10.13 Interconnection Agreement, dated July 1997, between the Registrant and Pacific Bell.
10.14 Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996,
dated as of June 5, 1998, between the Registrant and Bell Atlantic -- Pennsylvania, Inc.
10.15 Interconnection Agreement, dated as of June 3, 1998, between the Registrant and U S WEST for
Washington.
10.16 1997 Stock Option/Stock Issuance Plan.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Brobeck, Phleger & Harrison LLP.
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility of Trustee on Form T-1.
27 Financial Data Schedule
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
<PAGE>
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE PAGE 1
------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED CERTIFICATE OF
"RHYTHMS NETCONNECTIONS INC.", FILED IN THIS OFFICE ON THE SIXTH DAY OF MARCH,
A.D. 1998, AT 9 O'CLOCK A.M.
/s/ Edward J. Freel
--------------------------------------------
[SEAL] EDWARD J. FREEL, SECRETARY OF STATE
2723205 8100 AUTHENTICATION: 9056482
981166434 DATE: 04-30-98
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 03/06/1998
981088109 - 2723205
RESTATED CERTIFICATE OF INCORPORATION
OF RHYTHMS NETCONNECTIONS INC.,
a Delaware Corporation
Rhythms NetConnections Inc., a corporation organized and existing under the
laws of the state of Delaware, hereby certifies as follows:
1. The name of the corporation is Rhythms NetConnections Inc. The
corporation was originally incorporated under the name "Accelerated Connections,
Inc." The date the corporation filed its original Certificate of Incorporation
with the Secretary of State was February 27, 1997.
2. This Restated Certificate of Incorporation restates and amends the
provisions of the original Certificate of Incorporation of this corporation as
heretofore in effect and was duly adopted by the corporation's Board of
Directors in accordance with Sections 241 and 245 of the General Corporation Law
of the State of Delaware.
3. The text of the Certificate of Incorporation is hereby restated to
read as herein set forth in full:
ARTICLE I
The name of this corporation is Rhythms NetConnections Inc.
ARTICLE II
The address of the registered office of the corporation in the State of
Delaware is 30 Old Rudnick Lane, City of Dover, County of Kent 19901. The name
of its registered agent at such address is CorpAmerica, Inc.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
A. CLASSES OF STOCK. This corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of
<PAGE>
shares which the corporation is authorized to issue is Thirty-Nine Million Eight
Hundred Fifty-Four Thousand Five Hundred Ninety-Three (39,854,593) shares.
Twenty-Two Million Nine Hundred Nine Thousand Six Hundred Fifty (22,909,650)
shares shall be Common Stock, $0.001 par value per share and Sixteen Million
Nine Hundred Forty-Four Thousand Nine Hundred Forty-Three (16,944,943) shares
shall be Preferred Stock, $0.001 par value per share.
B. RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The
Preferred Stock authorized by this Restated Certificate of Incorporation may be
issued from time to time in series. The rights, preferences, privileges, and
restrictions granted to and imposed on (i) the Series A Preferred Stock, which
series shall consist of 12,900,000 shares and (ii) the Series B Preferred Stock,
which series shall consist of 4,044,943 shares, are as set forth below in this
Article IV(B). The Board of Directors is hereby authorized to fix or alter the
rights, preferences, privileges and restrictions granted to or imposed upon
additional series of Preferred Stock, and the number of shares constituting any
such series and the designation thereof, or of any of them. Subject to
compliance with applicable protective voting rights which have been or may be
granted to the Preferred Stock or series thereof in Certificates of
Determination or the corporation's Restated Certificate of Incorporation
("Protective Provisions"), but notwithstanding any other rights of the Preferred
Stock or any series thereof, the rights, privileges, preferences and
restrictions of any such additional series may be subordinated to, PARI PASSU
with (including, without limitation, inclusion in provisions with respect to
liquidation and acquisition preferences, redemption and/or approval of matters
by vote or written consent), or senior to any of those of any present or future
class or series of Preferred or Common Stock. Subject to compliance with
applicable Protective Provisions, the Board of Directors is also authorized to
increase or decrease the number of shares of any series (other than the Series A
Preferred Stock or Series B Preferred Stock) prior or subsequent to the issue of
that series, but not below the number of shares of such series then outstanding.
In case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
1. DIVIDEND PROVISIONS.
(a) Subject to the rights of series of Preferred Stock which may
from time to time come into existence, the holders of shares of Series A
Preferred Stock and Series B Preferred Stock shall be entitled to receive
dividends, out of any assets legally available therefor, prior and in preference
to any declaration or payment of any dividend (payable other than in:
(a) Common Stock or other securities and rights convertible into or entitling
the holder thereof to receive, directly or indirectly, additional shares of
Common Stock of this corporation; or (b) capital stock of other persons
(including without limitation subsidiaries of this corporation) or options or
rights to purchase any such capital stock) on the Common Stock of this
corporation, at the rate of (i) $0.08 per share of Series A Preferred Stock per
annum and $0.356 per share of Series B Preferred Stock per annum, or (ii) if
greater, the amount per annum which would be paid per share of Series A
Preferred Stock and Series B Preferred Stock, as the case may be, on the number
of shares of Common Stock into which such share is convertible as of the record
date fixed for determination of the stockholders entitled to receive such
distribution (assuming conversion of all convertible
-2-
<PAGE>
Preferred Stock), payable quarterly when, as and if declared by the Board of
Directors. Such dividends shall not be cumulative. Dividends paid in a form
other than cash shall be deemed to be the fair value thereof as determined by
the Board of Directors irrespective of any accounting treatment.
(b) In the event this corporation shall declare a distribution
payable in capital stock of other persons or options or rights to purchase any
such capital stock, then, (i) in the event this corporation distributes at the
same time (A) common stock of another person and (B) Series A preferred stock
and Series B preferred stock of such other person, with rights, preferences,
privileges and restrictions substantially the same as the Series A Preferred
Stock and Series B Preferred Stock, and the number of shares of common stock,
Series A preferred stock and Series B preferred stock distributed are in
substantially the same relative proportions as this corporation's then
outstanding shares of Common Stock, Series A Preferred Stock and Series B
Preferred Stock, then (V) all such common stock shall be distributed to the
Common Stock, (W) all such Series A preferred stock shall be distributed to the
Series A Preferred Stock, and (X) all such Series B preferred stock shall be
distributed to the Series B Preferred Stock, and (ii) in all other cases the
holders of the Series A Preferred Stock and Series B Preferred Stock shall be
entitled (together with the Common Stock) to a proportionate share, and no more,
of any such distribution as though the holders of the Series A Preferred Stock
and Series B Preferred Stock were the holders of the number of shares of Common
Stock of this corporation into which their respective shares of Series A
Preferred Stock and Series B Preferred Stock are convertible as of the record
date fixed for the determination of the stockholders entitled to receive such
distribution.
2. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up
of this corporation, either voluntary or involuntary, subject to the rights of
series of Preferred Stock which may from time to time come into existence, the
holders of Series A Preferred Stock and Series B Preferred Stock shall be
entitled to receive, prior and in preference to any distribution of any of the
assets of this corporation to the holders of Common Stock by reason of their
ownership thereof, an amount per share equal to the sum of (i) $1.00 for each
outstanding share of Series A Preferred Stock and $4.45 for each outstanding
share of Series B Preferred Stock (hereafter referred to as the "Original Series
A Issue Price" and "Original Series B Issue Price," respectively), and (ii) an
amount equal to declared but unpaid dividends on such share. If upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Series A Preferred Stock and Series B Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then, subject to the rights of series of Preferred Stock
which may from time to time come into existence, the entire assets and funds of
the corporation legally available for distribution shall be distributed ratably
among the holders of the Series A Preferred Stock and Series B Preferred Stock
in proportion to the product of the liquidation preference of each such share
and the number of such shares owned by each such holder.
(b) After the distributions described in subsection (a) above
have been paid, subject to the rights of series of Preferred Stock which may
from time to time
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come into existence, the remaining assets of the corporation available for
distribution to stockholders shall be distributed among the holders of Common
Stock pro rata based on the number of shares of Common Stock held by each.
(c) A consolidation or merger reorganization of this corporation
with or into any other corporation or corporations, or the effectuation by the
corporation of a transaction or series of related transactions in which more
than 50% of the voting power of the corporation is disposed of, or a sale,
conveyance or disposition of all or substantially all of the assets of this
corporation shall be deemed to be a liquidation within the meaning of this
Section 2; provided, however, that the sale and issuance of shares of Series A
Preferred Stock pursuant to that certain Series A Preferred Stock Purchase
Agreement dated July 3, 1997 and the sale and issuance of Series B Preferred
Stock pursuant to that certain Series B Preferred Stock Purchase Agreement dated
on or about March ___, 1998 shall not be deemed a liquidation under this
Section 2.
3. CONVERSION. The holders of the Series A Preferred Stock and
Series B Preferred Stock shall have conversion rights as follows (the
"Conversion Rights"):
(a) RIGHT TO CONVERT.
i) Subject to subsection (c), each share of Series A
Preferred Stock and each share of Series B Preferred Stock shall be convertible,
at the option of the holder thereof, at any time after the date of issuance of
such share at the office of this corporation or any transfer agent for the
Series A Preferred Stock and Series B Preferred Stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing (A)
the Original Series A Issue Price for each share of Series A Preferred Stock and
(B) the Original Series B Issue Price for each share of Series B Preferred
Stock, by the Conversion Price at the time in effect for such share. The
initial Conversion Price per share for shares of Series A Preferred Stock shall
be the Original Series A Issue Price and the initial Conversion Price per share
for shares of Series B Preferred Stock shall be the Original Series B Issue
Price; provided, however, that the Conversion Price for the Series A Preferred
Stock and Series B Preferred Stock shall be subject to adjustment as set forth
in subsection 3(c).
ii) Each share of Series A Preferred Stock and each share
of Series B Preferred Stock shall automatically be converted into shares of
Common Stock at the Conversion Price at the time in effect for such Series A
Preferred Stock and Series B Preferred Stock immediately upon the earlier of
(A) the consummation of the corporation's sale of its Common Stock in a bona
fide, firm commitment underwriting pursuant to a registration statement under
the Securities Act of 1933, as amended, the public offering price of which was
not less than $20,000,000 in the aggregate or (B) the date upon which the
corporation obtains the consent of the holders of 66-2/3% of the then
outstanding shares of Preferred Stock.
(b) MECHANICS OF CONVERSION. Before any holder of Series A
Preferred Stock or Series B Preferred Stock shall be entitled to convert the
same into shares
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of Common Stock, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of this corporation or of any transfer
agent for the particular series of Preferred Stock, and shall give written
notice by mail, postage prepaid, to this corporation at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are to
be issued. This corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock and/or Series
B Preferred Stock, or to the nominee or nominees of such holder, a certificate
or certificates for the number of shares of Common Stock to which such holder
shall be entitled as aforesaid. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such surrender of
the shares of Series A Preferred Stock and/or Series B Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock as of such date. If the
conversion is in connection with an underwritten offer of securities registered
pursuant to the Securities Act of 1933, the conversion may, at the option of any
holder tendering such Preferred Stock for conversion, be conditioned upon the
closing with the underwriter of the sale of securities pursuant to such
offering, in which event the person(s) entitled to receive the Common Stock
issuable upon such conversion of the Series A Preferred Stock and/or Series B
Preferred Stock shall not be deemed to have converted such Series A Preferred
Stock and/or Series B Preferred Stock until immediately prior to the closing of
such sale of securities.
(c) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK. The
Conversion Prices of the Series A Preferred Stock and Series B Preferred Stock
shall be subject to adjustment from time to time as follows:
i) A. Upon each issuance by the corporation of any
Additional Stock (as defined below), after the date upon which any shares of the
Series A Preferred Stock or Series B Preferred Stock were first issued (the
"Purchase Date" with respect to such series), without consideration or for a
consideration per share less than the Conversion Price for such series in effect
immediately prior to the issuance of such Additional Stock, the Conversion Price
for such series in effect immediately prior to each such issuance shall
forthwith (except as otherwise provided in this clause (i)) be adjusted to a
price determined by multiplying such Conversion Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance (including, without limitation, the number of
shares of Common Stock issuable upon the conversion of all outstanding Preferred
Stock and all other convertible securities and the exercise of all outstanding
options, warrants or other rights to purchase Common Stock or other securities
convertible into Common Stock) plus the number of shares of Common Stock which
the aggregate consideration received by the corporation for such issuance would
purchase at such Conversion Price; and the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to such issuance
(including, without limitation, the number of shares of Common Stock issuable
upon the conversion of all outstanding Preferred Stock and all other convertible
securities and the exercise of all outstanding options, warrants or other rights
to purchase Common Stock or other securities convertible into Common Stock) plus
the number of shares of such Additional Stock.
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B. No adjustment of the Conversion Price for the
Series A Preferred Stock or Series B Preferred Stock shall be made in an amount
less than one cent per share, provided that any adjustments which are not
required to be made by reason of this sentence shall be carried forward and
shall be either taken into account in any subsequent adjustment made prior to 3
years from the date of the event giving rise to the adjustment being carried
forward, or shall be made at the end of 3 years from the date of the event
giving rise to the adjustment being carried forward. Except to the limited
extent provided for in subsections 3(c)(i)(E)(3) and 3(c)(i)(E)(4), no
adjustment of such Conversion Price pursuant to this subsection 3(c)(i) shall
have the effect of increasing the Conversion Price above the Conversion Price in
effect immediately prior to such adjustment.
C. In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by this corporation for any underwriting or otherwise
in connection with the issuance and sale thereof.
D. In the case of the issuance of the Common Stock
for a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined by the
Board of Directors irrespective of any accounting treatment.
E. In the case of the issuance (whether before, on or
after the applicable Purchase Date) of options to purchase or rights to
subscribe for Common Stock, securities by their terms convertible into or
exchangeable for Common Stock or options to purchase or rights to subscribe for
such convertible or exchangeable securities, the following provisions shall
apply for all purposes of this subsection 3(c)(i) and subsection 3(c)(ii):
1. The aggregate maximum number of shares of
Common Stock deliverable upon exercise (assuming the satisfaction of
any conditions to exercisability, including without limitation, the
passage of time, but without taking into account potential
antidilution adjustments) of such options to purchase or rights to
subscribe for Common Stock shall be deemed to have been issued at the
time such options or rights were issued and for a consideration equal
to the consideration (determined in the manner provided in subsections
3(c)(i)(C) and (c)(i)(D)), if any, received by the corporation upon
the issuance of such options or rights plus the exercise price
provided in such options or rights (without taking into account
potential antidilution adjustments) for the Common Stock covered
thereby.
2. The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange (assuming
the satisfaction of any conditions to convertibility or
exchangeability, including, without limitation, the passage of time,
but without taking into account potential antidilution adjustments)
for any such convertible or exchangeable
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securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and
subsequent conversion or exchange thereof shall be deemed to have been
issued at the time such securities were issued or such options or
rights were issued and for a consideration equal to the consideration,
if any, received by the corporation for any such securities and
related options or rights (excluding any cash received on account of
accrued interest or accrued dividends), plus the additional
consideration, if any, to be received by the corporation (without
taking into account potential antidilution adjustments) upon the
conversion or exchange of such securities or the exercise of any
related options or rights (the consideration in each case to be
determined in the manner provided in subsections 3(c)(i)(C) and
(c)(i)(D)).
3. In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to
this corporation upon exercise of such options or rights or upon
conversion of or in exchange for such convertible or exchangeable
securities, including, but not limited to, a change resulting from the
antidilution provisions thereof, the Conversion Price of the Series A
Preferred Stock and Series B Preferred Stock, as applicable, and to
the extent in any way affected by or computed using such options,
rights or securities, shall be recomputed to reflect such change, but
no further adjustment shall be made for the actual issuance of Common
Stock or any payment of such consideration upon the exercise of any
such options or rights or the conversion or exchange of such
securities.
4. Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or
the expiration of any options or rights related to such convertible or
exchangeable securities, the Conversion Price of the Series A
Preferred Stock and Series B Preferred Stock, as applicable, to the
extent in any way affected by or computed using such options, rights
or securities or options or rights related to such securities, shall
be recomputed to reflect the issuance of only the number of shares of
Common Stock (and convertible or exchangeable securities which remain
in effect) actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities or upon the
exercise of the options or rights related to such securities.
5. The number of shares of Common Stock deemed
issued and the consideration deemed paid therefor pursuant to
subsections 3(c)(i)(E)(1) and (2) shall be appropriately adjusted to
reflect any change, termination or expiration of the type described in
either subsection 3(c)(i)(E)(3) or (4).
ii) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to subsection 3(c)(i)(E))
by this corporation after the Purchase Date other than
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A. Common Stock issued pursuant to a transaction
described in subsection 3(c)(iii) hereof,
B. shares of Common Stock issuable or issued to
employees, consultants or directors of this corporation directly or
pursuant to a stock option plan or restricted stock plan approved by
the Board of Directors of this corporation, or
C. shares of Common Stock issued upon conversion of
the Series A Preferred Stock or Series B Preferred Stock, or
D. shares of Common Stock issued or issuable (I) in a
public offering before or in connection with which all outstanding
shares of Series A Preferred Stock and Series B Preferred Stock will
be converted to Common Stock or (II) upon exercise of warrants or
rights granted to underwriters in connection with such a public
offering, or
E. shares of Common Stock issued or issuable to
persons or entities with which the corporation has business
relationships provided such issuances are for other than primarily
equity financing purposes approved by the Board of Directors.
iii) In the event the corporation should at any time or from
time to time after the Purchase Date fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or other securities or
rights convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Conversion
Price of the Series A Preferred Stock and Series B Preferred Stock then in
effect shall be appropriately decreased so that the number of shares of Common
Stock issuable on conversion of each share of such series shall be increased in
proportion to such increase of the aggregate of shares of Common Stock
outstanding and those issuable with respect to such Common Stock Equivalents
with the number of shares issuable with respect to Common Stock Equivalents
determined from time to time in the manner provided for deemed issuances in
subsection 3(c)(i)(E).
iv) If the number of shares of Common Stock outstanding at
any time after the Purchase Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price for the Series A Preferred Stock and Series B
Preferred Stock then in effect shall be appropriately increased so that the
number of shares of Common Stock issuable on conversion of each share of such
series shall be decreased in proportion to such decrease in outstanding shares.
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(d) RECAPITALIZATIONS. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 3) provision shall be made so that the holders of the Series A
Preferred Stock and Series B Preferred Stock shall thereafter be entitled to
receive upon conversion of the Series A Preferred Stock and Series B Preferred
Stock the number of shares of stock or other securities or property of the
Company or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 3 with respect to the rights of the holders of the Series A
Preferred Stock and Series B Preferred Stock after the recapitalization to the
end that the provisions of this Section 3 (including adjustment of the
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series A Preferred Stock and Series B Preferred Stock) shall
be applicable after that event as nearly equivalent as may be practicable.
(e) NO IMPAIRMENT. This corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by this corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 3 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred Stock and Series B
Preferred Stock against impairment.
(f) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
i) No fractional shares shall be issued upon conversion of
the Series A Preferred Stock and Series B Preferred Stock, and the number of
shares of Common Stock to be issued shall be rounded to the nearest whole share.
Whether or not fractional shares are issuable upon such conversion shall be
determined on the basis of the total number of shares of Series A Preferred
Stock and Series B Preferred Stock the holder is at the time converting into
Common Stock and the number of shares of Common Stock issuable upon such
aggregate conversion.
ii) Upon the occurrence of each adjustment or readjustment
of the Conversion Price of Series A Preferred Stock and Series B Preferred Stock
pursuant to this Section 3, this corporation, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of Series A Preferred Stock and Series B
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
This corporation shall, upon the written request at any time of any holder of
Series A Preferred Stock or Series B Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth (A) such adjustment
and readjustment, (B) the Conversion Price at the time in effect, and (C) the
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of a share of Series A
Preferred Stock or Series B Preferred Stock.
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(g) NOTICES OF RECORD DATE. In the event of any taking by this
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
corporation shall mail to each holder of Series A Preferred Stock and Series B
Preferred Stock, at least 20 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
(h) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. This
corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock and Series B Preferred
Stock such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of the Series A
Preferred Stock and Series B Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Series A Preferred Stock
and Series B Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Preferred Stock, this corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes.
(i) NOTICES. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series A Preferred Stock or
Series B Preferred Stock shall be deemed given if deposited in the United States
mail, postage prepaid, and addressed to each holder of record at his address
appearing on the books of this corporation.
4. VOTING RIGHTS.
(a) GENERAL VOTING RIGHTS. Except as set forth in subsection
4(b) below, the holder of each share of Series A Preferred Stock and the holder
of each share of Series B Preferred Stock shall have the right to one vote for
each share of Common Stock into which such share of Series A Preferred Stock
and/or such share of Series B Preferred Stock could then be converted (with any
fractional share determined on an aggregate conversion basis being rounded to
the nearest whole share), and with respect to such vote, each such holder shall
have full voting rights and powers equal to the voting rights and powers of the
holders of Common Stock, and shall be entitled, notwithstanding any provision
hereof, to notice of any stockholders' meeting in accordance with the by-laws of
this corporation, and shall be entitled to vote, together with holders of Common
Stock, with respect to any question upon which holders of Common Stock have the
right to vote.
(b) ELECTION OF DIRECTORS. Notwithstanding the provisions of
subsection 4(a) above, (i) so long as any shares of Series A Preferred Stock are
outstanding, the holders of the then outstanding shares of Series A Preferred
Stock, by a majority vote voting as a separate class, shall be entitled to elect
four (4) directors of the corporation (the
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"Series A Directors") and the holders of Common Stock and Series A Preferred
Stock, by a majority vote voting as a single class, shall be entitled to elect
one (1) director of the corporation (the "Common/Series A Director"); (ii) so
long as any shares of Series B Preferred are outstanding, the holders of the
then outstanding shares of Series B Preferred Stock, by a majority vote voting
as a separate class, shall be entitled to elect one (1) director of the
corporation (the "Series B Director"); and (iii) all remaining directors shall
be elected by the holders of the Preferred Stock and the holders of Common
Stock, by a majority vote voting as provided in paragraph 4(a) above. At any
meeting held for the purpose of electing or nominating directors, the presence
in person or by proxy of the holders of a majority of the Series A Preferred
Stock then outstanding shall constitute a quorum of the Series A Preferred Stock
for the election or nomination of the Series A Directors, the presence in person
or by proxy of the holders of a majority of the shares of Series B Preferred
Stock then outstanding, shall constitute a quorum of the Series B Preferred
Stock for the election or nomination of the Series B Director, the presence in
person or by proxy of the holders of a majority of the Common Stock and Series A
Preferred Stock, on an as-converted basis, then outstanding shall constitute a
quorum of the Common Stock and Series A Preferred Stock for the election or
nomination of the Common/Series A Director, and the presence in person or by
proxy of the holders of a majority of the Preferred Stock and Common Stock, on
an as-converted basis, then outstanding shall constitute a quorum of the
Preferred Stock and Common Stock for the election or nomination of all remaining
directors. A vacancy in any directorship elected solely by the holders of
Series A Preferred Stock shall be filled only by vote of the holders of Series A
Preferred Stock, a vacancy in the directorship elected solely by the holders of
the Series B Preferred Stock shall be filled only by vote of the Series B
Preferred Stock, a vacancy in the directorship elected by the holders of the
Common Stock and Series A Preferred Stock shall be filled only by vote of the
Common Stock and Series A Preferred Stock, voting together as provided above,
and a vacancy in any directorship elected by the holders of Preferred Stock and
Common Stock shall be filled only by the vote of the holders of Preferred Stock
and Common Stock voting as provided in paragraph 4(a) above. Any director
elected by the holders of Series A Preferred Stock may be removed during such
director's term of office, either for or without cause, by and only by the
affirmative vote of the holders of a majority of the outstanding shares of
Series A Preferred Stock, any director elected by the holders of Series B
Preferred Stock may be removed during such director's term of office, either for
or without cause, by and only by the affirmative vote of the holders of a
majority of the outstanding shares of Series B Preferred Stock, any director
elected by the holders of Common Stock and Series A Preferred Stock may be
removed during such director's term of office, either for or without cause, by
and only by the affirmative vote of the holders of a majority of the outstanding
shares of Common Stock and Series A Preferred Stock, voting together as provided
above, and any director elected by the holders of Preferred Stock and Common
Stock may be removed during such director's term of office, either for or
without cause, by and only by the affirmative vote of the holders of a majority
of the outstanding shares of Preferred Stock and Common Stock, voting together
as provided in paragraph 4(a) above.
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5. PROTECTIVE PROVISIONS.
(a) SERIES B PREFERRED STOCK. Subject to the rights of series
of Preferred Stock which may from time to time come into existence, so long as
shares of Series B Preferred Stock are outstanding, this corporation shall not
without first obtaining the approval (by vote or written consent, as provided by
law) of the holders of at least a majority of the then outstanding shares of
Series B Preferred Stock, voting together as a separate series on an as
converted basis:
i) take any action that would materially and adversely
alter the rights, preferences or privileges of the Series B Preferred Stock as a
separate series in a manner that is dissimilar and disproportionate relative to
the manner in which the rights, preferences or privileges of the Series A
Preferred Stock are altered;
ii) authorize additional shares of Series B Preferred
Stock;
iii) take any action that would cause it to become a "public
utility" or a "holding company" as those terms are defined under the Public
Utility Holding Company Act of 1935, as amended; or
iv) amend Article IV(B)(3)(a)(i) (provided that, subject to
Section IV(B)(5)(a)(i), the corporation shall not be prohibited from amending
Article IV(B)(3)(c));
v) take any action that would alter the right of the
holders of the then outstanding shares of Series B Preferred Stock to elect one
(1) director of the corporation pursuant to subitem (ii) of Article IV(B)4(b);
or
vi) amend this Article IV(B)5(a).
(b) SERIES A AND SERIES B PREFERRED STOCK. Subject to the
rights of series of Preferred Stock which may from time to time come into
existence, so long as shares of Series A Preferred Stock and/or Series B
Preferred Stock are outstanding, this corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least 55% or more of the then outstanding shares of Series A
Preferred Stock and Series B Preferred Stock, voting together as a single class
on an as converted basis:
i) sell, convey, or otherwise dispose of or encumber all
or substantially all of its property or business or merge into or consolidate
with any other corporation (other than a wholly owned subsidiary corporation) or
effect any transaction or series of related transactions in which more than 50%
of the voting power of the corporation is disposed of;
ii) create any new class or series of stock or any other
securities convertible into equity securities of the corporation having a
preference over, or
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being on a parity with, the Series A Preferred Stock or Series B Preferred Stock
with respect to voting, dividends or upon liquidation; or
iii) authorize additional shares of Series A Preferred
Stock.
6. STATUS OF CONVERTED STOCK. In the event any shares of Series A
Preferred Stock or Series B Preferred Stock shall be converted pursuant to
Section 3 hereof, the shares so converted shall be cancelled and shall not be
issuable by the corporation. The Certificate of Incorporation of this
corporation shall be appropriately amended to effect the corresponding reduction
in the corporation's authorized capital stock.
C. COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or winding
up of the corporation, the assets of the corporation shall be distributed as
provided in Section 2 of Division (B) of this Article IV hereof.
3. REDEMPTION. The Common Stock is not redeemable.
4. VOTING RIGHTS. The holder of each share of Common Stock shall
have the right to one vote for each share of Common Stock held by such holder,
and shall be entitled to notice of any stockholders' meeting in accordance with
the By-laws of this corporation, and shall be entitled to vote upon such matters
and in such manner as may be provided by law.
ARTICLE V
A. EXCULPATION. A director of the corporation shall not be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived any
improper personal benefit. If the Delaware General Corporation Law is hereafter
amended to further reduce or to authorize, with the approval of the
corporation's stockholders, further reductions in the liability of the
corporation's directors for breach of fiduciary duty, then a director of the
corporation shall not be liable for any such breach to the fullest extent
permitted by the Delaware General Corporation Law as so amended.
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B. INDEMNIFICATION. To the extent not prohibited by applicable law, this
corporation shall provide indemnification of (and advancement of expenses to)
such agents (and any other persons to which Delaware law permits this
corporation to provide indemnification) through bylaw provisions, agreements
with such agents or other persons, vote of stockholders or disinterested
directors or otherwise, in excess of the indemnification and advancement
otherwise permitted by Section 145 of the Delaware General Corporation Law,
subject only to limits created by applicable Delaware law (statutory or
non-statutory), with respect to actions for breach of duty to the corporation,
its stockholders, and others.
C. EFFECT OF REPEAL OR MODIFICATION. Any repeal or modification of any
of the foregoing provisions of this Article V shall not adversely affect any
right or protection of a director, officer or agent of the corporation (or any
other person to which Delaware law permits this corporation to provide
indemnification) existing at the time of, or increase the liability of any
director, officer or agent of the corporation (or other person) with respect to
any acts or omissions of such director, officer or agent (or other person)
occurring prior to, such repeal or modification.
ARTICLE VI
The corporation shall have perpetual existence.
ARTICLE VII
Except as otherwise provided in this Restated Certificate of Incorporation,
in furtherance and not in limitation of the powers conferred by statute, the
Board of Directors is expressly authorized to make, repeal, alter, amend and
rescind any or all of the Bylaws of the corporation.
ARTICLE VIII
Elections of directors need not be by written ballot except and to the
extent provided in the Bylaws of the corporation.
ARTICLE IX
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Restated Certificate of Incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
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<PAGE>
ARTICLE X
The corporation shall not be subject to the provisions of Section 203 of
the Delaware General Corporation Law.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation
has been executed as of this 6TH day of March, 1998.
RHYTHMS NETCONNECTIONS INC.
By: /s/ Catherine M. Hapka
----------------------------------------------
Catherine Hapka, President
[SIGNATURE PAGE TO
RESTATED CERTIFICATE OF INCORPORATION]
<PAGE>
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE PAGE 1
------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "RHYTHMS NETCONNECTIONS INC.", FILED IN THIS OFFICE ON THE TWENTY-EIGHTH DAY
OF APRIL, A.D. 1998, AT 9 O'CLOCK A.M.
/s/ Edward J. Freel
---------------------------------------------
[SEAL] EDWARD J. FREEL, SECRETARY OF STATE
2723205 8100 AUTHENTICATION: 9056481
981166434 DATE: 04-30-98
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 04/28/1998
981162582 - 2723205
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
FOR
RHYTHMS NETCONNECTIONS INC.
RHYTHMS NETCONNECTIONS INC., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"),
DOES HEREBY CERTIFY:
FIRST: That resolutions were duly adopted by the Board of Directors of the
Corporation setting forth a proposed amendment to the Restated Certificate of
Incorporation of the Corporation, and declaring said amendment to be advisable
and recommended for approval by the stockholders of the Corporation. The
resolutions setting forth the proposed amendment are as follows:
NOW, THEREFORE, BE IT RESOLVED, that in order to increase the authorized
number of shares of Common Stock of the Corporation, the officers of the
Corporation are hereby authorized and directed to execute and file a
Certificate of Amendment to the Restated Certificate of Incorporation
(the "Amendment") of the Corporation, which Amendment shall change
Article IV, Section A so that, as amended, said Section shall read in
its entirety as follows:
"A. CLASSES OF STOCK. This corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares which the corporation
is authorized to issue is Forty-One Million Eight Hundred Twenty-Six
Thousand Five Hundred Ninety-Three (41,826,593) shares. Twenty-Four
Million Eight Hundred Eighty-One Thousand Six Hundred Fifty
(24,881,650) shares shall be Common Stock, $0.001 par value per share
and Sixteen Million Nine Hundred Forty-Four Thousand Nine Hundred
Forty-Three (16,944,943) shares shall be Preferred Stock, $0.001 par
value per share."
RESOLVED, FURTHER, said Amendment shall also change Article IV,
Section B(3)(c)(ii) thereof so that, as amended, said subsection shall
read in its entirety as follows:
<PAGE>
"ii) "Additional Stock" shall mean any shares of Common Stock issued
(or deemed to have been issued pursuant to subsection 3(c)(i)(E)) by
this corporation after the Purchase Date other than
A. Common Stock issued pursuant to a transaction described
in subsection 3(c)(iii) hereof,
B. shares of Common Stock issuable or issued to employees,
consultants or directors of this corporation directly or pursuant to a
stock option plan or restricted stock plan approved by the Board of
Directors of this corporation, or
C. shares of Common Stock issued upon conversion of the
Series A Preferred Stock or Series B Preferred Stock, or
D. shares of Common Stock issued or issuable (I) in a
public offering before or in connection with which all outstanding
shares of Series A Preferred Stock and Series B Preferred Stock will
be converted to Common Stock or (II) upon exercise of warrants or
rights granted to underwriters in connection with such a public
offering, or
E. shares of Common Stock issued or issuable to persons or
entities with which the corporation has business relationships
provided such issuances are for other than primarily equity financing
purposes approved by the Board of Directors.
F. up to 1,972,000 shares of Common Stock issued or
issuable upon exercise of warrants (the "Warrants") granted to
purchasers of units (the "Units") consisting of 13 1/2% senior
discount notes due 2008 and such Warrants, which Units were issued
on or about May 5, 1998.
SECOND: That, thereafter, the stockholders of said Corporation approved
the amendment by written consent in accordance with Section 228 of the Delaware
General Corporation Law.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the Delaware General Corporation Law.
FOURTH: That the capital of said Corporation shall not be reduced under or
by reason of said amendment.
[Remainder of this Page Intentionally Left Blank]
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<PAGE>
IN WITNESS WHEREOF, said RHYTHMS NETCONNECTIONS INC. has caused this
certificate to be signed and attested by Catherine M. Hapka and John A.
Denniston, its President and Secretary, respectively, this 28TH day of April,
1998.
BY: /s/ Catherine M. Hapka
---------------------------------------------
Catherine M. Hapka, President and Chief
Executive Officer
ATTEST:
/s/ John Denniston
- ---------------------------------------------
John A. Denniston, Secretary
[SIGNATURE PAGE TO CERTIFICATE OF AMENDMENT]
-4-
<PAGE>
BYLAWS
OF
ACCELERATED CONNECTIONS, INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Dover, County of
Kent, State of Delaware.
Section 2. The corporation may also have offices at such other places both
within and without the State of Delaware as the Board of Directors may from time
to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of directors
shall be held in the City of San Diego, State of California, at such place as
may be fixed from time to time by the Board of Directors, or at such other place
either within or without the State of Delaware as shall be designated from time
to time by the Board of Directors and stated in the notice of the meeting.
Meetings of stockholders for any other purpose may be held at such time and
place, within or without the State of Delaware, as shall be stated in the notice
of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual meetings of stockholders, commencing with the year 1997,
shall be held on such date and at such time as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting, at which
<PAGE>
they shall elect by a plurality vote a board of directors, and transact such
other business as may properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote at
such meeting not less than ten (10) nor more than sixty (60) days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the Board of
Directors, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
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<PAGE>
Section 6. Written notice of a special meeting stating the place, date and
hour of the meeting and the purpose or purposes for which the meeting is called,
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting, to each stockholder entitled to vote at such meeting.
Section 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is
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<PAGE>
required, in which case such express provision shall govern and control the
decision of such question.
Section 10. Unless otherwise provided in the certificate of incorporation
each stockholder shall at every meeting of the stockholders be entitled to one
vote in person or by proxy for each share of the capital stock having voting
power held by such stockholder, but no proxy shall be voted on after three years
from its date, unless the proxy provides for a longer period.
Section 11. Unless otherwise provided in the certificate of incorporation,
any action required to be taken at any annual or special meeting of stockholders
of the corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the whole board
shall not be less than 2 nor more than 5. The first board shall consist of 2
directors. Thereafter, within the limits above specified, the number of
directors shall be determined by resolution of the Board of Directors or by the
stockholders at the annual meeting of the stockholders, except as
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<PAGE>
provided in Section 2 of this Article, and each director elected shall hold
office until his successor is elected and qualified. Directors need not be
stockholders.
Section 2. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next annual
election and until their successors are duly elected and shall qualify, unless
sooner displaced. If there are no directors in office, then an election of
directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of the shares at the time outstanding having the right to vote
for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
Section 3. The business of the corporation shall be managed by or under
the direction of its board of directors which may exercise all such powers of
the corporation and do all such lawful acts and things as are not by statute or
by the certificate of incorporation or by these bylaws directed or required to
be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 5. The first meeting of each newly elected Board of Directors
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting
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<PAGE>
and no notice of such meeting shall be necessary to the newly elected directors
in order legally to constitute the meeting, provided a quorum shall be present.
In the event of the failure of the stockholders to fix the time or place of such
first meeting of the newly elected Board of Directors, or in the event such
meeting is not held at the time and place so fixed by the stockholders, the
meeting may be held at such time and place as shall be specified in a notice
given as hereinafter provided for special meetings of the Board of Directors, or
as shall be specified in a written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the board.
Section 7. Special meetings of the board may be called by the President on
four (4) days' notice to each director by mail or 48 hours' notice to each
director either personally or by telegram; special meetings shall be called by
the President or Secretary in like manner and on like notice on the written
request of two directors unless the board consists of only one director, in
which case special meetings shall be called by the President or Secretary in
like manner and on like notice on the written request of the sole director.
Section 8. At all meetings of the board a majority of the directors shall
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors, except as may be otherwise specifically provided by
statute or by the certificate of incorporation. If a quorum shall not be
present at any meeting of the Board of Directors, the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
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<PAGE>
Section 9. Unless otherwise restricted by the certificate of incorporation
or these bylaws, any action required or permitted to be taken at any meeting of
the Board of Directors or of any committee thereof may be taken without a
meeting, if all members of the board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a majority
of the whole board, designate one or more committees, each committee to consist
of one or more of the directors of the corporation. The board may designate one
or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee.
In the absence of disqualification of a member of a committee, the member
or members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member.
Any such committee, to the extent provided in the resolution of the Board
of Directors, shall have and may exercise all the powers and authority of the
Board of Directors
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<PAGE>
in the management of the business and affairs of the corporation, and may
authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to amending the certificate of incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, recommending
to the stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the bylaws of the corporation; and, unless the
resolution or the certificate of incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 12. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving
the corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings.
REMOVAL OF DIRECTORS
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<PAGE>
Section 14. Unless otherwise restricted by the certificate of
incorporation or bylaw, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of shares entitled
to vote at an election of directors.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be elected by the Board
of Directors and shall include a President and a Secretary. The Board of
Directors may elect from among its members a Chairman of the Board and a Vice
Chairman of the Board. The Board of Directors may also elect a Treasurer and/or
one or more Vice Presidents, Assistant Secretaries
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<PAGE>
and Assistant Treasurers. Any number of offices may be held by the same person,
unless the certificate of incorporation or these bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each annual
meeting of stockholders shall elect a President and a Secretary and may also
elect Vice Presidents and a Treasurer.
Section 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers and agents of the corporation
shall be fixed by the Board of Directors.
Section 5. The officers of the corporation shall hold office until their
successors are chosen and qualified. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at all
meetings of the Board of Directors and of the stockholders at which he shall be
present. He shall have and may exercise such powers as are, from time to time,
assigned to him by the Board and as may be provided by law.
Section 7. In the absence of the Chairman of the Board, the Vice Chairman
of the Board, if any, shall preside at all meetings of the Board of Directors
and of the stockholders at which he shall be present. He shall have and may
exercise such powers as are, from time to time, assigned to him by the Board and
as may be provided by law.
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<PAGE>
THE PRESIDENT AND VICE PRESIDENT
Section 8. The President shall be the chief executive officer of the
corporation; and in the absence of the Chairman and Vice Chairman of the Board
he shall preside at all meetings of the stockholders and the Board of Directors.
He shall have general and active management of the business of the corporation
and shall see that all orders and resolutions of the Board of Directors are
carried into effect.
Section 9. He shall execute bonds, mortgages and other contracts requiring
a seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the corporation.
Section 10. In the absence of the President or in the event of his
inability or refusal to act, the Vice President, if any, (or in the event there
be more than one Vice President, the Vice Presidents in the order designated by
the directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The Secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the Board of Directors, and shall
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<PAGE>
perform such other duties as may be prescribed by the Board of Directors or
President, under whose supervision he shall be. He shall have custody of the
corporate seal of the corporation and he, or an Assistant Secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such Assistant
Secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by his
signature.
Section 12. The Assistant Secretary, or, if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the Secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 13. The Treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 14. He shall disburse the funds of the corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
corporation.
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<PAGE>
Section 15. If required by the Board of Directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
Section 16. The Assistant Treasurer, or if there shall be more than one,
the Assistant Treasurers in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the Treasurer or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the Treasurer and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled to
have a certificate, signed by, or in the name of the corporation by, the
Chairman or Vice Chairman of the Board of Directors, or the President or a Vice
President and the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary of the corporation, certifying the number of shares owned by
him in the corporation.
Certificates may be issued for partly paid shares and in such case upon the
face or back of the certificates issued to represent any such partly paid
shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
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<PAGE>
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 2. Any of or all the signatures on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing
such issue of a new certificate or certificates, the Board of Directors may, in
its discretion and as a
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<PAGE>
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or to give the
corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the corporation with respect to the certificate alleged
to have been lost, stolen or destroyed.
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<PAGE>
TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest
-16-
<PAGE>
in such share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise provided by the laws
of Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation, subject to
the provisions of the certificate of incorporation, if any, may be declared by
the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
-17-
<PAGE>
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by resolution
of the Board of Directors.
SEAL
Section 5. The Board of Directors may adopt a corporate seal having
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 6. The corporation shall indemnify its officers, directors,
employees and agents to the full extent permitted by the General Corporation Law
of Delaware.
ARTICLE VIII
AMENDMENT
Section 1. These bylaws may be altered, amended or repealed or new bylaws
may be adopted by the stockholders or by the Board of Directors, when such power
is conferred upon the Board of Directors by the certificate of incorporation at
any regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors if notice of
such alteration, amendment, repeal or adoption of new bylaws be contained in the
notice of such special meeting. If the power to adopt, amend or repeal bylaws
is conferred upon the Board of Directors by the certificate of incorporation it
shall not divest or limit the power of the stockholders to adopt, amend or
repeal bylaws.
-18-
<PAGE>
CERTIFICATE OF SECRETARY
The undersigned, being the Secretary of Accelerated Connections, Inc., a
Delaware corporation, does hereby certify the foregoing to be the Bylaws of said
Corporation, as adopted by the directors of the Corporation and which remain in
full force and effect as of the date hereof.
Executed at San Diego, California effective as of February 27, 1997.
/s/ Andrea Frenz
-----------------------------------
Andrea Frenz, Secretary
-19-
<PAGE>
AMENDMENT TO BYLAWS
OF
ACCELERATED CONNECTIONS, INC.
CERTIFICATE OF SECRETARY
The undersigned does hereby certify that:
I am the duly qualified and acting Secretary of Accelerated Connections,
Inc., a duly organized and existing Delaware corporation (the "Corporation").
The following is a true copy of the resolutions duly adopted by the
unanimous written consent of the Board of Directors of the Corporation on July
1, 1997, and approved by written consent of the stockholders of the Corporation
effective July 1, 1997, both of which appear in the minute book of the
Corporation:
1. DESIGNATION OF SIZE OF BOARD OF DIRECTORS.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
approves the following amendment of the Corporation's Bylaws (the
"Bylaws") to (i) amend and restate in its entirety Section 1 of
Articles III with the following:
"Section 1. The number of directors shall be set by
the Board of Directors. The directors shall be elected at
the annual meeting of the stockholders, except as provided
in Section 2 of this Article, and each director elected
shall hold office until his successor is elected and
qualified. Directors need not be stockholders."
2. RIGHT OF FIRST REFUSAL.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
approves the following amendment of the Corporation's Bylaws (the
"Bylaws") to (i) insert the following as a new Article VII, (ii) amend
the existing Article VII to Article VIII and any references thereto in
the Bylaws and (iii) amend the existing Article VIII to Article IX and
any references thereto in the Bylaws, such amendment to be effective
upon the closing of the sale and issuance of Series A Preferred Stock:
<PAGE>
"ARTICLE VII
RIGHT OF FIRST OFFER
No stockholder shall sell, assign, pledge, or in any manner
transfer any of the shares of stock of the corporation or any right or
interest therein, whether voluntarily or by operation of law, or by
gift or otherwise, except by a transfer which meets the requirements
hereinafter set forth in this Bylaw:
(a) If the stockholder receives from anyone a bona fide offer
acceptable to the stockholder to purchase any of his shares of stock,
then the stockholder shall first give written notice thereof to the
corporation. The notice shall name the proposed transferee and state
the number of shares to be transferred, the price per share and all
other terms and conditions of the offer.
(b) For fifteen (15) days following receipt of such notice, the
corporation shall have the option to purchase all or any lesser part
of the shares specified in the notice at the price and upon the terms
set forth in such bona fide offer. In the event the corporation
elects to purchase all the shares, it shall give written notice to the
selling stockholder of its election and settlement for said shares
shall be made as provided below in paragraph (d).
(c) In the event the corporation does not elect to acquire all
of the shares specified in the selling stockholder's notice, the
Secretary of the corporation shall, within fifteen (15) days of
receipt of said selling stockholder's notice, give written notice
thereof to the stockholders of the corporation other than the selling
stockholder. Said written notice shall state the number of shares
that the corporation has elected to purchase and the number of shares
remaining available for purchase (which shall be the same as the
number contained in said selling stockholder's notice, less any such
shares that the corporation has elected to purchase). Each of the
other stockholders shall have the option to purchase that proportion
of the shares available for purchase as the number of shares owned by
each of said other stockholders bears to the total issued and
outstanding shares of the corporation, excepting those shares owned by
the selling stockholder. A stockholder electing to exercise such
option shall, within ten (10) days after mailing of the corporation's
notice, give notice to the corporation specifying the number of shares
such stockholder will purchase. Within such ten-day period, each of
said other stockholders shall give written notice stating how many
additional shares such stockholder will purchase if additional shares
are made available. Failure to respond in writing within said ten-day
period to the notice given by the Secretary of the corporation shall
be deemed a rejection of such stockholder's right to acquire a
proportionate part of the shares of the selling stockholder. In the
event one or more stockholders do not elect to acquire the shares
available to them, said shares shall be allocated on a pro rata basis
to the stockholders who requested shares in addition to their pro rata
allotment.
-2-
<PAGE>
(d) In the event the corporation and/or stockholders, other than
the selling stockholder, elect to acquire any of the shares of the
selling stockholder as specified in said selling stockholder's notice,
the Secretary of the corporation shall so notify the selling
stockholder and settlement thereof shall be made in cash within thirty
(3) days after the Secretary of the corporation receives said selling
stockholder's notice; provided that if the terms of payment set forth
in said selling stockholder's notice were other than cash against
delivery, the corporation and/or its other stockholders shall pay for
said shares on the same terms and conditions set forth in said selling
stockholder's notice.
(e) In the event the corporation and/or its other stockholders
do not elect to acquire all of the shares specified in the selling
stockholder's notice, said selling stockholder may, within the
sixty-day period following the expiration of the option rights granted
to the corporation and other stockholders herein, sell elsewhere the
shares specified in said selling stockholder's notice which were not
acquired by the corporation and/or its other stockholders, in
accordance with the provisions of paragraph (d) of this bylaw,
provided that said sale shall not be on terms and conditions more
favorable to the purchaser than those contained in the bona fide offer
set forth in said selling stockholder's notice. All shares so sold by
said selling stockholder shall continue to be subject to the
provisions of this Bylaw in the same manner as before said transfer.
(f) Anything to the contrary contained herein notwithstanding,
the following transactions shall be exempt from the provisions of this
Bylaw:
(1) A stockholder's transfer of any or all shares held
either during such stockholder's lifetime or on death by will or
intestacy to such stockholder's immediate family. "Immediate family"
as used herein shall mean spouse, lineal descendant, father, mother,
brother or sister of the stockholder making such transfer and shall
include any trust established primarily for the benefit of the
stockholder or his immediate family.
(2) A stockholder's bona fide pledge or mortgage of any
shares with a commercial lending institution, provided that any
subsequent transfer of said shares by said institution shall be
conducted in the manner set forth in this Article VII.
(3) A stockholder's transfer of any or all of such
stockholder's shares to the corporation or to any other stockholder of
the corporation.
(4) A stockholder's transfer of any or all of such
stockholder's shares to a person who, at the time of such transfer, is
an officer or director of the corporation.
-3-
<PAGE>
(5) A corporate stockholder's transfer of any or all of its
shares pursuant to and in accordance with the terms of any merger,
consolidation, reclassification of shares or capital reorganization of
the corporate stockholder, or pursuant to a sale of all or
substantially all of the stock or assets of a corporate stockholder.
(6) A corporate stockholder's transfer of any or all of its
shares to any or all of its stockholders.
(7) A transfer by a stockholder which is a limited or
general partnership to any or all of its partners.
In any such case, the transferee, assignee, or other
recipient shall receive and hold such stock subject to the provisions
of this Bylaw, and there shall be no further transfer of such stock
except in accordance with this Bylaw.
(g) The provisions of this Article VII may be waived with
respect to any transfer either by the corporation, upon duly
authorized action of its Board of Directors, or by the stockholders,
upon the express written consent of the owners of a majority of the
voting power of the corporation (excluding the votes represented by
those shares to be sold by the selling stockholder). This Article VII
may be amended or repealed either by a duly authorized action of the
Board of Directors or by the stockholders, upon the express vote or
written consent of the owners of a majority of the voting power of the
corporation.
(h) Any sale or transfer, or purported sale or transfer, of
securities of the corporation shall be null and void unless the terms,
conditions and provisions of this Bylaw are strictly observed and
followed.
(i) The foregoing right of first refusal shall terminate upon
the date securities of the corporation are first offered to the public
pursuant to a registration statement filed with, and declared
effective by, the United States Securities and Exchange Commission
under the Securities Act of 1933, as amended.
(j) The certificates representing shares of stock of the
corporation shall bear on their face the following legend so long as
the foregoing right of first refusal remains in effect:
"The shares represented by this certificate are subject
to a right of first refusal option in favor of the
corporation and its other stockholders, as provided in the
bylaws of the corporation.""
-4-
<PAGE>
(j) The certificates representing shares of stock of the
corporation shall bear on their face the following legend so long as
the foregoing right of first refusal remains in effect:
"The shares represented by this certificate are subject
to a right of first refusal option in favor of the
corporation and its other stockholders, as provided in the
bylaws of the corporation.""
The foregoing resolutions are in conformity with the Certificate of
Incorporation and Bylaws of the Corporation, have never been modified or
repealed, and are now in full force and effect.
IN WITNESS WHEREOF, I have executed this Amendment to Bylaws and affixed
the seal of the Corporation on the 1st day of July, 1997.
/s/ Craig S. Andrews
-----------------------------------
Craig S. Andrews, Secretary
-5-
<PAGE>
AMENDMENT TO BYLAWS
OF
RHYTHMS NETCONNECTIONS INC.
Certificate of President
The undersigned does hereby certify that:
I am the duly qualified President of Rhythms NetConnections Inc., a duly
organized and existing Delaware corporation (the "Corporation").
The following is a true copy of a resolution duly adopted by written
consent of the stockholders of the Corporation effective as of March 6, 1998,
which appears in the minute book of the Corporation:
NOW, THEREFORE, BE IT RESOLVED, that Article III, Section 1 of the
Bylaws of this Corporation shall be amended and restated in its
entirety to read as follows:
"Section 1. The number of directors which shall constitute the
whole board shall not be less than 5 nor more than 9. The board
shall consist of 6 directors. Thereafter, within the limits
above specified, the number of directors shall be determined by
resolution of the Board of Directors or by the stockholders at
the annual meeting of the stockholders, except as provided in
Section 2 of this Article, and each director elected shall hold
office until his successor is elected and qualified. Directors
need not be stockholders."
The foregoing resolution is in conformity with the Certificate of
Incorporation and Bylaws of the Corporation, has never been modified or
repealed, and is now in full force and effect.
IN WITNESS WHEREOF, I have executed this Amendment to Bylaws and affixed
the seal of the Corporation as of the 6th day of March, 1998.
/s/ Catherine M. Hapka
-----------------------------------
Catherine Hapka, President
<PAGE>
RHYTHMS NETCONNECTIONS INC.
(a Delaware corporation)
$150,365,000 Gross Proceeds
Units consisting of 13 1/2% Senior Discount Notes due 2008 and Warrants
PURCHASE AGREEMENT
Dated: April 28, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
PURCHASE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . 2
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY . . . . . . . 2
(b OFFICER'S CERTIFICATES. . . . . . . . . . . . . . . . . . . 11
SECTION 2. SALE AND DELIVERY TO INITIAL PURCHASERS; CLOSING. . . . . . 11
(a) SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . 11
(b) PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(c) QUALIFIED INSTITUTIONAL BUYER . . . . . . . . . . . . . . . 12
(d) DENOMINATIONS; REGISTRATION . . . . . . . . . . . . . . . . 12
SECTION 3. COVENANTS OF THE COMPANY. . . . . . . . . . . . . . . . . . 12
(a) OFFERING MEMORANDUM . . . . . . . . . . . . . . . . . . . . 12
(b) NOTICE AND EFFECT OF MATERIAL EVENTS. . . . . . . . . . . . 13
(c) AMENDMENT TO OFFERING MEMORANDUM AND SUPPLEMENTS. . . . . . 13
(d) QUALIFICATION OF SECURITIES FOR OFFER AND SALE. . . . . . . 13
(e) CERTIFICATE OF AMENDMENT. . . . . . . . . . . . . . . . . . 13
(f) DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(g) USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . 14
(h) RESTRICTION ON SALE OF SECURITIES . . . . . . . . . . . . . 14
(i) PRESS RELEASES. . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 4 PAYMENT OF EXPENSES . . . . . . . . . . . . . . . . . . . . 14
(a) EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . 14
(b) TERMINATION OF AGREEMENT. . . . . . . . . . . . . . . . . . 14
SECTION 5. CONDITIONS OF INITIAL PURCHASERS' OBLIGATIONS . . . . . . . 15
(a) OPINIONS OF COUNSEL FOR COMPANY . . . . . . . . . . . . . . 15
(b) OPINION OF COUNSEL FOR INITIAL PURCHASERS . . . . . . . . . 15
(c) OFFICERS' CERTIFICATE . . . . . . . . . . . . . . . . . . . 15
(d) ACCOUNTANT'S COMFORT LETTER . . . . . . . . . . . . . . . . 15
(e) BRING-DOWN COMFORT LETTER . . . . . . . . . . . . . . . . . 16
(f) CERTIFICATE OF AMENDMENT. . . . . . . . . . . . . . . . . . 16
(g) PORTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(h) REGISTRATION RIGHTS AGREEMENTS. . . . . . . . . . . . . . . 16
(i) ADDITIONAL DOCUMENTS. . . . . . . . . . . . . . . . . . . . 16
(j) TERMINATION OF AGREEMENT. . . . . . . . . . . . . . . . . . 16
SECTION 6. SUBSEQUENT OFFERS AND RESALES OF THE SECURITIES . . . . . . 16
(a) OFFER AND SALE PROCEDURES . . . . . . . . . . . . . . . . . 16
(b) COVENANTS OF THE COMPANY. . . . . . . . . . . . . . . . . . 18
(c) RESALE PURSUANT TO RULE 903 OF REGULATION S
OR RULE 144A. . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 7. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . 19
(a) INDEMNIFICATION OF INITIAL PURCHASERS . . . . . . . . . . . 19
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS. . . . . 20
(c) ACTIONS AGAINST PARTIES, NOTIFICATION . . . . . . . . . . . 21
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. . . . . 21
SECTION 8. CONTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. . . . . . . . . . . . . . . . . . . . . . . . . . 23
i
<PAGE>
SECTION 10 TERMINATION OF AGREEMENT. . . . . . . . . . . . . . . . . . 23
(a) TERMINATION, GENERAL. . . . . . . . . . . . . . . . . . . . 23
(b) LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 11 DEFAULT BY ONE OR MORE OF THE INITIAL PURCHASERS. . . . . . 23
SECTION 12 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 13 PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 14 GOVERNING LAW AND TIME. . . . . . . . . . . . . . . . . . . 24
SECTION 15 EFFECT OF HEADINGS. . . . . . . . . . . . . . . . . . . . . 24
ii
<PAGE>
$150,365,000 Gross Proceeds
RHYTHMS NETCONNECTIONS, INC.
(a Delaware corporation)
Units consisting of 13 1/2% Senior Discount Notes due 2008 and Warrants
PURCHASE AGREEMENT
April 28, 1998
MERRILL LYNCH & CO.
Merrill Lynch Pierce, Fenner & Smith
Incorporated
Donaldson, Lufkin & Jenrette Securities
Corporation
as Representative(s) of the several Initial Purchasers
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Rhythms NetConnections, Inc., a Delaware corporation (the "Company"),
confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and each of the other Initial Purchasers
named in Schedule A hereto (collectively, the "Initial Purchasers", which term
shall also include any initial purchaser substituted as hereinafter provided in
Section 11 hereof), for whom Merrill Lynch and Donaldson, Lufkin & Jenrette
Securities Corporation are acting as representatives (in such capacity, the
"Representatives"), with respect to the issue and sale by the Company and the
purchase by the Initial Purchasers, acting severally and not jointly, of the
respective quantities set forth in said Schedule A of 290,000 of the Company's
Units ($150,365,000 gross proceeds) consisting of 13 1/2% Senior Discount Notes
due 2008 and Warrants (the "Securities"). The Securities are to be issued
pursuant to an indenture to be dated on or about May 5, 1998 (the "Indenture")
between the Company and State Street Bank and Trust Company of California, N.A.,
as trustee (the "Trustee") and a warrant agreement to be dated on or about May
5, 1998 (the "Warrant Agreement") between the Company and State Street Bank and
Trust Company of California, N.A., as warrant agent (the "Warrant Agent").
Securities issued in book-entry form will be issued to Cede & Co. as nominee of
The Depository Trust Company ("DTC") pursuant to one or more letter agreements,
to be dated as of the Closing Time (as defined in Section 2(b))(collectively,
the "DTC Agreement"), among the Company, the Trustee, the Warrant Agent and DTC.
<PAGE>
The Company understands that the Initial Purchasers propose to make an
offering of the Securities on the terms and in the manner set forth herein and
agrees that the Initial Purchasers may resell, subject to the conditions set
forth herein, all or a portion of the Securities to purchasers ("Subsequent
Purchasers") at any time after the date of this Agreement. The Securities are to
be offered and sold through the Initial Purchasers without being registered
under the Securities Act of 1933, as amended (the "1933 Act"), in reliance upon
exemptions therefrom. Pursuant to the terms of the Securities, the Indenture and
the Warrant Agreement, investors that acquire Securities may only resell or
otherwise transfer such Securities if such Securities are hereafter registered
under the 1933 Act or if an exemption from the registration requirements of the
1933 Act is available (including the exemption afforded by Rule 144A ("Rule
144A") or Regulation S ("Regulation S") of the rules and regulations promulgated
under the 1933 Act by the Securities and Exchange Commission (the
"Commission")).
The Company has prepared and delivered to each Initial Purchaser copies
of preliminary offering memoranda dated April , 1998 and April 9, 1998
(collectively, the "Preliminary Offering Memorandum") and has prepared and will
deliver to each Initial Purchaser, on the date hereof or the next succeeding
day, copies of a final offering memorandum dated April 28, 1998 (the "Final
Offering Memorandum"), each for use by such Initial Purchaser in connection with
its solicitation of purchases of, or offering of, the Securities. "Offering
Memorandum" means, with respect to any date or time referred to in this
Agreement, the most recent offering memorandum (whether the Preliminary Offering
Memorandum or the Final Offering Memorandum, or any amendment or supplement to
either such document), which has been prepared and delivered by the Company to
the Initial Purchasers in connection with their solicitation of purchases of, or
offering of, the Securities.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents and warrants to each Initial Purchaser as of the date hereof, and
will represent as of the Closing Time referred to in Section 2(b) hereof by
means of the certificate described in Section 5(c) hereof, and agrees with each
Initial Purchaser as follows:
(i) SIMILAR OFFERINGS. The Company has not, directly or
indirectly, solicited any offer to buy or offered to sell, and will not,
directly or indirectly, solicit any offer to buy or offer to sell, in
the United States or to any United States citizen or resident, any
security which is or would be integrated with the sale of the Securities
in a manner that would require the Securities to be registered under the
1933 Act.
(ii) OFFERING MEMORANDUM. The Offering Memorandum does not,
and at the Closing Time will not, include an untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided that this representation,
warranty and agreement shall not apply to such statements in or
omissions from the Offering Memorandum made in reliance upon and in
conformity with information furnished to the Company in writing by any
Initial Purchaser through the Representative(s) expressly for use in the
Offering Memorandum. It is understood that the statements set forth in
the Offering Memorandum on page i with respect to stabilization, under
the heading "Plan
2
<PAGE>
of Distribution" and the identity of counsel to the Initial Purchasers
under the heading "Legal Matters" constitute the only information
furnished in writing by or on behalf of the Initial Purchasers expressly
for use in the Offering Memorandum.
(iii) [INTENTIONALLY LEFT BLANK].
(iv) INDEPENDENT ACCOUNTANTS. The accountants who certified
the financial statements included in the Offering Memorandum are
independent certified public accountants with respect to the Company and
its subsidiaries within the meaning of Regulation S-X under the 1933
Act.
(v) FINANCIAL STATEMENTS. The financial statements,
together with the related schedules and notes, included in the Offering
Memorandum present fairly the consolidated financial position of the
Company and its subsidiaries at the dates indicated and the statement of
operations, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout
the periods involved. The selected financial data included in the
Offering Memorandum present fairly the information shown therein and
have been compiled on a basis consistent with that of the audited
financial statements included in the Offering Memorandum. The pro forma
and pro forma as adjusted columns of the selected financial data
included in the Offering Memorandum and the related notes thereto
present fairly the information shown therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to
pro forma financial information and have been properly compiled on the
bases described therein, and the assumptions used in the preparation
thereof are reasonable and the adjustments used therein are appropriate
to give effect to the transactions and circumstances referred to
therein.
(vi) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the
respective dates as of which information is given in the Offering
Memorandum, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in
the earnings, business affairs or business prospects of the Company and
its subsidiaries considered as one enterprise (a "Material Adverse
Effect"), whether or not arising in the ordinary course of business, (B)
there have been no transactions entered into by the Company or any of
its subsidiaries, other than those in the ordinary course of business,
which are material with respect to the Company and its subsidiaries
considered as one enterprise, and (C) there has been no dividend or
distribution of any kind declared, paid or made by the Company on any
class of its capital stock.
(vii) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Delaware and has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Offering Memorandum and to enter into and
perform its obligations under this Agreement; and the Company is duly
qualified as a foreign corporation to transact business and is in good
standing in each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or
3
<PAGE>
the conduct of business, except where the failure so to qualify or to be
in good standing would not result in a Material Adverse Effect.
(viii) GOOD STANDING OF DESIGNATED SUBSIDIARIES. Each of ACI
Corp. and ACI Corp. -- Virginia (collectively, the "Designated
Subsidiaries") has been duly organized and is validly existing as a
corporation (or, in the case of ACI Corp. -- Virginia, a Virginia public
benefit corporation) in good standing under the laws of the jurisdiction
of its incorporation, has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in
the Offering Memorandum and is duly qualified as a foreign corporation
to transact business and is in good standing, in each jurisdiction in
which such qualification is required, whether by reason of the ownership
or leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a
Material Adverse Effect; except as otherwise disclosed in the Offering
Memorandum, all of the issued and outstanding capital stock of each
Designated Subsidiary has been duly authorized and validly issued, is
fully paid and non-assessable and is directly owned by the Company (or,
in the case of ACI Corp. -- Virginia, by ACI Corp.), free and clear of
any security interest, mortgage, pledge, lien, encumbrance, claim or
equity; none of the outstanding shares of capital stock of any
Designated Subsidiary was issued in violation of any preemptive or
similar rights arising by operation of law, or under the charter or
by-laws of such Designated Subsidiary or under any agreement to which
the Company or such Designated Subsidiary is a party. The Company has no
subsidiaries other than the Designated Subsidiaries.
(ix) CAPITALIZATION. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Offering Memorandum
in the column entitled "Actual" under the caption "Capitalization"
(except for subsequent issuances, if any, pursuant to this Agreement or
the Warrant Agreement, pursuant to employee benefit or stock option
plans referred to in the Offering Memorandum or pursuant to the exercise
of convertible securities or options referred to in the Offering
Memorandum).
(x) AUTHORIZATION OF AGREEMENT. This Agreement has been
duly authorized, executed and delivered by the Company.
(xi) AUTHORIZATION OF THE INDENTURE AND THE WARRANT
AGREEMENT. The Indenture and the Warrant Agreement have
been duly authorized by the Company and, at the Closing Time, will have
been duly executed and delivered by the Company and will constitute the
valid and binding agreements of the Company, enforceable against the
Company in accordance with their terms, except as the enforcement
thereof may be limited by bankruptcy, insolvency (including, without
limitation, all laws relating to fraudulent transfers), reorganization,
moratorium or other similar laws relating to or affecting enforcement of
creditors' rights generally, or by general principles of equity
(regardless of whether enforcement is considered in a proceeding in
equity or at law).
(xii) AUTHORIZATION OF THE SECURITIES. The Securities have
been duly authorized and, at the Closing Time, will have been duly
executed by the Company and, when authenticated in the manner provided
for in the Indenture and the Warrant Agreement and delivered against
payment of the purchase price therefor will constitute valid and binding
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obligations of the Company, enforceable against the Company in
accordance with their terms, except as the enforcement thereof may be
limited by bankruptcy, insolvency (including, without limitation, all
laws relating to fraudulent transfers), reorganization, moratorium or
other similar laws relating, to or affecting enforcement of creditors'
rights generally, or by general principles of equity (regardless of
whether enforcement is considered in a proceeding, in equity or at law),
and will be in the form contemplated by, and entitled to the benefits
of, the Indenture and the Warrant Agreement. All of the outstanding
shares of capital stock of the Company have been duly authorized and
validly issued, are fully paid and nonassessable, are not subject to any
preemptive or similar rights and have been issued in compliance with or
in reliance upon an exemption from all applicable state and federal
securities laws. The Warrants are exercisable into Common Stock in
accordance with the terms of the Warrant Agreement. The Company has duly
authorized and reserved for issuance the shares of Common Stock issuable
upon exercise of the Warrants, and, when issued and paid for upon
exercise of the Warrants in accordance with the terms thereof, the
shares of Common Stock will be validly issued, fully paid and
nonassessable, free of any preemptive or similar rights.
(xiii) DESCRIPTION OF THE SECURITIES, THE INDENTURE AND THE
WARRANT AGREEMENT. The Securities, the Indenture and
the Warrant Agreement will conform in all material respects to the
respective statements relating thereto contained in the Offering
Memorandum and will be in substantially the respective forms
previously delivered to the Initial Purchasers.
(xiv) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company
nor any of its subsidiaries is in violation of its charter or by-laws or
in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or other
agreement or instrument to which the Company or any of its subsidiaries
is a party or by which any of them may be bound, or to which any of the
property or assets of the Company or any of its subsidiaries is subject
(collectively, "Agreements and Instruments") except for such defaults
that would not result in a Material Adverse Effect, and the execution,
delivery and performance of this Agreement, the Indenture, the Warrant
Agreement and the Securities and any other agreement or instrument
entered into or issued or to be entered into or issued by the Company in
connection with the transactions contemplated hereby or thereby or in
the Offering Memorandum and the consummation of' the transactions
contemplated herein and in the Offering Memorandum (including the
issuance and sale of the Securities and the use of the proceeds from the
sale of the Securities as described in the Offering Memorandum under the
caption "Use of Proceeds") and compliance by the Company with its
obligations hereunder have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute
a breach of, or default or a Repayment Event (as defined below) under,
or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, the Agreements and Instruments except for such
conflicts, breaches or defaults or liens, charges or encumbrances that,
singly or in the aggregate, would not result in a Material Adverse
Effect, nor will such action result in any violation of the provisions
of the charter or by-laws of the Company or any of its
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subsidiaries or any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any
of its subsidiaries or any of their assets or properties. As used
herein, a "Repayment Event" means any event or condition which gives the
holder of any note, debenture, other evidence of indebtedness or
preferred stock (or any person acting on such holder's behalf) the right
to require the repurchase, redemption or repayment of all or a portion
of such indebtedness or preferred stock by the Company or any of its
subsidiaries.
(xv) ABSENCE OF LABOR DISPUTE. No labor dispute with the
employees of the Company or any of its subsidiaries exists or, to the
knowledge of the Company, is imminent, and the Company is not aware of
any existing or imminent labor disturbance by the employees of any of
its or any of its subsidiaries' principal suppliers, manufacturers,
customers or contractors, which, in either case, may reasonably be
expected to result in a Material Adverse Effect.
(xvi) ABSENCE OF PROCEEDINGS. Except as disclosed in the
Offering Memorandum, there is no action, suit, proceeding, inquiry or
investigation before or by any court or governmental agency or body,
domestic or foreign, now pending, or, to the knowledge of the Company,
threatened, against or affecting the Company or any subsidiary thereof
which might reasonably be expected to result in a Material Adverse
Effect, or which might reasonably be expected to materially and
adversely affect the properties or assets of the Company or any of its
subsidiaries or the consummation of this Agreement or the performance by
the Company of its obligations hereunder. The aggregate of all pending
legal or governmental proceedings to which the Company or any subsidiary
thereof is a party or of which any of their respective property or
assets is the subject which are not described in the Offering
Memorandum, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect.
(xvii) POSSESSION OF INTELLECTUAL PROPERTY. Except as
disclosed in the Offering Memorandum, (A) the Company and its
subsidiaries own or possess, or can acquire on reasonable terms,
adequate patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") necessary
to carry on the business now operated by them, except that the Company
and its subsidiaries may fail to so own, possess or have the ability to
acquire on reasonable terms any Intellectual Property if such failure
would not result, singly or in the aggregate, in a Material Adverse
Effect, and (B) neither the Company nor any of its subsidiaries has
received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of
the Company or any of its subsidiaries therein, and which infringement
or conflict (if the subject of any unfavorable decision, ruling or
finding) or invalidity or inadequacy, singly or in the aggregate, would
result in a Material Adverse Effect.
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(xviii) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance or
sale of the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except as may be required under the 1933
Act or state securities or "blue sky" laws in connection with the
Exchange Offer (as defined in the Offering Memorandum).
(xix) POSSESSION OF LICENSES AND PERMITS. Except as disclosed
in the Offering Memorandum, the Company and its subsidiaries possess
such permits, licenses, approvals, consents and other authorizations
issued by the appropriate federal, state, local or foreign regulatory
agencies or bodies necessary to conduct the business now operated by
them (collectively, "Governmental Licenses"); the Company and its
subsidiaries are in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure so to comply would not,
singly or in the aggregate, have a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except
where the invalidity of such Governmental Licenses or the failure of
such Governmental Licenses to be in full force and effect would not have
a Material Adverse Effect; and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would result in a Material Adverse Effect. The
Company has not been informed of any fact, event or circumstance that is
reasonably likely to impair the Company's (or its subsidiaries') ability
to obtain any Governmental Licenses necessary or advisable in order to
effectuate the Company's future plans and strategies described in the
Offering Memorandum. Without limiting the generality of this paragraph
(xix):
(A) The Company and each of its subsidiaries hold
all telecommunications regulatory licenses, permits,
authorizations, consents and approvals (the "Telecommunications
Licenses") required from the Federal Communications Commission
(the "FCC") for the Company and its subsidiaries to conduct
their business on and as of the date hereof in the manner
described in the Offering Memorandum, except as would not have,
individually or in the aggregate, a Material Adverse Effect; the
Telecommunications Licenses have been duly and validly issued
and are in full force and effect, except where the failure to be
in full force and effect would not have, individually or in the
aggregate, a Material Adverse Effect; no proceedings to revoke
or restrict the Telecommunications Licenses are pending or, to
the best of the Company's knowledge, threatened; neither the
Company nor its subsidiaries are in violation of any of the
terms and conditions of any of the Telecommunications Licenses,
are in violation of the Communications Act of 1934, as amended
(the "Communications Act"), or are in violation of any FCC rules
and regulations, except as would not have, individually or in
the aggregate, a Material Adverse Effect; and the Company and
its subsidiaries have in effect with the FCC all international
and domestic service tariffs necessary to conduct their business
on and as of the date hereof in the manner described in the
Offering Memorandum except as would not have, individually or in
the aggregate, a Material Adverse Effect;
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(B) The Company and its subsidiaries have obtained
all state and municipal Telecommunications Licenses and filed
all tariffs required for the provision of telecommunications
services in any state to conduct their business on and as of the
date hereof in the manner described in the Offering Memorandum,
except where the failure to do so would not have, individually
or in the aggregate, a Material Adverse Effect;
(C) There is no outstanding adverse judgment,
injunction, decree or order that has been issued by the FCC or
any state utility commission or similar state agency ("PUC") or
municipality against the Company or its subsidiaries or any
action, proceeding or investigation pending before the FCC or
any state PUC or municipality, or, to the Company's knowledge,
threatened by the FCC or any state PUC or municipality against
the Company or its subsidiaries which, if the subject of any
unfavorable decision, ruling or finding, would have a Material
Adverse Effect on the Company or its subsidiaries;
(D) No license, permit, consent, approval, order or
authorization of, or filing with, the FCC or with any state PUC
or municipal authority on the part of the Company or its
subsidiaries is required in connection with the issuance or sale
of the Units; and
(E) Neither the issuance and sale of the Units nor
the performance by the Company or its subsidiaries of their
obligations under this Agreement, the Registration Rights
Agreements (as defined herein), the Warrant Agreement or the
Indenture (collectively, the "Purchase Documents") will result
in a violation in any material respect of: (1) the
Communications Act or the applicable rules or regulations, or
any order, writ, judgment, injunction, decree or award of the
FCC binding on the Company or its subsidiaries; (2) any state
telecommunications laws or any applicable state PUC rules or
regulations, or any order, writ, judgment, injunction, decree or
award of any state PUC binding on the Company or its
subsidiaries; or (3) any municipal rules or regulations
applicable to the Company or its subsidiaries; except that the
Company may be required to file applications and/or obtain
permits, authorizations, consents and approvals as a result of
the issuance of shares of common stock upon the exercise of the
Warrants if such issuance would be deemed to result in a change
in control of the Company, which requirement would not have a
Material Adverse Effect.
(xx) TITLE TO PROPERTY. The Company and its subsidiaries
have good and marketable title to all real property owned by the Company
and its subsidiaries and good title to all other properties owned by
them, in each case, free and clear of all mortgages, pledges,
liens, security interests, claims, restrictions or encumbrances of any
kind except such as (a) are described in the Offering Memorandum or (b)
do not, singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company or any of its subsidiaries; and all of
the leases and subleases material to the business of the Company and its
subsidiaries, considered as one enterprise, and under which the Company
or any of its subsidiaries holds
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properties described in the Offering Memorandum, are in full force and
effect, and neither the Company nor any of its subsidiaries has any
notice of any material claim of any sort that has been asserted by
anyone adverse to the rights of the Company or any of its subsidiaries
under any of the leases or subleases mentioned above, or affecting or
questioning the rights of the Company or any subsidiary thereof to the
continued possession of the leased or subleased premises under any such
lease or sublease.
(xxi) TAX RETURNS. The Company and its subsidiaries have filed
all federal, state, local and foreign tax returns that are required to
be filed or have duly requested extensions thereof and have paid all
taxes required to be paid by any of them and any related assessments,
fines or penalties, except for any such tax, assessment, fine or penalty
that is being contested in good faith and by appropriate proceedings,
and adequate charges, accruals and reserves have been provided for in
the financial statements referred to in Section l(a)(v) above in respect
of all federal, state, local and foreign taxes for all periods as to
which the tax liability of the Company or any of its subsidiaries has
not been finally determined or remains open to examination by applicable
taxing authorities, except for such failures to file, request
extensions, make payments and provide for adequate charges, accruals and
reserves as would not, singly or in the aggregate, result in a Material
Adverse Effect.
(xxii) ENVIRONMENTAL LAWS. Except as described in the Offering
Memorandum and except such matters as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any of its subsidiaries is in violation of any federal, state, local
or foreign statute, law, rule, regulation, ordinance, code, policy or
rule of common law or any judicial or administrative interpretation
thereof, including any judicial or administrative order, consent, decree
or judgment, relating to pollution or protection of human health, the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including,
without limitation, laws and regulations relating to the release or
threatened release of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling
of Hazardous Materials (collectively, "Environmental Laws"), (B) the
Company and its subsidiaries have all permits, authorizations and
approvals required under any applicable Environmental Laws and are each
in compliance with their requirements, (C) there are no pending or
threatened administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of noncompliance or
violation, investigation or proceedings relating to any Environmental
Law against the Company or any of its subsidiaries and (D) there are no
events or circumstances that might reasonably be expected to form the
basis of an order for clean-up or remediation, or an action, suit or
proceeding by any private party or governmental body or agency, against
or affecting the Company or any of its subsidiaries relating to
Hazardous Materials or Environmental Laws.
(xxiii) INVESTMENT COMPANY ACT. The Company is not, and upon
the issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Offering
Memorandum will not be, an "investment company"
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or an entity "controlled" by an "investment company" as such terms are
defined in the Investment Company Act of 1940, as amended (the "1940
Act").
(xxiv) RULE 144A ELIGIBILITY. The Securities are eligible for
resale pursuant to Rule 144A and will not be, at the Closing Time, of
the same class as securities listed on a national securities exchange
registered under Section 6 of the 1934 Act, or quoted in a U.S.
automated interdealer quotation system.
(xxv) NO GENERAL SOLICITATION. None of the Company, its
affiliates, as such term is defined in Rule 501 (b) under the 1933 Act
("Affiliates"), or any person acting on its or any of their behalf
(other than the Initial Purchasers, as to whom the Company makes no
representation) has engaged or will engage, in connection with the
offering of the Securities, in any form of general solicitation or
general advertising within the meaning of Rule 502(c) under the 1933
Act.
(xxvi) NO REGISTRATION REQUIRED. Subject to compliance by the
Initial Purchasers with the representations and warranties set forth in
Section 2 and the procedures set forth in Section 6 hereof, it is not
necessary in connection with the offer, sale and delivery of the
Securities to the Initial Purchasers and to each Subsequent Purchaser in
the manner contemplated by this Agreement and the Offering Memorandum to
register the Securities under the 1933 Act or to qualify the Indenture
under the Trust Indenture Act of 1939, as amended (the "1939 Act").
(xxvii) NO DIRECTED SELLING EFFORTS. With respect to those
Securities sold in reliance on Regulation S, (A) none of the Company,
its Affiliates or any person acting on its or their behalf (other than
the Initial Purchasers, as to whom the Company makes no representation)
has engaged or will engage in any directed selling efforts within the
meaning of Regulation S and (B) each of the Company and its Affiliates
and any person acting on its or their behalf (other than the Initial
Purchasers, as to whom the Company makes no representation) has complied
and will comply with the offering restrictions requirement of Regulation
S.
(xxviii) NO APPLICABLE ANTI-DILUTION PROVISIONS. Upon execution
of the waiver agreement in the form attached hereto as Annex B (the
"Waiver Agreement") by the parties thereto and compliance with the
transactions contemplated thereby, the issuance and sale of the
Securities pursuant to this Agreement and the transactions contemplated
hereby, and the issuance of shares of Common Stock upon exercise of the
Warrants, will not result in an adjustment to any conversion ratio,
conversion price, exercise price, redemption price or similar provision
applicable to any outstanding securities of the Company.
(xxix) INSURANCE. The Company and each of its subsidiaries
maintains insurance covering its properties, operations, personnel and
business. Such insurance insures against such losses and risks as are
adequate in accordance with customary industry practice to protect the
Company, each of its subsidiaries and their businesses. Neither the
Company or any of its subsidiaries has received notice from any insurer
or agent of such insurer that substantial capital improvement or other
expenditures will have to be made in order to
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continue such insurance. All such insurance is outstanding and duly in
force on the date hereof.
(xxx) INTERNAL ACCOUNTING CONTROLS. The Company maintains a
system of internal accounting controls sufficient to provide reasonable
assurances that (a) transactions are executed in accordance with
management's general or specific authorization; (b) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets; (c) access to assets is permitted only in
accordance with management's general or specific authorization; and (d)
the recorded accountability for assets is compared with existing assets
at reasonable intervals and appropriate action is taken with respect to
any differences.
(xxxi) STABILIZATION AND MANIPULATION. None of the Company or
any of its subsidiaries has (a) taken, directly or indirectly, any
action designed to, or that might reasonably be expected to, cause or
result in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Units, the Notes or
the Warrants or (b) since the date of the Preliminary Offering
Memorandum (I) sold, bid for, purchased or paid any person any
compensation for soliciting purchases of, the Units, the Notes or the
Warrants or (II) paid or agreed to pay to any person any compensation
for soliciting another to purchase any securities of the Company.
(xxxii) RELATED PARTY TRANSACTIONS. Except as disclosed in the
Offering Memorandum, there are no business relationships or related
party transactions required to be disclosed therein pursuant to Item 404
of Regulation S-K of the Commission (assuming for purposes of this
paragraph (xxxii) that Regulation S-K is applicable to the Offering
Memorandum).
(xxxiii) SOLVENCY. The Company is, and immediately after the
Closing Time will be, Solvent. As used herein, the term "Solvent" means,
with respect to the Company on a particular date, that on such date (A)
the fair market value of the assets of the Company is greater than the
total amount of liabilities (including contingent liabilities) of the
Company, (B) the present fair salable value of the assets of the Company
is greater than the amount that will be required to pay the probable
liabilities of the Company on its debts as they become absolute and
mature, (C) the Company is able to realize upon its assets and pay its
debts and other liabilities, including contingent obligations, as they
mature, and (D) the Company does not have unreasonably small capital.
(b OFFICER'S CERTIFICATES. Any certificate signed by any officer
of the Company or any of its subsidiaries delivered to the Representative(s) or
to counsel for the Initial Purchasers shall be deemed a representation and
warranty by the Company to each Initial Purchaser as to the matters covered
thereby.
SECTION 2. SALE AND DELIVERY TO INITIAL PURCHASERS; CLOSING.
(a) SECURITIES. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company agrees to sell to each Initial
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Purchaser, severally and not jointly, and each Initial Purchaser, severally and
not jointly, agrees to purchase from the Company, at the price set forth in
Schedule B, the quantity of Securities set forth in Schedule A opposite the name
of such Initial Purchaser, plus any additional principal amount of Securities
which such Initial Purchaser may become obligated to purchase pursuant to the
provisions of Section 11 hereof.
(b) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the office of Baker &
McKenzie, 805 Third Avenue, New York, New York 10022, or at such other place as
shall be agreed upon by the Representative(s) and the Company, at 10:00 A.M. on
the fifth business day after the date hereof (unless postponed in accordance
with the provisions of Section 11), or such other time not later than ten
business days after such date as shall be agreed upon by the Representative(s)
and the Company (such time and date of payment and delivery being herein called
the "Closing Time").
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Representative(s) for the respective accounts of the Initial Purchasers of
certificates for the Securities to be purchased by them. It is understood that
each Initial Purchaser has authorized the Representative(s), for its account, to
accept delivery of, receipt for, and make payment of the purchase price for, the
Securities which it has agreed to purchase. Merrill Lynch, individually and not
as representative of the Initial Purchasers, may (but shall not be obligated to)
make payment of the purchase price for the Securities to be purchased by any
Initial Purchaser whose funds have not been received by the Closing Time, but
such payment shall not relieve such Initial Purchaser from its obligations
hereunder. The certificates representing the Securities shall be registered in
the name of Cede & Co. pursuant to the DTC Agreement and shall be made available
for examination and packaging by the Initial Purchasers in The City of New York
not later than 10:00 A.M. on the last business day prior to the Closing Time.
(c) QUALIFIED INSTITUTIONAL BUYER. Each Initial Purchaser severally
and not jointly represents and warrants to, and agrees with, the Company that,
as of the date hereof and as of the Closing Date, it is a "qualified
institutional buyer" within the meaning, of Rule 144A under the 1933 Act (a
"Qualified Institutional Buyer") and an "accredited investor" within the meaning
of Rule 501(a) under the 1933 Act (an "Accredited Investor").
(d) DENOMINATIONS; REGISTRATION. Certificates for the Securities
shall be in such denominations and registered in such names as the
Representative(s) may request in writing at least one full business day before
the Closing Time.
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with
each Initial Purchaser as follows:
(a) OFFERING MEMORANDUM. The Company, as promptly as possible, will
furnish to each Initial Purchaser, without charge, such number of copies of the
Preliminary Offering Memorandum, the Final Offering Memorandum and any
amendments and supplements thereto and documents incorporated by reference
therein as such Initial Purchaser may reasonably request.
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(b) NOTICE AND EFFECT OF MATERIAL EVENTS. The Company will
immediately notify each Initial Purchaser, and confirm such notice in writing,
of (x) any filing made by the Company of information relating to the offering of
the Securities with any securities exchange or any other regulatory body in the
United States or any other jurisdiction, and (y) prior to the completion of the
placement of the Securities by the Initial Purchasers as evidenced by a notice
in writing from the Initial Purchasers to the Company, any material changes in
or affecting the earnings, business affairs or business prospects of the Company
and its subsidiaries which (i) make any statement in the Offering Memorandum
false or misleading or (ii) are not disclosed in the Offering Memorandum. In
such event or if during such time any event shall occur as a result of which it
is necessary, in the reasonable opinion of the Company, its counsel, the Initial
Purchasers or counsel for the Initial Purchasers, to amend or supplement the
Final Offering Memorandum in order that the Final Offering Memorandum not
include any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in the light of
the circumstances then existing, the Company will forthwith amend or supplement
the Final Offering Memorandum by preparing and furnishing to each Initial
Purchaser an amendment or amendments of, or a supplement or supplements to, the
Final Offering Memorandum (in form and substance satisfactory in the reasonable
opinion of counsel for the Initial Purchasers) so that, as so amended or
supplemented, the Final Offering Memorandum will not include an untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances existing at the time
it is delivered to a Subsequent Purchaser, not misleading.
(c) AMENDMENT TO OFFERING MEMORANDUM AND SUPPLEMENTS. The Company
will advise each initial Purchaser promptly of any proposal to amend or
supplement the Offering Memorandum and will not effect such amendment or
supplement without the consent of the Initial Purchasers. Neither the consent of
the Initial Purchasers, nor the Initial Purchasers' delivery of any such
amendment or supplement, shall constitute a waiver of any of the conditions set
forth in Section 5 hereof.
(d) QUALIFICATION OF SECURITIES FOR OFFER AND SALE. The Company
will use its best efforts, in cooperation with the Initial Purchasers, to
qualify the Securities for offering and sale by the Initial Purchasers to any
Subsequent Purchasers under the applicable securities laws of such jurisdictions
as the Representative(s) may reasonably designate and will maintain such
qualifications in effect as long as required for the sale of the Securities;
PROVIDED; HOWEVER, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation or as a
dealer in securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any jurisdiction in
which it is not otherwise so subject.
(e) CERTIFICATE OF AMENDMENT. The Company will use its best efforts
to cause a Certificate of Amendment (the "Certificate of Amendment") to its
Certificate of Incorporation to be filed with the Secretary of State of the
State of Delaware prior to completion of the transactions contemplated hereby,
which (i) shall cause the number of authorized shares of common stock, par value
$0.001 per share, of the Company to be increased to a number sufficient to
provide for the exercise of the Warrants and (ii) shall effectuate such further
amendments as the Initial Purchasers may reasonably request in order to
effectuate the transactions contemplated hereby.
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(f) DTC. The Company will cooperate with the Representative(s) and
use its best efforts to permit the Securities to be eligible for clearance and
settlement through the facilities of DTC.
(g) USE OF PROCEEDS. The Company will use the net proceeds received
by it from the sale of the Securities in the manner specified in the Offering
Memorandum under "Use of Proceeds".
(h) RESTRICTION ON SALE OF SECURITIES. During a period of 180 days
from the date of the Offering Memorandum, the Company will not, without the
prior written consent of Merrill Lynch, directly or indirectly, issue, sell,
offer or agree to sell, grant any option for the sale of, or otherwise dispose
of, any other debt securities of the Company or securities of the Company that
are convertible into, or exchangeable for, the Securities or such other debt
securities.
(i) PRESS RELEASES. From the date hereof to the Closing Time,
without the prior consent of the Initial Purchasers, the Company will not issue
directly or indirectly any press release or other public communication or hold
any press conference with respect to the Company or the business, financial
condition, assets, results of operations or prospects of the Company, unless in
the judgment of the Company and its counsel, and after notification to the
Initial Purchasers, such press release, communication or conference is required
by law.
SECTION 4 PAYMENT OF EXPENSES.
(a) EXPENSES. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and any filing of the Offering Memorandum (including
financial statements and any schedules or exhibits and any document incorporated
therein by reference) and of each amendment or supplement thereto, (ii) the
preparation, printing and delivery to the Initial Purchasers of this Agreement
and any Agreement among Initial Purchasers, the Indenture, the Warrant Agreement
and such other documents as may be required in connection with the offering,
purchase, sale and delivery of the Securities, (iii) the preparation, issuance
and delivery of the certificates for the Securities to the Initial Purchasers,
including any charges of DTC in connection therewith, (iv) the fees and
disbursements of the Company's counsel, accountants and other advisors, (v) the
qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Initial Purchasers in connection therewith
and in connection with the preparation of the Blue Sky Survey, any supplement
thereto and any Legal Investment Survey, which amounts shall not exceed $2,500,
(vi) the fees and expenses of the Trustee, including the fees and disbursements
of counsel for the Trustee in connection with the Indenture and the Securities,
(vii) any fees payable in connection with the rating of the Securities, (viii)
any fees payable to the review by the National Association of Securities
Dealers, Inc. (the "NASD") in connection with the initial and continued
designation of the Securities as PORTAL securities under the PORTAL Market Rules
pursuant to NASD Rule 5322 and (ix) the fees and expenses of the Warrant Agent,
including the fees and disbursements of counsel for the Warrant Agent in
connection with the Warrant Agreement and the Securities.
(b) TERMINATION OF AGREEMENT. If this Agreement is terminated by the
Representative(s) in accordance with the provisions of Section 5 or Section
10(a)(i) hereof, the Company shall
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reimburse the Initial Purchasers for all of their out-of-pocket expenses,
including the reasonable fees and disbursements of counsel for the Initial
Purchasers.
SECTION 5. CONDITIONS OF INITIAL PURCHASERS' OBLIGATIONS. The
obligations of the several Initial Purchasers hereunder are subject to the
accuracy of the representations and warranties of the Company contained in
Section 1 hereof or in certificates of any officer of the Company or any of its
subsidiaries delivered pursuant to the provisions hereof, to the performance by
the Company of its covenants and other obligations hereunder, and to the
following further conditions:
(a) OPINIONS OF COUNSEL FOR COMPANY. At the Closing Time, the
Representative(s) shall have received the opinions, dated as of the Closing
Time, together with signed or reproduced copies of such letters for each of the
other Initial Purchasers, (i) of Brobeck, Phleger & Harrison LLP, counsel for
the Company, to the effect set forth in Exhibit A-1 hereto, (ii) of Hale and
Dorr LLP, counsel for the Company, to the effect set forth in Exhibit A-2
hereto, (iii) of Blumenfeld & Cohen, counsel for the Company, to the effect set
forth in Exhibit A-3 hereto, (iv) of a firm to be designated by the Company and
reasonably satisfactory to the Initial Purchasers, in form and substance
satisfactory to counsel for the Initial Purchasers, to the effect set forth on
Exhibit A-4 hereto and (v) of Jeffrey Blumenfeld, General Counsel of the
Company, to the effect set forth on Exhibit A-5 hereto. In giving the opinion
described in clause (i) above such counsel may rely, as to all matters governed
by the laws of jurisdictions other than the law of the State of New York, the
federal law of the United States and the General Corporation Law of the State of
Delaware, upon the opinions of counsel satisfactory to the Representative(s).
(b) OPINION OF COUNSEL FOR INITIAL PURCHASERS. At the Closing Time,
the Representative(s) shall have received the favorable opinion, dated as of the
Closing Time, of Baker & McKenzie, counsel for the Initial Purchasers, together
with signed or reproduced copies of such letter for each of the other Initial
Purchasers, substantially to the effect set forth in Exhibit A-6 hereto. In
giving such opinion such counsel may rely, as to all matters governed by the
laws of jurisdictions other than the law of the State of New York, the federal
law of the United States and the General Corporation Law of the State of
Delaware, upon the opinions of counsel satisfactory to the Representative(s).
(c) OFFICERS' CERTIFICATE. At the Closing Time, there shall not
have been, since the date hereof or since the respective dates as of which
information is given in the Offering Memorandum, any material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, and the
Representative(s) shall have received a certificate of the President or a Vice
President of the Company and of the chief financial or chief accounting officer
of the Company, dated as of the Closing Time, to the effect that (i) there has
been no such material adverse change, (ii) the representations and warranties in
Section 1 hereof are true and correct with the same force and effect as though
expressly made at and as of the Closing Time, and (iii) the Company has complied
with all agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to the Closing Time.
(d) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of
this Agreement, the Representative(s) shall have received from Price Waterhouse
LLP a letter dated such date, in form and substance satisfactory to the
Representative(s), together with signed or reproduced copies of
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such letter for each of the other Initial Purchasers containing statements and
information of the type ordinarily included in accountants' "comfort letters" to
Initial Purchasers with respect to the financial statements and certain
financial information contained in the Offering Memorandum.
(e) BRING-DOWN COMFORT LETTER. At the Closing Time, the
Representative(s) shall have received from Waterhouse LLP a letter, dated as of
the Closing Time, to the effect that they reaffirm the statements made in the
letter furnished pursuant to subsection (d) of this Section, except that the
specified date referred to shall be a date not more than three business days
prior to the Closing Time.
(f) CERTIFICATE OF AMENDMENT. Prior to the Closing Time, the
Company shall have caused the Certificate of Amendment to be filed with the
Secretary of State of the State of Delaware and shall have delivered a certified
copy of such amendment to the Representatives.
(g) PORTAL. At the Closing Time, the Securities shall have been
designated for trading on PORTAL.
(h) REGISTRATION RIGHTS AGREEMENTS. The Issuers and the Initial
Purchasers shall have entered into registration rights agreements (the
"Registration Rights Agreements"), dated as of the Closing Time, substantially
in form and substance as described in the Offering Memorandum under the headings
"Description of the Notes--Exchange Offer; Note Registration Rights" and
"Description of the Warrants--Certain Terms--Registration Requirements."
(i) ADDITIONAL DOCUMENTS. At the Closing Time, counsel for the
Initial Purchasers shall have been furnished with such other documents and
opinions as they may reasonably require for the purpose of enabling them to pass
upon the issuance and sale of the Securities as herein contemplated, or in order
to evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the
Representative(s) and counsel for the Initial Purchasers.
(j) TERMINATION OF AGREEMENT. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement may be terminated by the Representative(s) by notice to the Company at
any time at or prior to the Closing Time, and such termination shall be without
liability of any party to any other party except as provided in Section 4 and
except that Sections 1, 7 and 8 shall survive any such termination and remain in
full force and effect.
SECTION 6. SUBSEQUENT OFFERS AND RESALES OF THE SECURITIES.
(a) OFFER AND SALE PROCEDURES. Each of the Initial Purchasers and
the Company hereby acknowledge and agree to observe the following procedures in
connection with the offer and sale of the Securities:
(i) OFFERS AND SALES ONLY TO REGULATION S PURCHASERS OR
QUALIFIED INSTITUTIONAL BUYERS. Offers and sales of the Securities will
be made only by the Initial Purchasers or
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Affiliates thereof qualified to do so in the jurisdictions in which such
offers or sales are made. Each such offer or sale shall only be made (A)
to persons whom the offeror or seller reasonably believes to be
qualified institutional buyers (as defined in Rule 144A under the
Securities Act) or (B) to non-U.S. persons outside the United States to
whom the offeror or seller reasonably believes offers and sales of the
Securities may be made in reliance upon Rules 903 and 904 of Regulation
S under the 1933 Act.
(ii) NO GENERAL SOLICITATION. The Securities will be offered
by approaching prospective Subsequent Purchasers on an individual basis.
No general solicitation or general advertising (within the meaning of
Rule 502(c) under the 1933 Act) will be used in the United States in
connection with the offering of the Securities.
(iii) PURCHASES BY NON-BANK FIDUCIARIES. In the case of a
non-bank Subsequent Purchaser of a Security acting as a fiduciary for
one or more third parties, in connection with an offer and sale to such
purchaser pursuant to clause (a) above, each third party shall, in the
judgment of the applicable Initial Purchaser, be an Institutional
Accredited Investor or a Qualified Institutional Buyer or a non-U.S.
person outside the United States.
(iv) SUBSEQUENT PURCHASER NOTIFICATION. Each Initial
Purchaser will take reasonable steps to inform, and cause each of its
U.S. Affiliates to take reasonable steps to inform, persons acquiring
Securities from such Initial Purchaser or Affiliate, as the case may be,
in the United States that the Securities (A) have not been and will not
be registered under the 1933 Act and have not been registered under any
state securities laws, (B) are being sold to them without registration
under the 1933 Act in reliance on Rule 144A or in accordance with
another exemption from registration under the 1933 Act, as the case may
be, and (C) may not be offered, sold or otherwise transferred except (1)
to the Company, (2) outside the United States in accordance with Rule
904 of Regulation S, or (3) inside the United States in accordance with
(x) Rule 144A to a person whom the seller reasonably believes is a
Qualified Institutional Buyer that is purchasing such Securities for its
own account or for the account of a Qualified Institutional Buyer to
whom notice is given that the offer, sale or transfer is being made in
reliance on Rule 144A or (y) the exemption from registration under the
1933 Act provided by Rule 144, if available.
(v) [INTENTIONALLY LEFT BLANK.]
(vi) RESTRICTIONS ON TRANSFER. The transfer restrictions and
the other provisions set forth in Section 3.17 of the Indenture and
Section 1.08 of the Warrant Agreement, including the legends required
thereby, shall apply to the Securities except as otherwise agreed by the
Company and the Initial Purchasers. The Company shall refuse to register
any transfer of securities not made in accordance with Regulation S
under the Securities Act, pursuant to registration under the Securities
Act, or pursuant to an available exemption from such registration.
Following the sale of the Securities by the Initial Purchasers to
Subsequent Purchasers pursuant to the terms hereof, the Initial
Purchasers shall not be liable or responsible to the Company for any
losses, damages or liabilities suffered or incurred by the Company,
including any losses, damages or liabilities under the 1933 Act, arising
from or relating to any resale or transfer by any Subsequent Purchaser
of any Security; provided, that
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nothing contained in this sentence shall limit the Initial Purchasers'
rights and obligations under Section 7 hereof.
(vii) DELIVERY OF OFFERING MEMORANDUM. Each Initial
Purchaser will deliver to each purchaser of the Securities from such
Initial Purchaser, in connection with its original distribution of the
Securities, a copy of the Offering Memorandum, as amended and
supplemented at the date of such delivery.
(viii) HEDGING TRANSACTIONS. The Initial Purchasers will not
engage in hedging transactions with respect to the Securities prior to
the expiration of the applicable distribution compliance period
specified in Rule 903 of Regulation S under the Securities Act, unless
in compliance with the Securities Act.
(b) COVENANTS OF THE COMPANY. The Company covenants with each
Initial Purchaser as follows:
(i) DUE DILIGENCE. In connection with the original
distribution of the Securities, the Company agrees that, prior to any
offer or resale of the Securities by the Initial Purchasers, the Initial
Purchasers and counsel for the Initial Purchasers shall have the right
to make reasonable inquiries into the business of the Company and its
subsidiaries. The Company also agrees to provide answers to each
prospective Subsequent Purchaser of Securities who so requests
concerning the Company and its subsidiaries (to the extent that such
information is available or can be acquired and made available to
prospective Subsequent Purchasers without unreasonable effort or expense
and to the extent the provision thereof is not prohibited by applicable
law) and the terms and conditions of the offering of the Securities, as
provided in the Offering Memorandum.
(ii) INTEGRATION. The Company agrees that it will not and
will cause its Affiliates not to make any offer or sale of securities of
the Company of any class if, as a result of the doctrine of
"integration" referred to in Rule 502 under the 1933 Act, such offer or
sale would render invalid (for the purpose of (i) the sale of the
Securities by the Company to the Initial Purchasers, (ii) the resale of
the Securities by the Initial Purchasers to Subsequent Purchasers or
(iii) the resale of the Securities by such Subsequent Purchasers to
others, in each case in accordance with the terms and conditions herein
set forth) the exemption from the registration requirements of the 1933
Act provided by Section 4(2) thereof or by Rule 144A or by Regulation S
thereunder or otherwise.
(iii) RULE 144A INFORMATION. The Company agrees that, in
order to render the Securities eligible for resale pursuant to Rule 144A
under the 1933 Act, while any of the Securities remain outstanding, it
will make available, upon request, to any holder of Securities or
prospective purchasers of Securities the information specified in Rule
144A(d)(4), unless the Company furnishes information to the Commission
pursuant to Section 13 or 15(d) of the 1934 Act (such information,
whether made available to holders or prospective purchasers or furnished
to the Commission, is herein referred to as "Additional Information").
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(iv) RESTRICTION ON REPURCHASES. Until the expiration of
three years after the original issuance of the Securities, the Company
will not, and will cause its Affiliates not to, purchase or agree to
purchase or otherwise acquire any Securities which are "restricted
securities" (as such term is defined under Rule 144(a)(3) under the 1933
Act), whether as beneficial owner or otherwise (except as agent acting
as a securities broker on behalf of and for the account of customers in
the ordinary course of business in unsolicited broker's transactions)
unless, immediately upon any such purchase, the Company or any Affiliate
shall submit such Securities to the Trustee for cancellation.
(c) RESALE PURSUANT TO RULE 903 OF REGULATION S OR RULE 144A. Each
Initial Purchaser represents and agrees, that, except as permitted by Section
6(a) above, it has offered and sold Securities and will offer and sell
Securities (i) as part of their distribution at any time and (ii) otherwise
until forty days (or, in the case of the Warrants, one year) after the later of
the date upon which the offering of the Securities commences and the Closing
Time, only in accordance with Rule 903 of Regulation S or Rule 144A under the
1933 Act. Accordingly, neither the Initial Purchasers, their affiliates nor any
persons acting on their behalf have engaged or will engage in any directed
selling efforts with respect to Securities, and the Initial Purchasers, their
affiliates and any person acting on their behalf have complied and will comply
with the offering restriction requirements of Regulation S. Each Initial
Purchaser agrees that, at or prior to confirmation of a sale of Securities
(other than a sale of Securities pursuant to Rule 144A), it will have sent to
each distributor, dealer or person receiving a selling concession, fee or other
remuneration that purchases Securities from it or through it during the
restricted period a confirmation or notice to substantially the following
effect:
"The Securities covered hereby have not been
registered under the United States Securities
Act of 1933 (the "Securities Act") and may not
be offered or sold within the United States or
to or for the account or benefit of U.S. persons
(i) as part of their distribution at any time
and (ii) otherwise until forty days (or, in the
case of the Warrants, one year) after the later
of the date upon which the offering of the
Securities commenced and the date of closing,
except in either case in accordance with
Regulation S or Rule 144A under the Securities
Act. Terms used above have the meaning given to
them by Regulation S."
Terms used in the above paragraph have the meanings given to them by Regulation
S.
Each Initial Purchaser severally represents and agrees that it has not entered
and will not enter into any contractual arrangements with respect to the
distribution of the Securities, except with its affiliates or with the prior
written consent of the Company.
SECTION 7. INDEMNIFICATION.
(a) INDEMNIFICATION OF INITIAL PURCHASERS. The Company agrees to
indemnify and hold harmless each Initial Purchaser and each person, if any, who
controls any Initial Purchaser within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act as follows:
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(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Offering Memorandum or the Final Offering Memorandum (or any amendment
or supplement thereto), or the omission or alleged omission therefrom of
a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or proceeding
by any governmental agency or body, commenced or threatened, or of any
claim whatsoever based upon any such untrue statement or omission, or
any such alleged untrue statement or omission; provided that (subject to
Section 7(d) below) any such settlement is effected with the written
consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Initial Purchaser through the Representative expressly for use in the Offering
Memorandum (or any amendment thereto), which information is described in Section
1(a)(ii) hereof; and PROVIDED further that the Company will not be liable to an
Initial Purchaser with respect to any Preliminary Offering Memorandum to the
extent that the Company shall sustain the burden of proof of proving that any
such loss, liability, claim, damage or expense resulted from the fact that such
Initial Purchaser, in contravention of a requirement of this Agreement or
applicable law, sold Securities to a person to whom such Initial Purchaser
failed to send or give, at or prior to the Closing Date, a copy of the Final
Offering Memorandum as then amended or supplemented if (i) the Company has
previously furnished copies thereof (sufficiently in advance of the Closing Date
to allow for the distribution by the Closing Date) to the Initial Purchasers and
the loss, liability, claim, damage or expense of such Initial Purchaser resulted
from an untrue statement or omission or alleged untrue statement or omission of
a material fact contained in or omitted from the Preliminary Offering Memorandum
which was corrected in the Final Offering Memorandum as, if applicable, amended
or supplemented prior to the Closing Date and (ii) giving or sending such Final
Offering Memorandum by the Closing Date to the party or parties asserting such
loss, liability, claim, damage or expense would have constituted a complete
defense to the claim asserted by such person.
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS. Each
Initial Purchaser severally agrees to indemnify and hold harmless the Company,
its directors, each of its officers who would be required to sign the Offering
Memorandum if it were a registration statement on Form S-1, and each person, if
any, who controls the Company within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act against any and all loss, liability, claim, damage
and expense described
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in the indemnity contained in subsection (a) of this Section, as incurred, but
only with respect to untrue statements or omissions, or alleged untrue
statements or omissions, made in the Offering Memorandum in reliance upon and in
conformity with written information furnished to the Company by such Initial
Purchaser through the Representative expressly for use in the Offering
Memorandum.
(c) ACTIONS AGAINST PARTIES, NOTIFICATION. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it is
not materially prejudiced as a result thereof and in any event shall not relieve
it from any liability which it may have otherwise than on account of this
indemnity agreement. In the case of parties indemnified pursuant to Section 7(a)
above, counsel to the indemnified parties shall be selected by Merrill Lynch,
and, in the case of parties indemnified pursuant to Section 7(b) above, counsel
to the indemnified parties shall be selected by the Company. An indemnifying
party may participate at its own expense in the defense of any such action;
provided, however, that counsel to the indemnifying party shall not (except with
the consent of the indemnified party) also be counsel to the indemnified party.
In no event shall the indemnifying parties be liable for fees and expenses of
more than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 7 or Section
8 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act by or on behalf of any indemnified party.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 7(a)(ii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
SECTION 8. CONTRIBUTION. If the indemnification provided for in
Section 7 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Initial Purchasers on the other hand from
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the offering of the Securities pursuant to this Agreement or (ii) if the
allocation provided by clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand and of the Initial Purchasers on the other hand in connection with the
statements or omissions which resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Initial Purchasers on the other hand in connection with the offering of the
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the Initial
Purchasers, bear to the aggregate initial offering price of the Securities.
The relative fault of the Company on the one hand and the Initial
Purchasers on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Initial Purchasers and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the Initial Purchasers agree that it would not be just
and equitable if contribution pursuant to this Section 8 were determined by pro
rata allocation (even if the Initial Purchasers were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 8. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 8 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 8, no Initial Purchaser
shall be required to contribute any amount in excess of the amount by which the
total price at which the Securities underwritten by it and distributed pursuant
to this Agreement were offered to the Subsequent Purchasers exceeds the amount
of any damages which such Initial Purchaser has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 8, each person, if any, who controls an Initial
Purchaser within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act shall have the same rights to contribution as such Initial Purchaser,
and each director of the Company, each officer of the Company who would be
required to sign the Offering Memorandum if it were a registration statement on
Form S-l, and each person, if any, who controls the Company within the meaning
of
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Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same
rights to contribution as the Company. The Initial Purchasers' respective
obligations to contribute pursuant to this Section 8 are several in proportion
to the principal amount of Securities set forth opposite their respective names
in Schedule A hereto and not joint.
SECTION 9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company submitted pursuant
hereto, shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any Initial Purchaser or controlling
person, or by or on behalf of the Company, and shall survive delivery of the
Securities to the Initial Purchasers.
SECTION 10 TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The Representative(s) may terminate this
Agreement, by notice to the Company, at any time at or prior to the Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the Offering
Memorandum, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Representative(s), impracticable to market the Securities or to
enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or limited by the Commission, or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the Nasdaq National Market has been suspended or limited, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices have
been required, by any of said exchanges or by such system or by order of the
Commission, the National Association of Securities Dealers, Inc. or any other
governmental authority, or (iv) if a banking moratorium has been declared by
either Federal or New York authorities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 7 and 8 shall survive such termination and remain in full force and effect.
SECTION 11 DEFAULT BY ONE OR MORE OF THE INITIAL PURCHASERS. If
one or more of the Initial Purchasers shall fail at the Closing Time to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representative(s) shall have the right, but
not the obligation, within 24 hours thereafter, to make arrangements, for one or
more of the non-defaulting Initial Purchasers, or any other Initial Purchasers,
to purchase all, but not less than all, of the Defaulted Securities in such
amounts as may be agreed upon and upon the terms herein set forth; if, however,
the Representative(s) shall not have completed such arrangements within such
23
<PAGE>
24-hour period, then this Agreement shall terminate without liability on the
part of any non-defaulting Initial Purchaser.
No action pursuant to this Section shall relieve any defaulting Initial
Purchaser from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement, either the Representative(s) or the Company shall have the
right to postpone the Closing Time for a period not exceeding seven days in
order to effect any required changes in the Offering Memorandum or in any other
documents or arrangement.
SECTION 12 NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to the
Initial Purchasers shall be directed to the Representative(s) at North Tower,
World Financial Center, New York, New York 10281-11201, attention of Marcey
Becker, with a courtesy copy to Malcolm I. Ross, Baker & McKenzie, 805 Third
Avenue, New York, New York 10022; notices to the Company shall be directed to it
at 7337 South Revere Parkway, Englewood, Colorado 80112-3931, attention of
Joseph D'Angelo, with a courtesy copy to John Denniston, Brobeck Phleger &
Harrison LLP, 550 West "C" Street, Suite 1300, San Diego, California 92101.
SECTION 13 PARTIES. This Agreement shall inure to the benefit of
and be binding upon the Initial Purchasers and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Initial Purchasers and the Company and their respective successors and the
controlling persons and officers and directors referred to in Sections 7 and 8
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the Initial Purchasers and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities
from any Initial Purchaser shall be deemed to be a successor by reason merely of
such purchase.
SECTION 14 GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15 EFFECT OF HEADINGS. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
[signature page follows]
24
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Initial Purchasers and the Company in accordance with its terms.
Very truly yours,
RHYTHMS NETCONNECTIONS, INC.
By /s/ Catherine M. Hapka
-------------------------------------------
Catherine Hapka
Chief Executive Officer & President
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By /s/ Marcy Becker
----------------------------------------
Authorized Signatory
For themselves and as Representatives of the other Initial Purchasers named in
Schedule A hereto.
25
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Quantity of
Name of Initial Purchaser Securities
------------------------- -----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated .......... 188,500
Donaldson, Lufkin & Jenrette Securities Corporation ......... 101,500
----------
Total ....................................................... 290,000
----------
----------
</TABLE>
Sch A - 1
<PAGE>
SCHEDULE B
RHYTHMS NETCONNECTIONS, INC.
290,000 Units consisting of 13 1/2% Senior Discount Notes due 2008 and Warrants
1. The initial public offering price of the Securities shall be
51.85% of the principal amount at maturity ($290,000,000) of the Notes included
therein.
2. The purchase price to be paid by the Initial Purchasers for the
Securities shall be 50.03525% of the principal amount at maturity of the Notes
included therein.
3. The interest rate on the Notes shall be 13 1/2% per annum
commencing May 15, 2003.
4. Each Unit shall contain $1,000 in principal amount at maturity
of Notes and four Warrants to purchase 1.7 shares of the Company's common stock
at $0.01 per share.
5. The further terms and conditions of the Securities are as set
forth in the Offering Memorandum.
Sch B - 1
<PAGE>
Exhibit A-1
FORM OF OPINION OF COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(i)
[Form of Brobeck Phleger opinion follows]
A - 1 - 1
<PAGE>
May , 1998
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
as Representative(s) of the Several Initial Purchasers
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
We have acted as counsel to Rhythms NetConnections Inc., a
Delaware corporation (the "Company") in connection with the issuance and sale by
the Company of Units (the "Offering") consisting of _____% Senior Discount Notes
due 2008 (the "Notes") and Warrants to purchase up to __________ shares of the
Company's Common Stock (the "Warrants") with gross proceeds in the amount of
$125,000,000 (collectively, the "Units"), pursuant to that certain Purchase
Agreement dated April __, 1998 (the "Purchase Agreement"), among the Company and
you , as the Representatives of the Initial Purchasers. This opinion is being
rendered to you pursuant to Section 5(a)(i) of the Purchase Agreement.
Capitalized terms used herein and not otherwise defined have the respective
meanings set forth in the Purchase Agreement.
In our capacity as counsel to the Company in connection with the
transaction contemplated by the Purchase Agreement, we have examined, among
other things, originals, or copies identified to our satisfaction as being true
copies, of the following:
(i) The Preliminary Offering Memorandum dated April
9, 1998 (the "Preliminary Offering Memorandum");
(ii) The final Offering Memorandum dated __________,
1998 (the "Offering Memorandum");
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Securities Corporation
(iii) The Certificates of Incorporation of the Company and ACI
Corp., a Delaware corporation ("ACI Corp. -- Delaware") and ACI Corp. --
Virginia, a Virginia corporation ("ACI Corp. -- Virginia") (each of ACI Corp. --
Delaware and ACI Corp. -- Virginia, a "Designated Subsidiary"), including all
amendments thereto, as in effect at the date hereof;
(iv) The Bylaws of the Company and each Designated
Subsidiary, including all amendments thereto, as in effect at the date hereof;
(v) Resolutions of the Board of Directors of the Company
adopted at a telephonic meeting of the Board held on March 27, 1998,
authorizing the issuance and sale of the Units, the preparation of the
Preliminary Offering Memorandum and Offering Memorandum and other related
actions with regard thereto;
(vi) Resolutions of the Pricing Committee of the Board of
Directors of the Company adopted at a telephonic meeting held on __________,
1998, authorizing the pricing of the Notes and other final terms of the issuance
and sale of the Units;
(vii) The Purchase Agreement;
(viii) The forms of the certificates representing the Notes and
Warrants;
(ix) The certificate dated the date hereof of the President
and Chief Financial Officer of the Company, delivered to you pursuant to Section
5(c) of the Purchase Agreement;
(x) The Indenture (the "Indenture"), dated the date
hereof, by and between the Company and State Street Bank and Trust Company of
California, N.A. (the "Trustee");
(xi) The Warrant Agreement (the "Warrant Agreement"),
dated as of the date hereof, by and between the Company and State Street Bank
and Trust Company of California (the "Warrant Agent").
(xii) The Officers' Certificate attached hereto as EXHIBIT A
(the "Officers' Certificate"); and
(xiii) The opinion of _________________ dated as of the date
hereof (the "_________________ Opinion").
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Donaldson, Lufkin & Jenrette Page 3
Securities Corporation
In addition, we have obtained from public officials and from officers
and other representatives of the Company such other certificates and assurances
as we consider necessary for purposes of this opinion. In our examination of
documents, we have assumed, without independent verification, the legal capacity
of all natural persons, that the signatures on all documents examined by us are
genuine, the authenticity of all documents submitted to us as originals, and the
conformity to original documents of all documents submitted to us as copies.
Regarding documents executed by parties other than the Company, we have assumed
(i) that each such other party (A) properly signed such documents (and that such
signatures are genuine) and (B) had the power to enter into and perform all of
its obligations thereunder, and (ii) that such documents constitute the legal,
valid, binding and enforceable obligations of such party, which assumptions we
have not independently verified. Specifically and without limiting the
generality of the foregoing, we have assumed that the certificates representing
the Notes and the Warrants have been executed for delivery by authorized
officers of the Trustee and Warrant Agent, respectively.
As used in this opinion, the expression "to our knowledge" and "known to
us" with reference to matters of fact means that after considering the actual
knowledge of those attorneys in our firm who have given substantive attention to
this matter for the Company, but not including any constructive or imputed
notice of any information, we find no reason to believe that the opinions
expressed herein are factually incorrect. Beyond that, we have made
no independent factual investigation for the purpose of rendering an opinion
with respect to such matters except as otherwise expressly specified in this
opinion.
Except as provided in the following sentence, this opinion relates
solely to the laws of the State of California, the laws of the State of New
York, the Delaware General Corporation Law, the Federal securities laws of the
United States, and the Trust Indenture Act of 1939 (the "TIA"), and we express
no opinion with respect to the effect or applicability of any laws in other
areas or of other jurisdictions. To the extent that the matters addressed in
numbered paragraphs 2, 5, 11 and 16 below involve the laws of the State of
Virginia, we have relied with your and their consent, solely on the
_____________ Opinion, without independently investigating or considering any of
the matters covered thereby.
For purposes of the matters addressed in numbered paragraph 1 below
relating to the valid existence and good standing of the Company under the
Delaware General Corporate Law, we have relied, with your consent, solely upon
the Certificate of Good Standing dated _____________ , 1998, received from the
Secretary of State of the State of Delaware, without further investigation.
For purposes of the matters addressed in numbered paragraph 2 below
relating to the valid existence and good standing of ACI Corp. -- Delaware under
the Delaware General
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Merrill Lynch & Co. May __, 1998
Donaldson, Lufkin & Jenrette Page 4
Securities Corporation
Corporate Law, we have relied, with your consent, solely upon the Certificate of
Good Standing dated _____________, 1998, received from the Secretary of State of
the State of Delaware, without further investigation.
For purposes of the matters addressed in numbered paragraph 3 below
relating to the qualification of each of the Company and ACI Corp. -- Delaware
to transact business as a foreign corporation in certain jurisdictions and their
good standing therein, we have relied, with your consent, solely upon (i) the
representations of the Company set forth in the Officers' Certificate that the
only jurisdictions in which the real and personal property or assets or
business conducted by the Company and ACI Corp. -- Delaware are located include:
California and Colorado, and (ii) the Certificates of Qualification and Good
Standing of the Secretaries of State of the States of California (dated
_____________, 1998) and Colorado (dated _____________, 1998) without further
investigation.
For purposes of the matters addressed in paragraph 12 below, we have
assumed that the Initial Purchasers are qualified institutional buyers (as
defined in the Purchase Agreement), and we have relied, with your consent, upon
the representations, warranties, covenants and agreements of the Company in the
Purchase Agreement, the covenants and agreements of the Initial Purchasers in
the Purchase Agreement and on the accuracy of the disclosure in the Offering
Memorandum under the caption "Plan of Distribution" and "Notice to Investors,"
in each case without independent verification. In addition, we express no
opinion herein as to any sale of the Units, Notes and/or Warrants subsequent to
the initial resales thereof by the Initial Purchasers to the Subsequent
Purchasers.
Based upon and subject to the foregoing and the other qualifications and
conditions set forth herein, we are of the opinion that:
1. The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware. The Company has the corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the Offering
Memorandum and to enter into and perform its obligations under the Purchase
Agreement.
2. Each Designated Subsidiary has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Offering Memorandum.
3. The Company is duly qualified and is in good standing as
a foreign corporation in California and Colorado. ACI Corp. -- Delaware is duly
qualified and is in good standing as a foreign corporation in California and
Colorado.
<PAGE>
Merrill Lynch & Co. May __, 1998
Donaldson, Lufkin & Jenrette Page 5
Securities Corporation
4. To our knowledge, the Designated Subsidiaries are the
Company's only subsidiaries.
5. The Company has ______________ shares of Common Stock
authorized and _____ shares of Preferred Stock authorized. To our knowledge,
the company has ______ of Common Stock issued and outstanding and _______ shares
of Preferred Stock issued and outstanding. All of the issued and outstanding
shares of capital stock of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, and, to our knowledge, were not
issued in violation of any preemptive or similar right. All of the issued and
outstanding shares of capital stock of each Designated Subsidiary have been duly
authorized and validly issued and are fully paid and non-assessable, and, to our
knowledge, are owned by the Company. To our knowledge and based solely on our
review of : (i) the representations of the Company set forth in the Officers'
Certificate, (ii) UCC searches in the States of California, Colorado, Delaware
and Virginia, and (iii) original stock certificate No. __________ representing
_____ shares of Common Stock of ACI Corp. -- Delaware, and original stock
certificate No. __________ representing _____ shares of Common Stock of ACI
Corp. -- Virginia, both of which are in the Company's possession, and the stock
ledgers of the Designated Subsidiaries, the issued and outstanding shares of
capital stock of each Designated Subsidiary owned by the Company are free and
clear of any security interest, mortgage, pledge, lien, encumbrance, claim or
equity.
6. The shares of Common Stock issuable upon exercise of the
Warrants have been duly authorized, and, when issued and delivered against
payment therefor in accordance with the terms of the Warrants and Warrant
Agreement, will be validly issued, fully paid and nonassessable.
7. The Purchase Agreement has been duly authorized,
executed and delivered by the Company.
8. The certificate representing the Notes delivered to the
Trustee is in the form contemplated by the Indenture and the certificate
representing the Warrants delivered to the Warrant Agent is the form
contemplated by the Warrant Agreement. The Notes and the Warrants have been
duly authorized by the Company and, when the Notes and Warrants are executed and
authenticated in accordance with the provisions of the Indenture and
Warrant Agreement, respectively, and delivered to and paid for by the Initial
Purchasers in accordance with the terms of the Purchase Agreement will
<PAGE>
Merrill Lynch & Co. May __, 1998
Donaldson, Lufkin & Jenrette Page 6
Securities Corporation
be valid and binding obligations of the Company, enforceable against the Company
in accordance with their respective terms.
9. The Indenture and the Warrant Agreement have been duly
authorized, executed and delivered by the Company and constitute the valid and
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms.
10. To our knowledge, except as set forth in the Offering
Memorandum, there are no legal or governmental proceedings, actions, suits,
inquiries, or investigations pending or threatened against the Company or the
Designated Subsidiaries, or to which the property of the Company or any
Designated Subsidiary is subject, before or brought by any court or governmental
agency or body, which might reasonably be expected to result in a Material
Adverse Effect on the consummation of the transactions contemplated in the
Purchase Agreement or the performance by the Company of its obligations
thereunder or the issuance and sale of the Units contemplated by the Offering
Memorandum.
11. No authorization, approval, consent or order of, or
qualification with, any governmental authority or agency having jurisdiction
over the Company (other than such as may be required under the applicable
securities or "blue sky" laws of the various jurisdictions in which the Units
will be offered or sold, and, with respect to the Exchange Notes (as defined in
the Notes Registration Rights Agreement dated as of the date hereof between the
Company and you), the Securities Act of 1933, as amended (the "Securities Act"),
and the TIA as to which we need express no opinion) is required in connection
with the due authorization, execution and delivery of the Purchase Agreement or
the due execution, delivery or performance of the Indenture and the Warrant
Agreement by the Company or the compliance by the Company with all of the
provisions thereof and the consummation of the transactions contemplated
thereby. The execution, delivery and performance of the Purchase Agreement, the
DTC Agreement, the Indenture, the Warrant Agreement and the Units and the
consummation of the transactions contemplated in the Purchase Agreement, the
description of the "Use of Proceeds" set forth in the Offering Memorandum, and
compliance by the Company with its obligations under the Purchase Agreement, the
Indenture, the Warrant Agreement and the Units will not, whether with or without
the giving of notice or lapse of time or both, conflict with or constitute a
breach of, or default or Repayment Event under or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company or any Designated Subsidiary pursuant to any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or any other
agreement or instrument material to the Company and the Designated
Subsidiaries, taken as a whole, (as identified by the Company in Schedule A to
the Officers' Certificate), nor will such action conflict with or constitute a
breach of any of the terms or
<PAGE>
Merrill Lynch & Co. May __, 1998
Donaldson, Lufkin & Jenrette Page 7
Securities Corporation
provisions of, or a default under, the Certificates of incorporation and Bylaws
of the Company and the Designated Subsidiaries, or any applicable law, statute,
rule, regulation, judgment, order, writ or decree, known to us, of any
government, government instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any Designated Subsidiary or any of their
respective properties, assets or operations. With respect to the opinion set
forth above in this numbered paragraph 11 regarding the description of the "Use
of Proceeds," without limiting the generality of the other qualifications and
conditions set forth herein, this firm is not opining on or providing any
guarantee regarding how or if the Company will actually use any of the net
proceeds from the Offering.
12. It is not necessary in connection with the offer, sale and
delivery of the Securities to the Initial Purchasers in the manner contemplated
by the Purchase Agreement or in connection with sales from the Initial
Purchasers to the Subsequent Purchasers in the manner contemplated by the
Purchase Agreement and the Offering Memorandum to register the Securities under
the Securities Act or to qualify the Indenture under the TIA.
13. The statements in the Offering Memorandum under the captions
"Description of the Units," "Description of the Notes," "Description of the
Warrants," and "Description of Capital Stock" insofar as such statements
constitute summaries of the legal matters and documents referred to therein,
fairly present, in all material respects, such legal matters and documents.
14. The statements in the Offering Memorandum under the caption
"Certain Federal Income Tax Considerations" insofar as such statements
constitute a summary of certain federal income tax laws referred to therein,
fairly present, in all material respects, such federal income tax laws.
15. To our knowledge, assuming the Offering Memorandum was a
prospectus included in a Registration Statement on Form S-1, there are no
contracts, indentures, mortgages, loan agreements, notes, leases, or other
instruments that are required to be described in the Offering Memorandum that
are not so described, and the descriptions thereof are accurate in all material
respects.
16. Each of the past corporate actions listed on Exhibit B hereto
(which includes all material corporate transactions disclosed in the Officers'
Certificate or otherwise known to us) have been duly authorized by the Company
and the appropriate Designated Subsidiary, as the case may be. To our knowledge
and based solely on our review of the Officers' Certificate and other
certificates attached hereto as Exhibit C received from Chief Executive Officer
and President of the Designated Subsidiaries , no default by the Company or any
Designated Subsidiary that would have a Material Adverse Effect exists
<PAGE>
Merrill Lynch & Co. May __, 1998
Donaldson, Lufkin & Jenrette Page 8
Securities Corporation
in the due performance or observance of any material obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument material to the Company
and the Designated Subsidiaries, taken as a whole, as identified as items 1
through 11 on Schedule A to the Officers' Certificate. Notwithstanding anything
else set forth in this opinion and without limiting the generality of the other
qualifications and conditions set forth herein, the scope of the opinions set
forth in this numbered paragraph 16 do include any actions or inactions by the
Company or any Designated Subsidiary after the Closing Time.
In addition, we participated in conferences with certain officers and
other representatives of the Company, its regulatory counsel, its independent
public accountants, and with you and your counsel at which the contents of the
Offering Memorandum and related matters were discussed. We are not, however,
passing upon, and do not assume any responsibility for, and we have not
independently checked or verified the accuracy, completeness or fairness of the
information contained in the Offering Memorandum. In addition we are not
experts on issues related to patents, the FCC, state regulations applicable to
intrastate and interstate communications, the Investment Company Act of 1940,
the Telecommunications Act of 1996, the Public Utility Holding Company Act of
1935, and the other matters being opined on by Bloomenfeld & Cohen and Hale and
Dorr as required by Section 5(a)(ii) and (iii) of the Purchase Agreement, and,
without limiting the generality of the other qualifications and conditions set
forth herein, we are not passing upon, and do not assume any responsibility for,
and we have not independently checked or verified, the accuracy, completeness or
fairness of the information contained in the Offering Memorandum with respect to
such issues.
We may state, however, that, based upon our participation as described
in the preceding paragraph, we confirm that we have no reason to believe that
(other than the financial statements, including the notes and schedules thereto,
and the other financial and statistical data included therein, as to which we
express no belief), the Offering Memorandum contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
Our opinions in numbered paragraph 11 above with respect to laws
referred to therein are limited to laws normally applicable to transactions of
the type contemplated in the Purchase Agreement, Indenture and Warrant Agreement
and do not extend to licenses, permits and approvals necessary for the conduct
of the Company's business. In addition and without limiting the generality of
the previous sentence, we express no opinion herein with respect to the effect
of any environmental law, any state or federal antitrust law or any local law.
<PAGE>
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Donaldson, Lufkin & Jenrette Page 9
Securities Corporation
The opinions set forth above are also subject to the following
qualifications, assumptions, limitations and exceptions:
(a) The enforceability of the obligations of the Company under the
Indenture, Warrant Agreement, Notes and Warrants (the "Operative Documents") may
be subject to or limited by (i) bankruptcy, insolvency, reorganization,
arrangement, moratorium, fraudulent transfer and other similar laws affecting
the rights of creditors generally; and (ii) general equitable principles
(whether relief is sought in a proceeding at law or in equity), including,
without limitation, concepts of materiality, reasonableness, good faith, and
fair dealing.
(b) We express no opinion as to provisions, if any, of the Operative
Documents, purporting to establish an evidentiary standard or to authorize
conclusive determinations by any party thereto or any other person or allowing
any party thereto or any other person to make determinations in its sole
discretion.
(c) We also express no opinion as to:
(i) the enforceability of provisions, if any, of the
Operative Documents, pursuant to which the Company agrees to make payments
without set-off, defense or counterclaim;
(ii) remedial provisions, if any, of the Operative Documents,
including, without limitation, certain of the waivers therein, which purport to
permit the Initial Purchasers or any other person to exercise remedies with
respect to the Company other than in compliance with applicable laws;
(iii) the enforceability of provisions relating to
indemnification, contribution or exculpation, to the extent any such provision
is contrary to public policy or prohibited by law (including, without
limitation, federal and state securities laws);
(iv) provisions, if any, providing for the exclusive
jurisdiction of a particular court or purporting to waive rights to trial by
jury, service of process or objections to the laying of venue or to forum on the
basis of forum non conveniens, in connection with any litigation arising out of
or pertaining to the Operative Documents;
(v) provisions, if any, contained in the Operative Documents
purporting to waive either illegality as a defense to the performance of
contract obligations or any other defense to such performance which cannot, as a
matter of law, be effectively waived;
<PAGE>
Merrill Lynch & Co. May __, 1998
Donaldson, Lufkin & Jenrette Page 10
Securities Corporation
(vi) provisions, if any, of the Operative Documents,
permitting modification thereof only by means of an agreement in writing signed
by the parties thereto;
(vii) provisions, if any, of the Operative Documents,
requiring payment of attorneys' fees, except to the extent a court determines
such fees to be reasonable;
(viii) the effect of the law of any jurisdiction other than the
State of New York which limits the rates of interest legally chargeable or
collectible; and
(ix) provisions of the Operative Documents, if any, to the
extent that they purport to exclude conflict of law principles under New York
law.
This opinion is furnished by us as counsel to the Company, to you, the
Representatives of the Initial Purchasers, in connection with the transactions
contemplated by the Purchase Agreement, and is solely for the benefit of the
Initial Purchasers and may not be delivered to, quoted or relied upon by any
other person, or for any other purpose, without our express prior written
consent. This opinion is effective as of the date hereof, and we undertake no
obligation to update or otherwise supplement this opinion in the future for any
reason. Our opinion is expressly limited to the matters set forth above and we
render no opinion, whether by implication or otherwise, as to any other matters
relating to the Company.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
EXHIBIT A
Rhythms NetConnections Inc.
ACI Corp.
ACI Corp.--Virginia
OFFICERS' CERTIFICATE
To: Brobeck, Phleger & Harrison LLP
The undersigned, Joseph R. D'Angelo, Chief Financial Officer of Rhythms
NetConnections Inc., a Delaware corporation (the "Company") and Catherine M.
Hapka, Chief Executive Officer and President of ACI Corp., a Delaware
corporation ("ACI Corp. -- Delaware") and ACI Corp. -- Virginia, a Virginia
corporation (collectively, the "Designated Subsidiaries"), hereby certify as
officers of and on behalf of the Company and each Designated Subsidiary,
respectively, that:
1. The representations and warranties of the Company
contained in the Purchase Agreement dated as of April ______, 1998, among the
Company and Merrill Lynch & Co., Merrill, Lynch, Pierce, Fenner & Smith
Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation, are true
and correct on and as of the date hereof.
2. All tax returns and payments due and owing with respect
to the Company and each Designated Subsidiary have been filed with or paid to
the proper authorities in the States of California, Colorado, Delaware and
Virginia.
3. To my knowledge, no authorization, approval, consent or
order of, or qualification with, any governmental authority or agency having
jurisdiction over the Company (other than such as may be required under the
applicable securities or "blue sky" laws of the various jurisdictions in which
the Units will be offered or sold, and, with respect to the New Senior Notes,
the Securities Act of 1933, as amended, and the TIA) is required in connection
with the due authorization, execution and delivery of the Purchase Agreement or
the due execution, delivery or performance of the Indenture and the Warrant
Agreement by the Company or the compliance by the Company with all of the
provisions thereof and the consummation of the transactions contemplated
thereby. To my knowledge, the execution, delivery and performance of the
Purchase Agreement, the Indenture, the Warrant Agreement and the Units, and the
consummation of the transactions contemplated in the Purchase Agreement, the
description of the "Use of Proceeds" set forth in the Offering Memorandum,
and compliance by the Company with its obligations under the Purchase Agreement,
the Indenture, the Warrant Agreement and the Units will not, whether with or
without the giving of notice or lapse of time or both, conflict with or
constitute a breach of, or default or Repayment Event under or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any Designated Subsidiary pursuant to any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note,
1.
<PAGE>
lease or any other agreement or instrument material to the Company and the
Designated Subsidiaries, taken as a whole, as identified on Schedule A hereto,
nor will such action conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the Certificates of Incorporations and Bylaws
of the Company and the Designated Subsidiaries, or any applicable law, statute,
rule, regulation, judgment, order, writ or decree, known to us, of any
government, government instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any Designated Subsidiary or any of their
respective properties, assets or operations. The Company and each Designated
Subsidiary have made available to Brobeck, Phleger & Harrison LLP copies of all
agreements listed in Schedule A hereto, and none of the foregoing has been
amended or modified from the form so provided.
4. Except as set forth in the Offering Memorandum, there
are no legal or governmental proceedings, actions, suits, inquiries, or
investigations pending or threatened against the Company or the Designated
Subsidiaries, or to which the property of the Company or any Designated
Subsidiary is subject, before or brought by any court or governmental agency or
body, which might reasonably be expected to result in a Material Adverse Effect
on the consummation of the transactions contemplated in the Purchase Agreement
or the performance by the Company of its obligations thereunder or the
transactions contemplated by the Offering Memorandum.
5. The only jurisdictions in which any material real and
personal property or material assets or business conducted by the Company or ACI
Corp. -- Delaware are located are California and Colorado.
6. The Designated Subsidiaries are the Company's only
subsidiaries.
7. The authorized, issued and outstanding capital stock of
the Company as of December 31, 1997, is as set forth under the heading "Actual"
under the caption "Capitalization" in the Offering Memorandum. All of the
issued and outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable, and were not
issued in violation of any preemptive or similar right. All of the issued and
outstanding shares of capital stock of each Designated Subsidiary have been duly
authorized and validly issued and are fully paid and non-assessable, and, are
owned by the Company. The issued and outstanding shares of capital stock of
each Designated Subsidiary are free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity.
8. All material agreements of the Company have been
described in the Offering Memorandum.
9. No default by the Company or any Designated Subsidiary
that would have a Material Adverse Effect exists in the due performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement, note, lease or
other agreement or instrument material to the
2.
<PAGE>
Company and the Designated Subsidiaries, taken as a whole, identified as items 1
through 11 on Schedule A hereto.
This Certificate is made and delivered by the undersigned to permit you
to deliver your legal opinion as required pursuant to Section 5(a)(i) of the
Purchase Agreement. Capitalized terms not otherwise defined herein shall have
the meanings given to such terms in the Purchase Agreement.
IN WITNESS WHEREOF, the undersigned officer has signed this Certificate
as of the ____ day of April, 1998.
--------------------------------------
Catherine M. Hapka,
Chief Executive Officer and President
ACI Corp.
ACI Corp. -- Virginia
--------------------------------------
Joseph R. D'Angelo,
Chief Financial Officer
Rhythms NetConnections Inc.
3.
<PAGE>
SCHEDULE A
to Officer's Certificate
RHYTHMS NETCONNECTIONS INC.
LIST OF MATERIAL AGREEMENTS
1. QuickStart Loan and Security Agreement between Rhythms and Silicon Valley
Bank dated October 29, 1997 ($l,000,000 credit line).
2. Master Lease Agreement No. 1642 and Addendum thereto between Rhythms and
Sun Financial Group, Inc. dated November 19, 1997. ($2,000,000 data
communication equipment).
3. [Equipment lease financing with GATX Capital ($32.5 million lease facility
currently being negotiated) -- will not be covered in opinion if not
finalized.]
4. Preferred stock investment documents:
a. Series A Preferred Stock Purchase Agreement;
b. Series B Preferred Stock Purchase Agreement;
c. Amended and Restated Investors' Rights Agreement (pages 52, 98). bph
d. Voting Agreement; and
e. Voting Trust Agreement (page 98).
8. Employment agreement with Catherine Hapka.
9. Employment agreement with James Greenberg.
10. Employment agreement with Rand Kennedy.
11. Employment agreement with Jeffrey Blumenfeld.
12. Interconnection Agreement between Accelerated Connections, Inc. and Pacific
Bell dated July 1997.
A-1
<PAGE>
RHYTHM NETCONNECTIONS INC.
List of Material Events
1. Chronology of Charter:
a. Incorporation in State of Delaware on February 27, 1997 as
"Accelerated Connections, Inc."
b. Certificate of Amendment of Certificate of Incorporation filed May 21,
1997, increasing number of authorized shares of Common Stock. (See
Items 4 and 5 below)
c. Restated Certificate of Incorporation filed July 3, 1997 authorizing
Series A Preferred Stock, and setting forth rights, preferences and
privileges of same. (See Items 7 and 8 below)
d. Certificate of Correction of Restated Certificate of Incorporation
filed July 24, 1997.
e. Certificate of Amendment of Restated Certificate of Incorporation
filed September 12, 1997, changing the corporate name from Accelerated
Connections Inc. to Rhythms NetConnections Inc. (See Items 9 and 10
below)
f. Restated Certificate of Incorporation filed March 6, 1998, authorizing
Series B Preferred Stock and setting forth rights, preferences and
privileges of same. See Items 15 and 16 below)
2. Action by Written Consent of Incorporator dated February 27, 1997, electing
as directors of the corporation Bill Stensrud and Thomas Clancy.
3. Minutes of Action of Board of Directors dated February 27, 1997:
a. Establishes principal place of business.
b. Establishes registered office in state of Delaware.
c. Establishes registered agent.
d. Adopts bylaws of the corporation.
<PAGE>
e. Elects Bill Stensrud President and CEO, Thomas Clancy as Vice
President Operations, and Andrea Frenz as Treasurer and Secretary.
f. Authorizes filing of qualification to do business in California.
g. Authorizes filing of SS-4 form with the IRS.
h. Authorizes sale of shares of common stock as follows:
Enterprise Partners III, L.P. 920,000 shares
Enterprise Partners III Associates, L.P. 80,000 shares
4. Unanimous Written Consent of the Board of Directors dated May 14, 1997:
a. Authorizing Certificate of Amendment of Certificate of Incorporation,
increasing the number of shares of common stock.
b. Electing Craig Andrews as Secretary to replace Andrea Frenz.
5. Written Consent of the Stockholders dated May 14, 1997, authorizing
Certificate of Amendment of Certificate of Incorporation increasing the
number of shares of capital stock.
6. Unanimous Written Consent of the Board of Directors dated May 22, 1997,
authorizing sale of shares of common stock as follows:
Enterprise Partners IV L.P. 500,000
7. Unanimous Written Consent of the Board of Directors dated July l, 1997:
a. Electing Catherine Hapka as President and Chief Executive Officer to
replace Bill Stensrud, effective as of June 9, 1997.
b. Authorizing Restatement of Certificate of Incorporation to (i) effect
a stock split, (ii) increase number of shares of authorized common
stock, (iii) authorize shares of Series A Preferred Stock, (iv) set
forth the rights, preferences and privileges of the Series A Preferred
Stock.
c. Authorizing issuance of Series A Preferred Stock pursuant to Series A
Preferred Stock Purchase Agreement and collateral documents.
2
<PAGE>
d. Bylaws Amendment inserting a right of first refusal on all outstanding
shares of the corporation's capital stock and amending provision
relating to the determination of the size of the board of directors.
e. Authorizing adoption of 1997 Stock Option Stock Issuance Plan.
f. Authorizing grant of options of 1,441,177 shares of common stock to
Catherine Hapka.
g. Accepting resignation of Thomas Clancy as a director and designating
the size of the board at 6.
8. Written Consent of the Stockholders dated July 1, 1997:
a. Authorizing Restatement of Certificate of Incorporation to (i) effect
a stock split, (ii) increase number of shares of authorized common
stock, (iii) authorize shares of Series A Preferred stock, (iv) set
forth the rights, preferences and privileges of the Series A Preferred
stock.
b. Authorizing Bylaws Amendment inserting a right of first refusal on all
outstanding shares of the corporation's capital stock and amending
provision relating to the determination of the size of the board of
directors.
c. Electing to the Board of Directors Catherine Hapka, Kevin Compton,
Keith Geeslin and John Walecka.
d. Adopting 1997 Stock Option Stock Issuance Plan.
9. Written Consent of the Stockholders dated August 15, 1997, authorizing
Certificate of Amendment of Restated Certificate of Incorporation changing
the corporate name from Accelerated Connections, Inc. to Rhythms
NetConnections Inc.
10. Minutes of the Meeting of the Board of Directors dated August 15, 1997:
a. Board adopted resolution amending Restated Articles of Incorporation
to change the corporate name.
b. Board adopted resolution to enter into banking relationship at Bank of
America, Silicon Valley Bank, Sanwa Bank and Paine Webber.
c. Board appointed Eric Geis as acting Secretary.
d. Board adopted the Company's form of proprietary information agreement.
3
<PAGE>
e. Board adopted the 1997 Stock Issuance Plan and approved the
reservation of 4,863,971 shares of common stock for purchase under the
Plan.
f. Board approved the granting of stock options to certain employees in
the aggregate amount of 2,259,931 shares of common stock.
g. Board approved the issuance of shares of approved Series A Preferred
stock to "friends and family" pursuant to Series A Preferred Stock
Purchase Agreement.
11. Minutes of the Meeting of the Board of Directors dated October 30, 1997:
a. Board authorized granting of stock options to certain employees in the
aggregate amount of 157,450 shares of common stock.
12. Minutes of the Meeting of the Board of Directors dated December 12, 1997:
a. Board ratified Price Waterhouse LLP as the company's independent
auditors for 1998.
b. Board approved revised "friends and family" allocation schedule.
13. Minutes of the Meeting of the Board of Directors dated January 28, 1998:
14. Minutes of the Meeting of the Board of Directors dated February 27, 1998:
a. Board ratified general release and waiver of all claims between the
company and William Cobb, a former employee.
b. Board approved loans made by the Company to Frederick Smith and Robert
Masitti, two of the Company's employees.
c. Board approved grant of stock options to certain employees, in the
aggregate amount of 106,700 shares of common stock.
d. Board appointed John Denniston Secretary of the Company to replace
Craig Andrews.
e. Board ratified formation of ACI Corp., a wholly-owned Delaware
subsidiary of the Company.
f. Board approved certain bonus payments to certain employees in
connection with services rendered during 1997.
4
<PAGE>
g. Board approved sale of 365,094 Series A Preferred stock to Catherine
Hapka pursuant to the terms of her Employment Agreement at a purchase
price per share of $.80
h. Board authorized establishing a compensation committee with John
Walecka and Kevin Compton as members.
i. Board established an audit committee with Kevin Compton and John
Walecka as members.
15. Unanimous Written Consent of the Board of Directors dated March 6, 1998:
a. Authorizes Restated Certificate of Incorporation designating shares of
Series B Preferred Stock and providing for the rights, preferences and
privileges of same.
b. Authorizes issuance of Series B Preferred Stock pursuant to Series B
Preferred Stock Purchase Agreement and collateral documents.
c. Authorizes amendment to Bylaws to increase size of board.
16. Written Consent and Waiver of Stockholders dated March 6, 1998:
a. Approved Restated Certificate of Incorporation designating shares of
Series B Preferred Stock and providing for the rights, preferences and
privileges of same.
b. Approves Series B Preferred Stock financing documents.
c. Approves Amendment to Bylaws to increase size of Board of Directors.
d. Elects Ken Harrison to the Board of Directors.
e. Waiver and Consent:
(1) Series A holders waive rights to notice under Investors
Rights Agreement.
(2) Series A holders consent to amending the prior
Investors Rights Agreement.
(3) Series A holders consent to the registration rights provided
by the Series B Preferred Stock financing.
5
<PAGE>
17. Minutes of Special Telephonic Meeting of the Board of Directors dated
March 27, 1998:
a. Board approved distributing financial projections in connection with
the proposed debt offering.
b. Board authorized participation in road show in connection with
proposed debt offering.
c. Board authorized amendment to Certificate of Incorporation to account
for warrants issued in connection with proposed debt offering.
d. Board authorized the proposed terms of equipment lease financing with
GATX Capital Corporation.
18. Unanimous Written Consent of the Board of Directors dated April __, 1998:
a. Authorizes private placement of units consisting of notes and warrants
in an amount not to exceed $125 million:
(1) Authorizes Offering Memorandum.
(2) Authorizes Purchase Agreement in connection with debt offering.
(3) Authorizes Registration Rights Agreement in connection with debt
offering.
(4) Authorizes Warrant Agreement and Warrant registration rights in
connection with debt offering.
(5) Authorizes Registration Statement in connection with exchange of
the notes.
(6) Authorizes Exchange of Notes for a new issue of debt securities.
(7) Authorizes use of proceeds.
(8) Authorizes State Street Bank as Trustee and as warrant agent in
connection with debt offering.
(9) Authorizes Indenture in connection with debt offering.
6
<PAGE>
b. Approves listing of units on PORTAL market and to be eligible for
trading via Cedel and Euroclear.
c. Approves form of note and authorizes DTC to act as depository.
d. Authorizes blue sky resolutions in connection with debt offering.
e. Authorizes formation of pricing committee in connection with pricing
of debt offering.
f. Appoints Jeff Blumenfeld as agent for service of process in connection
with debt offering.
g. Authorizes company to pay expenses in connection with debt offering.
h. Authorizes formation of ACI Corp. -- Virginia, a Virginia Public
Service Corporation, as a wholly-owned subsidiary of the Company.
i. Authorizes form of indemnification agreement to be entered into with
directors of the Company.
19. Written Consent and Waiver of Stockholders dated April 9, 1998 authorizing
Amendment to Restated Certificate of Incorporation to increase number of
shares as common stock to account for warrants to be issued in connection
with debt offering.
a. Waiver and Consent:
(1) Stockholders waive rights of notice under Investors Rights
Agreement relating to rights of first offer with respect to the
sale of warrants.
(2) Stockholders consent to registration rights be provided to the
purchasers of the units, notes and warrants in connection with
debt offering.
(3) Stockholders waive rights to antidilution protection in
connection with issuance of warrants issued pursuant to the debt
offering.
7
<PAGE>
EXHIBIT C
OTHER OFFICERS' CERTIFICATES
Rhythms NetConnections Inc.
ACI Corp.
ACI Corp. -- Virginia
OFFICER'S CERTIFICATE
To: Brobeck, Phleger & Harrison LLP
I, Jeffrey Blumenfeld, Vice President and General Counsel of Rhythms
NetConnections Inc., a Delaware corporation (the "Company"), hereby certify on
behalf of the Company that:
No default by the Company that would have a Material Adverse Effect exists
in the due performance or observance of any material obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument material to the Company
and the Designated Subsidiaries, taken as a whole, as identified on Schedule A
hereto.
This Certificate is made and delivered by the undersigned to permit you to
deliver your legal opinion as required pursuant to Section 5(a(i) of the
Purchase Agreement. Capitalized terms not otherwise defined herein shall have
the meanings given to such terms
in the Purchase Agreement.
IN WITNESS WHEREOF, the undersigned officer has signed this Certificate
as of the ____ day of April, 1998.
-----------------------------------
Jeffrey Blumenfeld,
Vice President and General Counsel
A-3
<PAGE>
SCHEDULE A
to Officer's Certificate
1. QuickStart Loan and Security Agreement between Rhythms and Silicon Valley
Bank dated October 29, 1997 ($l,000,000 credit line).
2. Master Lease Agreement No. 1642 and Addendum thereto between Rhythms and
Sun Financial Group, Inc. dated November 19, 1997. ($2,000,000 data
communication equipment.)
3. [Equipment lease financing with GATX Capital ($32.5 million lease facility
currently being negotiated) -- will not be covered in opinion if not
finalized.]
4. Preferred stock investment documents:
a. Series A Preferred Stock Purchase Agreement;
b. Series B Preferred Stock Purchase Agreement;
c. Amended and Restated Investors' Rights Agreement (pages 52, 98). bph
d. Voting Agreement; and
e. Voting Trust Agreement (page 98).
8. Employment agreement with Catherine Hapka.
9. Employment agreement with James Greenberg.
10. Employment agreement with Rand Kennedy.
11. Employment agreement with Jeffrey Blumenfeld.
A-4
<PAGE>
Exhibit A-2
FORM OF OPINION OF COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(ii)
[form of Hale and Dorr opinion follows]
A - 2 - 1
<PAGE>
HALE & DORR LLP
Counsellors at Law
60 State Street, Boston, Massachusetts 02109
617-526-6000 - Fax 617-526-5000
May , 1998
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
North Tower
World Financial Center
New York, NY 10281-1209
Gentlemen:
We have acted as Investment Company Act counsel to Rhythms NetConnections,
Inc., a Delaware corporation (the "Company"). We are delivering this opinion in
connection with the issue and sale by the Company and the purchase by the
Initial Purchasers of $125,000,000 aggregate principal amount of the Company's
Units consisting of __% Senior Discount Notes due 2008 and Warrants. The terms
of this issue, sale and purchase are governed by a Purchase Agreement dated
April _____, 1998 (the "Purchase Agreement") among Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Donaldson, Lufkin & Jenrette
Securities Corporation (collectively, the "Representatives") and the Company.
Capitalized terms not otherwise defined in this opinion have the same meanings
as in the Purchase Agreement.
In connection with the opinion expressed below, we have examined (1) the
Purchase Agreement; (2) the Offering Memorandum dated _____, 1998 relating to
the offering of the Units by the Representatives; and (3) such other documents
and records as we deemed necessary to furnish this opinion. In our examination,
we have assumed the authenticity of original documents, the accuracy of all
copies (whether certified or not), the genuineness of all signatures and the
legal capacity of all natural persons executing all documents examined by us.
In rendering this opinion, we have relied, as to all questions of fact
material to this opinion, upon certificates of officers of the Company,
including the certificate (the "Certificate") attached to this opinion as
Exhibit A. We have not undertaken any independent investigation to determine
the existence or absence of such facts, and no inference as to our knowledge of
the existence or absence of such facts should be drawn from the fact of our
representation of the Company.
Washington, DC Boston, MA London, UK*
- --------------------------------------------------------------------------------
HALE AND DORR LLP INCLUDES PROFESSIONAL CORPORATIONS
*BROBECK HALE AND DORR INTERNATIONAL (AN INDEPENDENT JOINT VENTURE LAW FIRM)
<PAGE>
Merrill Lynch & Co. et als
May __, 1998
Page 2
We are opining herein only with respect to the laws of the United States of
America. Accordingly, to the extent that any law of any jurisdiction other than
the federal laws of the United States governs any of the matters as to which we
express an opinion below, we have assumed, without independent investigation,
that the law of such jurisdiction is the same as the federal laws of the United
States.
The opinion set forth below is based on the following factual assumptions.
1. Neither the Company nor any of its majority-owned subsidiaries owns or
proposes to acquire or, after ______, 1998, will own or acquire, investment
securities with a value exceeding 40% of the value of its total assets
(excluding Government securities and cash items, both as defined in the
Certificate) on an unconsolidated basis.
2. The primary business of the Company and its majority-owned
subsidiaries is providing telecommunications services. Each of the Company and
any majority-owned subsidiary is not, and does not hold itself out as being,
engaged primarily, and does not propose to engage primarily, in the business of
investing, reinvesting or trading in securities. Neither the Company nor any of
its majority-owned subsidiaries engages in the business of acquiring control of
other companies primarily for the purpose of profiting from the sale of stock of
such companies.
3. No person owns beneficially, either directly or through one or more
controlled companies, more than 25% of the outstanding voting securities of the
Company or has the contractual or voting power to elect or appoint more than 25%
of the board of directors of the Company.
Based on and subject to the foregoing, it is our opinion that the Company
is not an "investment company" or an entity "controlled" by an "investment
company," as each of these terms is defined in the Investment Company Act of
1940, as amended.
This opinion is based upon currently existing statutes, rules, regulations
and judicial decisions, and we disclaim any obligation to advise you of any
change in any of these sources of law or subsequent legal or factual
developments which might affect any matters or opinions set forth herein. We are
opining only as to the matters expressly set forth herein, and no opinion should
be inferred as to any other matters.
<PAGE>
Merrill Lynch & Co. et als
May __, 1998
Page 3
This opinion is being delivered to you solely for the benefit of the
Representatives and Initial Purchasers, and may not be relied upon by any other
party without our prior written consent.
Very truly yours,
Hale and Dorr LLP
<PAGE>
EXHIBIT A
RHYTHMS NETCONNECTIONS, INC.
OFFICER'S CERTIFICATE RELATING
TO OPINION OF HALE AND DORR LLP
I, the undersigned treasurer/chief financial officer of Rhythms
NetConnections, Inc. (the "Company"), hereby certify on behalf of the Company,
in connection with the opinion of Hale and Dorr LLP dated May _, 1998 and
addressed to Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation , as
follows:
1. Neither the Company nor any of its majority-owned subsidiaries owns,
proposes to acquire or, after ____________, 1998, will own or acquire,
investment securities with a value exceeding 40% of the value of its total
assets (excluding Government securities and cash items) on an unconsolidated
basis. Investment securities include all securities other than Government
securities and securities of majority-owned subsidiaries that are not themselves
investment companies. For this purpose, repurchase agreements, shares of money
market funds, certificates of deposit and cash equivalents are considered
investment securities and are not cash items. Demand deposits are considered
cash items, not investment securities, for this purpose. Government securities
include only those securities issued by the U.S. Treasury, the Government
National Mortgage Association, the Federal National Mortgage Association, the
Resolution Funding Corporation, the Federal Farm Credit Banks or the Student
Loan Marketing Association.
2. The primary business of the Company and its majority-owned
subsidiaries is providing telecommunications services. Each of the Company and
any majority-owned subsidiary is not, and does not hold itself out as being,
engaged primarily, and does not propose to engage primarily, in the business of
investing, reinvesting or trading in securities. Neither the Company nor any of
its majority-owned subsidiaries engages in the business of acquiring control of
other companies primarily for the purpose of profiting from the sale of stock of
such companies
3. No person owns beneficially, either directly or through one or more
controlled companies, more than 25% of the outstanding voting securities of the
Company or has the contractual or voting power to elect or appoint more than 25%
of the board of directors of the Company.
IN WITNESS WHEREOF, the undersigned has executed this certificate on the
_____th day of May 1998.
----------------------------------
Name:
----------------------------
Title: Treasurer/Chief Financial Officer
<PAGE>
Exhibit A-3
FORM OF OPINION OF COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(iii)
[form of Blumenfeld & Cohen opinion follows]
A - 3 - 1
<PAGE>
April 27, 1998
[Letterhead of Blumenfeld & Cohen]
[Closing Date], 1998
MERRILL LYNCH & CO.,
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Donaldson, Lufkin & Jenrette Securities
Corporation
as Representatives of the Initial Purchasers
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Purchase Agreement, dated April , 1998, by and
among Rhythms NetConnections Inc. and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, and Donaldson, Lufkin & Jenrette
Securities Corporation
--------------------------------------------------------
Ladies and Gentlemen:
We are acting as special regulatory counsel to Rhythms NetConnections Inc.,
a Delaware corporation (the "Company"), and its respective direct and indirect
wholly-owned subsidiaries, ACI Corp., a Delaware corporation ("ACI"), and ACI
Corp. - Virginia, a Virginia corporation ("ACI Corp.-Va")(ACI and ACI - Va being
collectively referred to herein as the "Subsidiaries"), in connection with the
Purchase Agreement, dated April , 1998 (the "Agreement"), by and among the
Company and each of you (the "Representatives") and each of the Initial
Purchasers named in Schedule A to the Agreement (collectively, the "Initial
Purchasers"), providing, among other things, for the issue and sale by the
Company and the purchase by the Initial Purchasers of the Company's Units
consisting of % Senior Discount Notes Due 2008 and Warrants. All terms used
herein which are defined in the Agreement shall have the same meanings specified
therein unless otherwise defined herein. This opinion is being delivered to the
Representatives pursuant to Section 5(a) of the Agreement.
We have examined the originals, or certified, conformed or reproduction
copies, of all such records, instruments and documents as we have deemed
relevant or necessary as the basis for the opinions hereinafter expressed. In
all such examinations, we have assumed the genuineness of all signatures on
original or certified copies and the conformity to original or certified copies
of all copies submitted to us as conformed or reproduction copies. As to various
questions of fact relevant to such opinions, we have relied upon certificates of
public officials or representatives of the Company and others.
<PAGE>
Based upon the foregoing, we are of the opinion as follows:
1. We understand, based upon the information set forth in the Offering
Memorandum, that the Company and the Subsidiaries are presently offering
commercial services only in the State of California and, therefore, the
California Public Utilities Commission (the "Commission") is the only state
regulatory commission that can exercise jurisdiction over the present offering
of commercial services by the Company and its Subsidiaries. Appendix A to this
opinion accurately and completely lists all federal, state and municipal
Telecommunications Licenses held by the Company and the Subsidiaries on the date
hereof. The Company and the Subsidiaries have all Telecommunications Licenses
required by the Communications Act, the California Public Utilities Code and the
rules and regulations of the Commission for the provision of telecommunications
services provided by the Company or the Subsidiaries on the date hereof, except
for such Telecommunications Licenses as would not have a Material Adverse Effect
2. The Company and the Subsidiaries are not subject to any pending or, to
our knowledge, threatened complaint, investigation or proceeding before the FCC
or any State Commission or municipality, except for (a) proceedings involving
the licensing of the Subsidiaries to provide telecommunications services not
presently provided by the Subsidiaries on the date hereof in the jurisdiction or
jurisdictions where such licensing proceeding or proceedings are pending on the
date hereof, and (b) advocacy pleadings filed by the Company in opposition of
petitions pending before the FCC.
3. The license set forth in Appendix A hereto (the "License") is (a)
outstanding, and (b) in full force and effect, and is not subject to any
conditions not applicable generally to other licensees (i) holding licenses
comparable to the License and (ii) offering services comparable to those offered
by the Company pursuant to the License.
4. The Company has not, to our knowledge and based upon contacting
officials at the California Public Utilities Commission (the "Commission"),
failed to file with the Commission any reports, tariffs and other documents
required to be filed by the Company on or as of the date hereof under the
Commission's Regulations and the California Public Utilities Code, except for
those reports, tariffs or other documents where the failure to so file would not
result in a Material Adverse Effect.
5. The statements in the Offering Memorandum under the headings "RISK
FACTORS - GOVERNMENT REGULATION" and "BUSINESS - GOVERNMENT REGULATION", insofar
as such statements constitute a summary of the legal matters or proceedings of
the FCC and State Commissions with respect to telecommunications matters
referred to therein, are accurate in all material respects.
6. All tariffs applicable to the Company's local exchange and
interexchange data operations in California (the "Tariffs") are in
full force and effect in accordance with their terms. To our knowledge and
based upon our review with officers of the Company, there is no outstanding
notice of suspension, cancellation or termination or any threatened suspension,
cancellation or termination with respect to any of the Tariffs. The Company
is not subject to any restrictions or conditions applicable to the Tariffs
that limit the operations of the Company (other than restrictions and
conditions generally applicable to persons (i) holding tariffs comparable to
the Tariffs, and (ii) offering data services comparable to those offered by
the Company pursuant to the Tariffs); PROVIDED, HOWEVER, we express no
opinion with respect to the specific pricing and other commercial provisions
set forth in any such Tariffs. Neither the Company nor any of the
Subsidiaries are presently required to file a tariff with the FCC. Based upon
our understanding that the Company and its
2
<PAGE>
Subsidiaries are presently offering commercial services only in the State of
California, no other tariffs are effective or required in states other than the
State of California on and as of the date hereof.
7. There are no consents and approvals of the FCC or the Commission
required for the sale and issuance of the Units to the Initial Purchasers on the
Closing Date.
8. Neither the execution of the Agreement by the Company nor the
performance by the Company of its obligations under the Agreement which are
required to be performed on the Closing Date will violate the Communications Act
or the California Public Utilities Code or the rules and regulations of the
Commission.
9. To our knowledge and based upon our review of available public files
at the FCC and the Commission and our review with officers of the Company, (a)
there is no unsatisfied adverse FCC or Commission order, decree or ruling
outstanding against the Company or the Subsidiaries or the License, (b) neither
the Company nor any Subsidiary is a party to any complaint, disciplinary action
or revocation proceeding at the FCC or the Commission (including complaints,
disciplinary actions or revocation proceedings against other licensees or
applicants); (c) Appendix B hereto lists all applications on behalf of the
Company or the Subsidiaries with respect to any certification, authorization or
franchise that are now pending before the FCC and/or the State Commissions
and/or municipalities, as the case may be, and (d) neither the Company nor any
Subsidiary has been the subject of any final order, decree or ruling of the FCC
or the Commission or any municipality which has (i) denied any application by
the Company or any Subsidiary to obtain a certification, authorization or
franchise, (ii) limited or prohibited any of the Company's or any Subsidiary's
operations as described in the Offering Memorandum and as offered by the Company
or any of the Subsidiaries, respectively, on the date hereof, and/or (iii)
resulted in any monetary fine or forfeiture by the Company or any Subsidiary
which would result in a Material Adverse Effect.
The opinions expressed above are subject to the following qualifications:
we express no opinion herein on (a) any matter other than telecommunications
laws and regulations and proceedings before any governmental entity
administering such laws and regulations, (b) the fairness of any of the
transactions contemplated in the Agreement or the Offering Memorandum, or
(c) except as set forth in Paragraph 5 of this opinion, the accuracy or
completeness of the Offering Memorandum.
We are members of the bars of the District of Columbia and the State of
California and do not hold ourselves out as being conversant with the laws of
any other jurisdiction other than those of the United States of America.
The opinions expressed herein are solely for the benefit of the
Representatives and the Initial Purchasers and may not be delivered to, quoted
or relied upon in any manner or for any purpose by any other person. This
opinion is effective as of the date hereof, and we undertake no obligation to
update or otherwise supplement this opinion in the future for any reason.
Very truly yours,
BLUMENFELD & COHEN
3
<PAGE>
APPENDIX A: LIST OF LICENSES
California PUC Certificate of Public Convenience &
Necessity No. U-5813-C, Decision D.97-07-032
(granted July 16, 1997) authorizing the resale of
local exchange and long distance services
California PUC Certificate of Public Convenience &
Necessity No. U-5813-C, Decision D.97-09-110
(granted September 24, 1997) authorizing the
provision of facilities-based local exchange
services
California PUC Certificate of Public Convenience &
Necessity No. U-5813-C, Decision D.98-02-038
(granted February 4, 1998) authorizing the
provision of facilities-based long distance
services
Schedule Cal. PUC No. 1-T (effective December 24,
1997) tariffing the provision of intrastate
IntraLATA and InterLATA high speed digital
connection service
The foregoing Certificate of Public Convenience and Necessity was issued to the
Company by, and the foregoing Tariff was filed by the Company with, the
Commission.
4
<PAGE>
APPENDIX B: LICENSE APPLICATIONS
ACI Corp. has filed or caused to be filed on its behalf in each of the
State Commissions listed below an appropriate application to obtain
authority to operate as a local exchange and interexchange provider of both
(a) high-speed data services on a facilities and resale basis, and (b)
voice services on a resale basis. In most of these states, ACI Corp. is
seeking authority to offer such services under the name "Accelerated
Connections" or some similar variation thereof.
State Commissions:
-----------------
New York Public Service Commission
New Jersey Board of Public Utilities
Maryland Public Service Commission
Pennsylvania Public Utility Commission
Michigan Public Service Commission
Illinois Commerce Commission
Massachusetts Department of Telecommunications and Energy
California Public Utility Commission
ACI Corp. -- Virginia has filed or caused to be filed on its behalf
with the Virginia State Corporation Commission an appropriate application
to qualify as a public service corporation and to obtain authority to
operate as a local exchange and interexchange provider of both (a)
high-speed data services on a facilities and resale basis, and (b) voice
services on a resale basis.
5
<PAGE>
Exhibit A-4
FORM OF OPINION OF COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(iv)
(i) The Company is not a "holding company" or a "subsidiary company" or an
"affiliate" of a holding company within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
In rendering such opinion, such counsel may rely, as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).
A - 4 - 1
<PAGE>
Exhibit A-5
FORM OF OPINION OF THE COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(v)
[form of General Counsel opinion follows]
A - 5 - 1
<PAGE>
April 27, 1998
[Letterhead of Rhythms NetConnections Inc.]
[Closing Date], 1998
MERRILL LYNCH & CO.,
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Donaldson, Lufkin & Jenrette Securities
Corporation
as Representatives of the Initial Purchasers
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Purchase Agreement, dated April , 1998, by and
among Rhythms NetConnections Inc. and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, and Donaldson, Lufkin & Jenrette
Securities Corporation
--------------------------------------------------
Ladies and Gentlemen:
As Vice President and General Counsel of Rhythms NetConnections Inc., a
Delaware corporation (the "Company"), I am familiar with the Purchase Agreement,
dated April , 1998 (the "Agreement"), by and among the Company and each of you
(the "Representatives") and each of the Initial Purchasers named in Schedule A
to the Agreement (collectively, the "Initial Purchasers"), providing, among
other things, for the issue and sale by the Company and the purchase by the
Initial Purchasers of the Company's Units consisting of % Senior Discount Notes
Due 2008 and Warrants. All terms used herein which are defined in the Agreement
shall have the same meanings specified therein unless otherwise defined herein.
This opinion is being delivered to the Representatives pursuant to Section 5(a)
of the Agreement.
I have examined the originals, or certified, conformed or reproduction
copies, of all such records, instruments and documents as I have deemed relevant
or necessary as the basis for the opinion hereinafter expressed. In all such
examinations, I have assumed the genuineness of all signatures on original or
certified copies and the conformity to original or certified copies of all
copies submitted to me as conformed or reproduction copies. As to various
questions of fact relevant to such opinion, I have relied upon certificates of
public officials or representatives of the Company and others.
Based upon the foregoing, I am of the opinion that, to my knowledge, no
default by the Company or any Designated Subsidiary that would have a Material
Adverse Effect
<PAGE>
exists in the due performance or observance of any material obligation,
agreement, covenant or condition contained in the Interconnection Agreement,
dated July 1997, by and between the Company and Pacific Bell Corporation.
I am a member of the bar of the District of Columbia and do not hold myself
out as being conversant with the laws of any other jurisdiction other than those
of the United States of America.
The opinion expressed herein is solely for the benefit of the
Representatives and the Initial Purchasers and may not be delivered to, quoted
or relied upon in any manner or for any purpose by any other person. This
opinion is effective as of the date hereof, and I undertake no obligation to
update or otherwise supplement this opinion in the future for any reason.
Very truly yours,
Jeffrey Blumenfeld,
Vice President & General Counsel
2
<PAGE>
Exhibit A-6
FORM OF OPINION OF INITIAL PURCHASERS' LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
[form of Baker & McKenzie opinion follows]
A - 6 - 1
<PAGE>
May____, 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
North Tower
World Financial Center
New York, NY 10281-1209
Re: RHYTHMS NETCONNECTIONS, INC.
Ladies and Gentlemen:
We have acted as your counsel in connection with the issuance and sale to
you (the "Initial Purchaser") on the date hereof by Rhythms NetConnections, Inc.
a Delaware corporation (the "Company"), of 290,000 units (the "Units")
consisting of $290,000,000 aggregate principal amount at maturity of 13 1/2%
Senior Discount Notes due 2008 (the "Notes") and warrants (the "Warrants") to
purchase 1,972,000 shares of common stock, par value $0.001 per share, of the
Company (the "Common Stock," and together with the Warrants and Notes, the
"Securities"), in accordance with an exemption from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
as described in the Company's offering memorandum, dated April 28, 1998 (the
"Offering Memorandum"). This opinion is being rendered to you pursuant to
Section 5(b) of the Purchase Agreement, dated April 28, 1998, by and among you
and the Company (the "Purchase Agreement"). Unless otherwise stated herein,
capitalized terms used herein shall have the respective meanings set forth in
the Purchase Agreement.
As such counsel, we have made such legal and factual examinations and
inquiries, including an examination of originals or copies certified or
otherwise identified to our satisfaction of such documents, corporate records
and other instruments, as we have deemed necessary or appropriate for purposes
of this opinion, except where a statement is qualified as to knowledge or
awareness, in which case we have made no or limited inquiry as specified below.
In our examination, we have assumed the genuineness of the signatures,
the authenticity of all documents submitted to us as originals, the conformity
to authentic original documents of all
<PAGE>
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
May __, 1998
Page 2
documents submitted to us as copies and the legal capacity of all individuals
executing those documents.
We have been furnished with, and with your consent have exclusively
relied upon, certificates of officers of the Company and each of the
Subsidiaries with respect to certain factual matters. In addition, we have
obtained and relied upon such certificates and assurances from public officials
as we have deemed necessary.
We are opining herein as to the effect on the subject transaction only of
federal laws of the United States of America (other than the Communications Act
of 1934, as amended, and the rules, regulations, orders or policies promulgated
or adopted by the FCC or any other statute, rule or regulation relating to the
regulation of telecommunications (the "Communications Laws")), the General
Corporation Law of the State of Delaware and the laws of the State of New York,
and we express no opinion with respect to the applicability thereto, or the
effect thereon, of the laws of any other jurisdiction or, in the case of
Delaware, any other laws, or as to the matters of municipal law or the laws of
any local agencies within any state.
Whenever a statement herein is qualified by "to the best of our
knowledge" or a similar phrase, it is intended to indicate that those attorneys
in this firm who have rendered legal services in connection with the above
transaction do not have current knowledge of the inaccuracy of such statement.
However, except as otherwise expressly indicated, we have not undertaken any
independent investigation to determine the accuracy of any such statement, and
no inference that we have any knowledge of any matters pertaining to such
statement should be drawn from our representation of you.
Based upon the foregoing, and subject to the assumptions and
qualifications herein contained, we are of the opinion that, as of the date
hereof:
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the Offering
Memorandum and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Offering Memorandum under the caption
"Description of Capital Stock" (except for
<PAGE>
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
May __, 1998
Page 3
subsequent issuances, if any, pursuant to the Purchase Agreement or pursuant to
reservations, agreements, employee stock option or benefit plans or the exercise
of convertible securities or options referred to in the Offering Memorandum);
the shares of issued and outstanding capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable; to our
knowledge, none of the outstanding shares of capital stock of the Company was
issued in violation of the preemptive or other similar rights of any security
holder of the Company; and the shares of Common Stock issuable upon exercise of
the Warrants in accordance with the terms of the Warrant Agreement will be, when
issued and paid for as set forth in the Warrant Agreement, duly authorized,
validly issued, fully paid and nonassessable.
(iv) Each Designated Subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation and has corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Offering Memorandum, and ACI Corp. is duly qualified as a foreign corporation to
transact business and is in good standing in California and Colorado (officers
of the Company have submitted to us a certificate stating that these
jurisdictions are the only jurisdictions in which the real or personal property
or assets (owned, leased, licensed or used) or businesses conducted by the
Designated Subsidiaries are located); all of the issued and outstanding capital
stock of the Designated Subsidiaries has been duly authorized and validly
issued, is fully paid and nonassessable, and to our knowledge is owned by the
Company directly; and, to our knowledge, the Designated Subsidiaries are the
Company's only subsidiaries; and to our knowledge, all of the issued and
outstanding capital stock of the Designated Subsidiaries is owned by the Company
directly free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity.
(v) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
(vi) The Indenture and the Warrant Agreement have been duly authorized,
executed and delivered by the Company and (assuming the due authorization,
execution and delivery of the Indenture by the Trustee and of the Warrant
Agreement by the Warrant Agent) constitute the valid and binding agreements of
the Company, enforceable against the Company in accordance with their respective
terms, except as the enforcement thereof may be limited by bankruptcy,
insolvency (including, without limitation, all laws relating to fraudulent
transfers), reorganization, moratorium or other similar laws relating to or
affecting enforcement of creditors' rights generally, or by general principles
of equity (regardless of whether enforcement is considered in a proceeding in
equity or at law).
<PAGE>
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
May __, 1998
Page 4
(vii) The Notes are in the form contemplated by the Indenture and the
Warrants are in the form contemplated by the Warrant Agreement, and each have
been duly authorized by the Company and, when executed by the Company and
authenticated by the Trustee and the Warrant Agent in the manner provided in the
Indenture and the Warrant Agreement, as the case may be (assuming the due
authorization, execution and delivery of the Indenture by the Trustee and of the
Warrant Agreement by the Warrant Agent) and delivered against payment of the
purchase price therefor, will constitute valid and binding obligations of the
Company, enforceable against the Company in accordance with their respective
terms, except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium (including, without limitation, all laws
relating to fraudulent transfers), or other similar laws relating to or
affecting enforcement of creditor's rights generally, or by general principles
of equity (regardless of whether enforcement is considered in a proceeding in
equity or at law), and will be entitled to the benefits of the Indenture and the
Warrant Agreement, respectively.
(viii) The statements in the Offering Memorandum under the "Description
of the Units," "Description of the Notes" and "Description of the Warrants,"
insofar as such statements constitute a summary of the Securities or instruments
referred to therein, fairly present, in all material respects, such Securities
or instruments.
To the extent that the obligations of the Company and each of the
Designated Subsidiaries under the Indenture, the Warrant Agreement and the
Purchase Agreement (the "Agreements") may be dependent upon such matters, we
have assumed for purposes of this opinion that each of the Trustee, the Warrant
Agent and you (i) has been duly organized and is validly existing and in good
standing under the laws of its jurisdiction of organization, (ii) has been duly
qualified to engage in the activities contemplated by the Agreements to which it
is a party, (iii) has the requisite organizational and other power and authority
to execute and deliver, and to perform its obligations under, the Agreements to
which it is a party. We have further assumed that (i) each of such Agreements to
which the Trustee, the Warrant Agent or you are a party constitutes the
Trustee's, the Warrant Agent's or your legal, valid and binding obligation,
enforceable against the Trustee, the Warrant Agent or you, as applicable, in
accordance with its terms, (ii) the Trustee is in compliance, generally and with
respect to acting as trustee under the Indenture, with all applicable laws and
regulations and (iii) the Warrant Agent is in compliance, generally and with
respect to acting as warrant agent under the Warrant Agreement, with all
applicable laws and regulations.
In addition, we have participated in conferences with officers and other
representatives of and counsel for the Company, representatives of the
independent public accountants of the Company and representatives of the Initial
Purchasers at which the contents of the Offering Memorandum and related
<PAGE>
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
May __, 1998
Page 5
matters were discussed and, although we have not undertaken to investigate or
verify independently, and do not assume any responsibility for, the accuracy,
completeness or fairness of the statements contained in the Offering Memorandum,
on the basis of the foregoing, nothing has come to our attention that would lead
us to believe that the Offering Memorandum or any amendment or supplement
thereto (except for financial statements and schedules and other financial data
included therein, as to which we express no belief), at the time the Offering
Memorandum was issued, at the time any such amended or supplemented Offering
Memorandum was issued or at the Closing Time, included or includes an untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
Because the primary purpose of our professional engagement was not to
establish or confirm factual, financial or accounting matters and because of the
wholly or partially non-legal character of many of the statements contained in
the Offering Memorandum, we are not passing upon, and do not assume any
responsibility for, the accuracy, completeness or fairness of the statements
contained in the Offering Memorandum except for those made under the captions
"Description of the Units," "Description of the Notes" and "Description of the
Warrants" in the Offering Memorandum, insofar as they relate to the provisions
of the Securities described therein. Other than as set forth in the preceding
sentence, we make no representation that we have independently verified the
accuracy, completeness or fairness of such statements. Without limiting the
foregoing, we assume no responsibility for, and have not independently verified,
the accuracy, completeness or fairness of the financial statements and schedules
and other financial data included in the Offering Memorandum, and we have not
examined the financial or accounting records from which such financial
statements, schedules and data are derived.
This opinion is rendered only to you and is solely for your benefit in
connection with the transactions covered hereby. This opinion may not be relied
upon by you for any other purpose, or furnished to, quoted to, or relied upon by
any other person, firm or corporation for any purpose, without our prior written
consent.
Very truly yours,
DRAFT
[DRAFT dated April 28, 1998]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RHYTHMS NETCONNECTIONS INC., as Issuer
and
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., as Trustee
---------------------------
INDENTURE
Dated as of May 5, 1998
---------------------------
$290,000,000 principal amount at maturity
13 1/2% Senior Discount Notes due 2008, Series A
13 1/2% Senior Discount Notes due 2008, Series B
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Reconciliation and tie between Trust Indenture Act of 1939,
as amended, and Indenture, dated as of May 5, 1998
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
- ----------------- --------------
<S> <C>
Section 310 (a)(1) . . . . . . . . . . . . . . . . . . . 6.09
(a)(2) . . . . . . . . . . . . . . . . . . . 6.09
(a)(3) . . . . . . . . . . . . . . . . . . . Not Applicable
(a)(4) . . . . . . . . . . . . . . . . . . . 6.05
(b) . . . . . . . . . . . . . . . . . . . 6.05, 6.08
. . . . . . . . . . . . . . . . . . . 6.10
Section 311 (a) . . . . . . . . . . . . . . . . . . . 6.07
(b) . . . . . . . . . . . . . . . . . . . 6.07
(c) . . . . . . . . . . . . . . . . . . . Not Applicable
Section 312 (a) . . . . . . . . . . . . . . . . . . . 3.05, 7.01
(b) . . . . . . . . . . . . . . . . . . . 7.02
(c) . . . . . . . . . . . . . . . . . . . 7.02
Section 313 (a) . . . . . . . . . . . . . . . . . . . 7.03
(b) . . . . . . . . . . . . . . . . . . . 7.03
(c) . . . . . . . . . . . . . . . . . . . 7.03
(d) . . . . . . . . . . . . . . . . . . . 7.03
Section 314 (a) . . . . . . . . . . . . . . . . . . . 10.09
(b) . . . . . . . . . . . . . . . . . . . Not Applicable
(c)(1) . . . . . . . . . . . . . . . . . . . 1.04, 4.04(10), 10.21,
12.01
(c)(2) . . . . . . . . . . . . . . . . . . . 1.04, 4.04(10), 10.21, 12.01
(c)(3) . . . . . . . . . . . . . . . . . . . Not Applicable
(d) . . . . . . . . . . . . . . . . . . . Not Applicable
(e) . . . . . . . . . . . . . . . . . . . 1.04
Section 315 (a) . . . . . . . . . . . . . . . . . . . 6.01(a)
(b) . . . . . . . . . . . . . . . . . . . 6.02
(c) . . . . . . . . . . . . . . . . . . . 6.01(b)
(d) . . . . . . . . . . . . . . . . . . . 6.01(c)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
- ----------------- --------------
<S> <C>
(e) . . . . . . . . . . . . . . . . . . . 5.14
Section 316 (a) (last sentence) . . . . . . . . . . . . . 3.14
(a)(1)(A) . . . . . . . . . . . . . . . . . . 5.12
(a)(1)(B) . . . . . . . . . . . . . . . . . . 5.13
(a)(2) . . . . . . . . . . . . . . . . . . . Not Applicable
(b) . . . . . . . . . . . . . . . . . . . 5.08
(c) . . . . . . . . . . . . . . . . . . . Not Applicable
Section 317 (a)(1) . . . . . . . . . . . . . . . . . . . 5.03
(a)(2) . . . . . . . . . . . . . . . . . . . 5.04
(b) . . . . . . . . . . . . . . . . . . . 10.03
Section 318 (a) . . . . . . . . . . . . . . . . . . . 1.08
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01. Definitions.. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.02. Other Definitions.. . . . . . . . . . . . . . . . . . . . . . . . 24
Section 1.03. Rules of Construction.. . . . . . . . . . . . . . . . . . . . . . 25
Section 1.04. Form of Documents Delivered to Trustee. . . . . . . . . . . . . . 26
Section 1.05. Acts of Holders.. . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 1.06. Notices, etc., to the Trustee and the Company.. . . . . . . . . . 27
Section 1.07. Notice to Holders; Waiver.. . . . . . . . . . . . . . . . . . . . 28
Section 1.08. Conflict with Trust Indenture Act.. . . . . . . . . . . . . . . . 28
Section 1.09. Effect of Headings and Table of Contents. . . . . . . . . . . . . 28
Section 1.10. Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . 28
Section 1.11. Separability Clause.. . . . . . . . . . . . . . . . . . . . . . . 29
Section 1.12. Benefits of Indenture.. . . . . . . . . . . . . . . . . . . . . . 29
Section 1.13. GOVERNING LAW.. . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 1.14. No Recourse Against Others. . . . . . . . . . . . . . . . . . . . 29
Section 1.15. Independence of Covenants.. . . . . . . . . . . . . . . . . . . . 29
Section 1.16. Exhibits and Schedules. . . . . . . . . . . . . . . . . . . . . . 29
Section 1.17. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 1.18. Duplicate Origin . . . . . . . . . . . . . . . . . . . . . . . . 30
2. TWO
FORM OF NOTES
Section 2.01. Form and Dating.. . . . . . . . . . . . . . . . . . . . . . . . . 30
3. THREE
THE NOTES
Section 3.01. Title and Terms.. . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 3.02. Registrar and Paying Agent. . . . . . . . . . . . . . . . . . . . 31
Section 3.03. Execution and Authentication. . . . . . . . . . . . . . . . . . . 32
Section 3.04. Temporary Notes.. . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 3.05. Transfer and Exchange.. . . . . . . . . . . . . . . . . . . . . . 34
Section 3.06. Mutilated, Destroyed, Lost and Stolen Notes.. . . . . . . . . . . 35
Section 3.07. Payment of Interest; Interest Rights Preserved. . . . . . . . . . 35
(i)
<PAGE>
Section 3.08. Persons Deemed Owners.. . . . . . . . . . . . . . . . . . . . . . 36
Section 3.09. Cancellation. . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 3.10. Computation of Interest.. . . . . . . . . . . . . . . . . . . . . 37
Section 3.11. Legal Holidays. . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 3.12. CUSIP and CINS Numbers. . . . . . . . . . . . . . . . . . . . . . 37
Section 3.13. Paying Agent To Hold Money in Trust.. . . . . . . . . . . . . . . 38
Section 3.14. [Intentionally Omitted].. . . . . . . . . . . . . . . . . . . . . 38
Section 3.15. Deposits of Monies. . . . . . . . . . . . . . . . . . . . . . . . 38
Section 3.16. Book-Entry Provisions for Global Notes. . . . . . . . . . . . . . 38
Section 3.17. Special Transfer Provisions.. . . . . . . . . . . . . . . . . . . 40
Section 3.18. Components of Unit. . . . . . . . . . . . . . . . . . . . . . . . 43
4. FOUR
DEFEASANCE OR COVENANT DEFEASANCE
Section 4.01. Company's Option To Effect Defeasance or
Covenant Defeasance.. . . . . . . . . . . . . . . . . . . . . . . 43
Section 4.02. Defeasance and Discharge. . . . . . . . . . . . . . . . . . . . . 43
Section 4.03. Covenant Defeasance.. . . . . . . . . . . . . . . . . . . . . . . 44
Section 4.04. Conditions to Defeasance or Covenant
Defeasance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 4.05. Deposited Money and U.S. Government Obligations
To Be Held in Trust; Other Miscellaneous
Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 4.06. Reinstatement.. . . . . . . . . . . . . . . . . . . . . . . . . . 47
5. FIVE
REMEDIES
Section 5.01. Events of Default.. . . . . . . . . . . . . . . . . . . . . . . . 47
Section 5.02. Acceleration of Maturity, Rescission and
Annulment.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 5.03. Collection of Indebtedness and Suits for
Enforcement by Trustee. . . . . . . . . . . . . . . . . . . . . . 49
Section 5.04. Trustee May File Proofs of Claims.. . . . . . . . . . . . . . . . 50
Section 5.05. Trustee May Enforce Claims Without Possession
of Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 5.06. Application of Money Collected. . . . . . . . . . . . . . . . . . 51
Section 5.07. Limitation on Suits.. . . . . . . . . . . . . . . . . . . . . . . 52
Section 5.08. Unconditional Right of Holders To Receive
Principal, Premium and Interest. . . . . . . . . . . . . . . . . 52
Section 5.09. Restoration of Rights and Remedies. . . . . . . . . . . . . . . . 53
Section 5.10. Rights and Remedies Cumulative. . . . . . . . . . . . . . . . . . 53
Section 5.11. Delay or Omission Not Waiver. . . . . . . . . . . . . . . . . . . 53
Section 5.12. Control by Majority.. . . . . . . . . . . . . . . . . . . . . . . 53
Section 5.13. Waiver of Past Defaults.. . . . . . . . . . . . . . . . . . . . . 54
Section 5.14. Undertaking for Costs.. . . . . . . . . . . . . . . . . . . . . . 54
Section 5.15. Waiver of Stay, Extension or Usury Laws.. . . . . . . . . . . . . 54
(ii)
<PAGE>
6. SIX
THE TRUSTEE
Section 6.01. Certain Duties and Responsibilities.. . . . . . . . . . . . . . . 55
Section 6.02. Notice of Defaults. . . . . . . . . . . . . . . . . . . . . . . . 56
Section 6.03. Certain Rights of Trustee.. . . . . . . . . . . . . . . . . . . . 56
Section 6.04. Trustee Not Responsible for Recitals,
Dispositions of Notes or Application
of Proceeds Thereof.. . . . . . . . . . . . . . . . . . . . . . . 57
Section 6.05. Trustee and Agents May Hold Notes; Collections;
Etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Section 6.06. Money Held in Trust.. . . . . . . . . . . . . . . . . . . . . . . 58
Section 6.07. Compensation and Indemnification of Trustee and
Its Prior Claim.. . . . . . . . . . . . . . . . . . . . . . . . . 58
Section 6.08. Conflicting Interests.. . . . . . . . . . . . . . . . . . . . . . 58
Section 6.09. Corporate Trustee Required; Eligibility.. . . . . . . . . . . . . 58
Section 6.10. Resignation and Removal; Appointment of
Successor Trustee.. . . . . . . . . . . . . . . . . . . . . . . . 59
Section 6.11. Acceptance of Appointment by Successor. . . . . . . . . . . . . . 60
Section 6.12. Merger, Conversion, Amalgamation, Consolidation
or Succession to Business.. . . . . . . . . . . . . . . . . . . . 61
7. SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.01. Preservation of Information; Company To Furnish
Trustee Names and Addresses of Holders. . . . . . . . . . . . . . 62
Section 7.02. Communications of Holders.. . . . . . . . . . . . . . . . . . . . 62
Section 7.03. Reports by Trustee. . . . . . . . . . . . . . . . . . . . . . . . 62
8. EIGHT
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
Section 8.01. Company May Consolidate, etc., Only on Certain
Terms.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 8.02. Successor Substituted.. . . . . . . . . . . . . . . . . . . . . . 64
9. NINE
SUPPLEMENTAL INDENTURES AND WAIVERS
Section 9.01. Supplemental Indentures, Agreements and Waivers
Without Consent of Holders. . . . . . . . . . . . . . . . . . . . 64
Section 9.02. Supplemental Indentures, Agreements and Waivers
with Consent of Holders.. . . . . . . . . . . . . . . . . . . . . 65
Section 9.03. Execution of Supplemental Indentures,
Agreements and Waivers. . . . . . . . . . . . . . . . . . . . . . 66
Section 9.04. Effect of Supplemental Indentures.. . . . . . . . . . . . . . . . 67
Section 9.05. Conformity with Trust Indenture Act.. . . . . . . . . . . . . . . 67
Section 9.06. Reference in Notes to Supplemental Indentures.. . . . . . . . . . 67
(iii)
<PAGE>
Section 9.07. Record Date.. . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Section 9.08. Revocation and Effect of Consents.. . . . . . . . . . . . . . . . 68
10. TEN
COVENANTS
Section 10.01. Payment of Principal, Premium and Interest. . . . . . . . . . . . 68
Section 10.02. Maintenance of Office or Agency.. . . . . . . . . . . . . . . . . 68
Section 10.03. Money for Note Payments To Be Held in Trust.. . . . . . . . . . . 69
Section 10.04. Corporate Existence.. . . . . . . . . . . . . . . . . . . . . . . 70
Section 10.05. Payment of Taxes and Other Claims.. . . . . . . . . . . . . . . . 70
Section 10.06. Maintenance of Properties.. . . . . . . . . . . . . . . . . . . . 71
Section 10.07. Insurance.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Section 10.08. Books and Records.. . . . . . . . . . . . . . . . . . . . . . . . 71
Section 10.09. Provision of SEC Reports. . . . . . . . . . . . . . . . . . . . . 71
Section 10.10. Change of Control.. . . . . . . . . . . . . . . . . . . . . . . . 72
Section 10.11. Limitation on Additional Indebtedness.. . . . . . . . . . . . . . 74
Section 10.12. Statement by Officers as to Default.. . . . . . . . . . . . . . . 75
Section 10.13. Limitation on Restricted Payments.. . . . . . . . . . . . . . . . 75
Section 10.14. Limitation on Transactions with Affiliates. . . . . . . . . . . . 78
Section 10.15. Disposition of Proceeds of Asset Sales. . . . . . . . . . . . . . 79
Section 10.16. Limitation on Liens Securing Certain
Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Section 10.17. Limitation on Status as Investment Company. . . . . . . . . . . . 83
Section 10.18. Limitation on Issuances and Sales of Capital
Stock of Restricted Subsidiaries. . . . . . . . . . . . . . . . . 83
Section 10.19. Limitation on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries. . . . . . . . . . 84
Section 10.20. Limitation on Designations of Unrestricted
Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Section 10.21. Compliance Certificates and Opinions. . . . . . . . . . . . . . . 86
Section 10.22. Limitation on Issuances of Guarantees by
Restricted Subsidiaries.. . . . . . . . . . . . . . . . . . . . . 86
Section 10.23. Registration Rights . . . . . . . . . . . . . . . . . . . . . . . 87
Section 10.24. [Intentionally Omitted].. . . . . . . . . . . . . . . . . . . . . 88
Section 10.25. Business Activities.. . . . . . . . . . . . . . . . . . . . . . . 88
Section 10.26. Limitation on Sale/Leaseback Transactions.. . . . . . . . . . . . 88
11. ELEVEN
SATISFACTION AND DISCHARGE
Section 11.01. Satisfaction and Discharge of Indenture.. . . . . . . . . . . . . 89
Section 11.02. Application of Trust Money. . . . . . . . . . . . . . . . . . . . 89
(iv)
<PAGE>
12. TWELVE
REDEMPTION
Section 12.01. Notices to the Trustee. . . . . . . . . . . . . . . . . . . . . . 90
Section 12.02. Selection of Notes To Be Redeemed.. . . . . . . . . . . . . . . . 90
Section 12.03. Notice of Redemption. . . . . . . . . . . . . . . . . . . . . . . 91
Section 12.04. Effect of Notice of Redemption. . . . . . . . . . . . . . . . . . 91
Section 12.05. Deposit of Redemption Price.. . . . . . . . . . . . . . . . . . . 92
Section 12.06. Notes Redeemed or Purchased in Part.. . . . . . . . . . . . . . . 92
EXHIBIT A-l - Form of Rhythms NetConnections Inc. 131/2% Senior
Discount Notes due 2008, Series A
EXHIBIT A-2 - Form of Rhythms NetConnections Inc. 131/2% Senior
Discount Notes due 2008, Series B
EXHIBIT B - Form of Supplemental Indenture
EXHIBIT C - Form of Legend for Book-Entry Securities
EXHIBIT D - Form of Certificate To Be Delivered in Connection with
Transfers to Non-QIB Accredited Investors
EXHIBIT E - Form of Certificate To Be Delivered in Connection with
Transfers Pursuant to Regulation S
SCHEDULE A - Existing and Committed Indebtedness
</TABLE>
(v)
<PAGE>
INDENTURE
INDENTURE (this "Indenture"), dated as of May 5, 1998,
between RHYTHMS NETCONNECTIONS INC., a corporation incorporated under the
laws of the State of Delaware, as issuer (the "Company"), and STATE STREET
BANK AND TRUST COMPANY OF CALIFORNIA, N.A., a national banking corporation,
as trustee (the "Trustee").
RECITALS
The Company has duly authorized the creation of an issue of
(i) 13 1/2% Senior Discount Notes due 2008, Series A, and (ii) 13 1/2% Senior
Discount Notes due 2008, Series B, to be issued in exchange for the 13 1/2%
Senior Discount Notes due 2008, Series A, pursuant to the Registration Rights
Agreement (as hereinafter defined) (collectively, the "Notes"; such term to
include the Initial Notes (as hereinafter defined) and the Unrestricted Notes
(as hereinafter defined), if any, including the Exchange Notes (as
hereinafter defined), if any, treated as a single class of securities under
this Indenture), of substantially the tenor and amount hereinafter set forth,
and to provide therefor the Company has duly authorized the execution and
delivery of this Indenture.
All things necessary have been done to make the Notes, when
executed by the Company, and authenticated and delivered hereunder and duly
issued by the Company, the valid obligations of the Company and to make this
Indenture a valid agreement of each of the Company and the Trustee in
accordance with the terms hereof.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of
the Notes by the Holders (as hereinafter defined) thereof, it is mutually
covenanted and agreed, for the equal and proportionate benefit of all Holders
of the Notes, as follows:
1. ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 1.01. DEFINITIONS.
"Accreted Value" means, as of any date (the "Specified
Date"), with respect to each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date is one of the following dates
(each a "Semi-Annual Accrual Date"), the amount set forth opposite such
date below:
<PAGE>
<TABLE>
<CAPTION>
Semi-Annual Accreted
Accrual Date Value
-------------------- ---------
<S> <C>
Issue Date . . . . . . . . . . . . . . . . . . . . . .$ 518.50
May 15, 1998 . . . . . . . . . . . . . . . . . . . . . .$ 520.38
November 15, 1998 . . . . . . . . . . . . . . . . . . . . . .$ 555.51
May 15, 1999 . . . . . . . . . . . . . . . . . . . . . .$ 593.00
November 15, 1999 . . . . . . . . . . . . . . . . . . . . . .$ 633.03
May 15, 2000 . . . . . . . . . . . . . . . . . . . . . .$ 675.76
November 15, 2000 . . . . . . . . . . . . . . . . . . . . . .$ 721.37
May 15, 2001 . . . . . . . . . . . . . . . . . . . . . .$ 770.07
November 15, 2001 . . . . . . . . . . . . . . . . . . . . . .$ 822.05
May 15, 2002 . . . . . . . . . . . . . . . . . . . . . .$ 877.53
November 15, 2002 . . . . . . . . . . . . . . . . . . . . . .$ 936.77
May 15, 2003 . . . . . . . . . . . . . . . . . . . . . .$1,000.00
</TABLE>
(ii) if the Specified Date occurs between two Semi-Annual
Accrual Dates, the sum of (a) the Accreted Value for the Semi-Annual
Accrual Date immediately preceding the Specified Date and (b) an amount
equal to the product of (x) the Accreted Value for the Semi-Annual
Accrual Date immediately following the Specified Date less the Accreted
Value for the Semi-Annual Accrual Date immediately preceding the
Specified Date and (y) a fraction, the numerator of which is the number
of days actually elapsed from the immediately preceding Semi-Annual
Accrual Date to the Specified Date, using a 360-day year of twelve
30-day months, and the denominator of which is 180; and
(iii) if the Specified Date is after May 15, 2003, $1,000.
"Acquired Indebtedness" means Indebtedness of a Person (i)
assumed in connection with an Asset Acquisition from such Person or (ii)
existing at the time such Person is merged or consolidated with or into the
Company or any Restricted Subsidiary or becomes a Restricted Subsidiary, in
each case not incurred in connection with, or in anticipation of, such Asset
Acquisition or merger or consolidation or such Person becoming a Restricted
Subsidiary; PROVIDED that Indebtedness of such Person which is redeemed,
defeased, retired or otherwise repaid at the time of or immediately upon
consummation of such Asset Acquisition or the transactions by which such
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<PAGE>
Person is merged or consolidated with or into the Company or any Restricted
Subsidiary or becomes a Restricted Subsidiary shall not constitute Acquired
Indebtedness.
"Affiliate" of any specified Person means (i) any other
Person which, directly or indirectly, controls, is controlled by or is under
direct or indirect common control with, the specified Person, (ii) any other
Person that owns, directly or indirectly, 10% or more of the specified
Person's Voting Stock or (iii) any executive officer or director of the
specified Person; PROVIDED that Donaldson, Lufkin & Jenrette, Inc. and its
Affiliates shall not be deemed to be Affiliates of the Company solely as a
result of such entities holding the Units, the Notes, the Warrants, the
Series A Preferred Stock or the Series B Preferred Stock (or any security
which is convertible into or exchangeable for any of the foregoing) or having
the right to nominate and have elected one member of the Board. For the
purposes of this definition, "control" when used with respect to any Person
means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities,
by contract or otherwise, and the terms "affiliated," "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Acquisition" means (i) any capital contribution (by
means of transfers of cash or other property to others or payments for
property or services for the account or use of others, or otherwise) by the
Company or any Restricted Subsidiary in any other Person, or any acquisition
or purchase of Capital Stock of any other Person by the Company or any
Restricted Subsidiary, in either case pursuant to which such Person shall (a)
become a Restricted Subsidiary or (b) shall be merged or consolidated with or
into the Company or any Restricted Subsidiary or (ii) any acquisition by the
Company or any Restricted Subsidiary of the assets of any Person which
constitute substantially all of an operating unit or line of business of such
Person or which is otherwise outside of the ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance,
transfer or lease (that has the effect of a disposition and is not for
security purposes) or other disposition (that is not for security purposes)
(including by way of a Sale/Leaseback Transaction) to any Person other than
the Company or a Restricted Subsidiary, in one transaction or a series of
related transactions, of (i) any Capital Stock of any Restricted Subsidiary,
(ii) any assets of the Company or any Restricted Subsidiary which constitute
substantially all of an operating unit or line of business of the Company and
the Restricted Subsidiaries or (iii) any other property or asset of the
Company or any Restricted Subsidiary outside of the ordinary course of
business. For the purposes of this definition, the term "Asset Sale" shall
not include (i) any disposition of properties and assets of the Company that
is governed under Article Eight hereof, (ii) sales of property or equipment
that have become worn out, obsolete or damaged or otherwise unsuitable for
use in connection with the business of the Company or any Restricted
Subsidiary, as the case may be, and (iii) for purposes of Section 10.15
hereof, (a) sales, conveyances, transfers, leases or other dispositions of
property or assets, whether in one transaction or a series of related
transactions occurring within one year, involving assets with a Fair Market
Value not in excess of $500,000 in any 12 month period and (b) any asset of
the Company or a Restricted Subsidiary that is the subject of a
Sale/Leaseback Transaction with a Person (other than the Company or an
Affiliate of the Company) made in accordance with Section 10.26 hereof
-3-
<PAGE>
and that was acquired by the Company or such Restricted Subsidiary no more
than 120 days prior to the transfer to a third party in a Sale/Leaseback
Transaction.
"Attributable Debt" in respect of a Sale/Leaseback
Transaction means, as at the time of determination, the present value
(discounted at the interest rate implicit in the terms of the lease included
in such Sale/Leaseback Transaction) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has
been extended).
"Average Life to Stated Maturity" means, with respect to any
Indebtedness, as at any date of determination, the quotient obtained by
dividing (i) the sum of the products of (a) the number of years from such
date to the date or dates of each successive scheduled principal payment
(including, without limitation, any sinking fund requirements) of such
Indebtedness multiplied by (b) the amount of each such principal payment by
(ii) the sum of all such principal payments; PROVIDED that, in the case of
any Capitalized Lease Obligation, all calculations hereunder shall give
effect to any applicable options to renew in favor of the Company or any
Restricted Subsidiary.
"Bankruptcy Law" means Title 11, United States Code or any
similar federal, state or foreign law relating to bankruptcy, insolvency,
receivership, winding-up, liquidation, reorganization or relief of debtors.
"Bankruptcy Order" means any binding court order made in a
proceeding pursuant to or within the meaning of any Bankruptcy Law,
containing an adjudication of bankruptcy or insolvency, or providing for
liquidation, receivership, winding-up, dissolution or reorganization, or
appointing a Custodian of a debtor or of all or any substantial part of a
debtor's property, or providing for the staying, arrangement, adjustment or
composition of indebtedness or other relief of a debtor.
"Board" means the Board of Directors of the Company.
"Board Resolution" means a copy of a resolution certified by
the Secretary or an Assistant Secretary of the Company to have been duly
adopted by the Board and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday,
Thursday and Friday which is not a day on which banking institutions in The
City of New York, New York, or the city in which the Corporate Trust Office
of the Trustee is located, are authorized or obligated by law, regulation or
executive order to close.
"Capital Stock" means, with respect to any Person, any and
all shares, interests, participations, rights in, or other equivalents
(however designated and whether voting and/or non-voting) of, such Person's
capital stock, including Preferred Stock, whether outstanding on the
-4-
<PAGE>
Issue Date or issued after the Issue Date, and any and all rights (other than
any evidence of Indebtedness), warrants or options exchangeable for or
convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay
rent or other amounts under a lease of (or other agreement conveying the
right to use) any property (whether real, personal or mixed, immovable or
movable) that is required to be classified and accounted for as a capitalized
lease obligation under GAAP, and for the purpose of this Indenture, the
amount of such obligation at any date shall be the capitalized amount thereof
at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness
which matures 365 days or less from the date of purchase or acquisition
issued or directly and fully guaranteed or insured by the United States
Government or any agency or instrumentality thereof (PROVIDED that the full
faith and credit of the United States Government is pledged in support
thereof or such Indebtedness constitutes a general obligation of such
country); (ii) deposits, certificates of deposit or acceptances with a
maturity of 365 days or less of any financial institution that is a member of
the Federal Reserve System, in each case having combined capital and surplus
and undivided profits (or any similar capital concept) of not less than
$500.0 million and whose senior unsecured debt is rated at least "A-1" by S&P
or "P-1" by Moody's; (iii) commercial paper with a maturity of 365 days or
less issued by a corporation (other than an Affiliate of the Company)
organized under the laws of the United States or any State thereof and rated
at least "A-1" by S&P or "P-1" by Moody's; (iv) repurchase agreements and
reverse repurchase agreements relating to marketable direct obligations
issued or unconditionally guaranteed by the United States Government or
issued by any agency thereof and backed by the full faith and credit of the
United States Government maturing within 365 days from the date of
acquisition; and (v) money market funds in the United States which invest
substantially all of their assets in securities of the type described in any
of the preceding clauses (i) through (iv).
"Cedel" means Cedel Bank, Societe Anonyme.
"Change of Control" means the occurrence of any of the
following events: (a) any "person" or "group" (as such terms are used in
Sections 13(d) or 14(d) of the Exchange Act, PROVIDED that no "group" shall
be deemed to result solely from the Investors' Rights Agreement, the Voting
Agreement or the Voting Trust Agreement (as each such term is defined in the
Offering Memorandum) or the transactions contemplated thereby), excluding
Permitted Holders, is or becomes the "beneficial owner" (as defined in Rules
13d-3 or 13d-5 under the Exchange Act, except that a person shall be deemed
to have "beneficial ownership" of all securities that such person has or
acquires the right to acquire, whether such right is exercisable immediately
or only after the passage of time), directly or indirectly, of more than 50%
of the total voting power of all Voting Stock of the Company (except that the
person or group shall not be deemed the "beneficial owner" of shares tendered
pursuant to a tender or exchange offer made by that person or group or any of
their Affiliates until the tendered shares are accepted for purchase or
exchange) or has, directly or indirectly, the right to elect or designate a
majority of the Board or (b) the Company consolidates with, or merges with or
into, another person
-5-
<PAGE>
or sells, assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any person, or any person consolidates
with, or merges with or into, the Company, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Company is converted
into or exchanged for cash, securities or other property, other than any such
transaction where (i) the outstanding Voting Stock of the Company is
converted into or exchanged for (1) Voting Stock (other than Disqualified
Stock) of the surviving or transferee corporation or its parent corporation
and/or (2) cash, securities and other property in any amount which could be
paid by the Company as a Restricted Payment under this Indenture, (ii) the
"beneficial owners" (as so defined) of the Voting Stock of the Company
immediately before such transaction own, directly or indirectly, immediately
after such transaction, at least a majority of the voting power of all Voting
Stock of the surviving or transferee corporation or its parent corporation
immediately after such transaction, as applicable, or (iii) immediately after
such transaction, no "person" or "group" (as such terms are defined above),
excluding the Permitted Holders, is the "beneficial owner" (as defined
above), directly or indirectly, of more than 50% of the Voting Stock of such
surviving or transferee corporation or its parent corporation, as applicable,
or has, directly or indirectly, the right to elect or designate a majority of
the board of directors of the surviving or transferee corporation or its
parent corporation, as applicable, or (c) during any consecutive two-year
period, individuals who at the beginning of such period constituted the Board
(together with any new directors whose election by the Board or whose
nomination for election by the stockholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board then in office. The good faith determination by the
Board, based upon advice of outside counsel, of the beneficial ownership of
securities of the Company within the meaning of Rules 13d-3 or 13d-5 under
the Exchange Act shall be conclusive, absent contrary controlling precedent
or contrary written interpretation published by the SEC. No inference shall
be created that officers or employees of the Company are acting as a "person"
or "group" (as such terms are used in Sections 13(d) or 14(d) of the Exchange
Act) with the power to designate a majority of the members of the Board
solely because such officers or employees constitute a majority of the
members of the Board.
"Closing Time" has the meaning specified in the Purchase
Agreement.
"Common Stock" means, with respect to any Person, any and all
shares, interests, participations or rights in, or other equivalents (however
designated and whether voting and/or non-voting) of, such Person's common
stock and includes, without limitation, all series and classes of such common
stock.
"Company" means the Person named as the "Company" in the
first paragraph of this Indenture, until a successor Person shall have
replaced such Person pursuant to the applicable provisions of this Indenture,
and thereafter "Company" shall mean such successor Person.
"Company Request" or "Company Order" means a written request
or order signed in the name of the Company by any one of its Chairman of the
Board, its Vice-Chairman, its Chief
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Executive Officer, its President or a Vice President, and by its Secretary or
an Assistant Secretary or the Treasurer or an Assistant Treasurer, and
delivered to the Trustee.
"Consolidated Income Tax Expense" means, with respect to any
period, the provision for federal, state, local, foreign and other income
taxes of the Company and the Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any
period, without duplication, the sum of (i) the interest expense of the
Company and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP, including, without limitation,
(a) any amortization of debt discount, (b) the net cost under Interest Rate
Obligations (including any amortization of discounts), (c) the interest
portion of any deferred payment obligation, (d) all commissions, discounts
and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing and similar transactions and (e) all
capitalized interest and accrued interest, (ii) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by the Company and the Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP, (iii) the portion
of any rental obligation in respect of any Sale/Leaseback Transaction
allocable to interest expense (determined as if such were treated as a
Capital Lease Obligation), and (iv) the amount of dividends and distributions
in respect of Preferred Stock or Disqualified Stock paid by the Restricted
Subsidiaries to a Person other than the Company or a Restricted Subsidiary or
by the Company during such period.
"Consolidated Net Income" means, with respect to any period,
the net income (or loss) of the Company and the Restricted Subsidiaries for
such period determined on a consolidated basis in accordance with GAAP,
adjusted, to the extent included in calculating such consolidated net income
(or loss), by excluding, without duplication, (i) all extraordinary, unusual
or nonrecurring gains or losses and all gains or losses from sales or other
dispositions of assets (including Asset Sales) out of the ordinary course of
business (net of taxes, fees and expenses relating to the transaction giving
rise thereto) for such period, (ii) that portion of such net income (or loss)
derived from or in respect of Investments in Persons other than Restricted
Subsidiaries, except to the extent of any cash dividends actually received by
the Company or any Restricted Subsidiary (subject, in the case of any
Restricted Subsidiary, to the provisions of clause (vi) of this definition),
(iii) any gain or loss, net of taxes, realized upon the termination of any
employee pension benefit plan during such period, (iv) that portion of such
net income (or loss) allocable to minority interests in any Restricted
Subsidiary for such period, (v) net income (or loss) of any other Person
combined with the Company or any Restricted Subsidiary on a "pooling of
interests" basis attributable to any period prior to the date of combination
and (vi) the net income of any Restricted Subsidiary for such period to the
extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is not at the time permitted, directly
or indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulations applicable to that Restricted Subsidiary or its stockholders.
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"Consolidated Net Worth" means, with respect to any Person, the
consolidated stockholders' or partners' equity of such Person reflected on the
most recent balance sheet of such Person, determined in accordance with GAAP,
less any amounts attributable to redeemable capital stock (as determined under
applicable accounting standards promulgated by the SEC) of such Person.
"Consolidated Operating Cash Flow" means, with respect to any
period, Consolidated Net Income for such period (a) increased (without
duplication), to the extent deducted in arriving at such Consolidated Net
Income, by the sum of (i) Consolidated Income Tax Expense for such period; (ii)
Consolidated Interest Expense for such period; and (iii) depreciation,
amortization and any other non-cash items for such period of the Company and the
Restricted Subsidiaries (other than any noncash item which requires the accrual
of, or a reserve for, cash charges for any future period), including, without
limitation, amortization of capitalized debt issuance costs for such period, all
determined on a consolidated basis in accordance with GAAP, and (b) decreased by
any non-cash items (including non-recurring gains and non-recurring items of
income) to the extent they increased Consolidated Net Income for such period
(including any partial or complete reversal of reserves taken in a prior
period).
"Corporate Trust Office" means the Office of the Trustee at
which at any particular time the trust created by this Indenture shall be
principally administered, which office at the date of execution of this
Indenture is located at Library Tower, 633 West 5th Street, Twelfth Floor, Los
Angeles, California 90071, Attention: Corporate Trust Department, except for
purposes of Sections 3.02 and 10.02 hereof. For purposes of such Sections, such
office is located at 61 Broadway, 15th Floor, New York, New York 10006.
"Custodian" means any receiver, interim receiver, receiver and
manager, receiver-manager, trustee, assignee, liquidator, sequestrator or
similar official under any Bankruptcy Law or any other Person with like powers
whether appointed judicially or out of court and whether pursuant to an interim
or final appointment.
"Debt Securities" means any debt securities issued by the
Company in a public offering or in a private placement to institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act).
"Default" means any event that is, or after notice or passage of
time or both would be, an Event of Default.
"Default Amount" means (i) as of any date prior to May 15, 2003,
the Accreted Value of the Notes (and any applicable premium thereon) as of such
date and (ii) as of any date on and after May 15, 2003, the principal amount at
maturity of the Notes (and any applicable premium thereon) and any accrued and
unpaid interest thereon.
"Depository" means The Depository Trust Company, its nominees
and their respective successors until a successor Depositary shall have become
such pursuant to the applicable provisions
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of this Indenture, and thereafter "Depositary" shall mean or include each
Person who is then a Depositary hereunder.
"Disinterested Director" means, with respect to any transaction
or series of related transactions, a member of the Board other than a director
who (i) has any material direct or indirect financial interest in or with
respect to such transaction or series of related transactions or (ii) is an
employee or officer of the Company or an Affiliate that is itself a party to
such transaction or series of transactions or an Affiliate of a party to such
transaction or series of related transactions.
"Disqualified Stock" means, with respect to any Person, any
Capital Stock which, by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or becomes exchangeable for Indebtedness at the option
of the holder thereof, or becomes redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final maturity date of the
Notes; PROVIDED that any Capital Stock that would not constitute Disqualified
Stock but for provisions thereof giving holders thereof the right to require
such Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the final maturity date
of the Notes will not constitute Disqualified Stock so long as the "asset sale"
or "change of control" provisions applicable to such Capital Stock are no more
favorable to the holders thereof than Sections 10.10 and 10.15 hereof and such
Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to Sections
10.10 and 10.15 hereof.
"Euroclear" means Morgan Guaranty Trust Company of New York,
Brussels Office, as operator of the Euroclear System.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated by the SEC thereunder.
"Exchange Notes" means the 13 1/2% Senior Discount Notes due
2008, Series B, of the Company, to be issued in exchange for the Initial Notes
pursuant to the Registration Rights Agreement.
"Exchange Offer" shall have the meaning specified in the
Registration Rights Agreement.
"Fair Market Value" means, with respect to any asset or
property, the price (after taking into account any liabilities relating to such
asset or property) that could be negotiated in an arms-length free market
transaction, for cash, between a willing seller and a willing buyer, neither of
whom is under pressure or compulsion to complete the transaction. Unless
otherwise specified in the Indenture, Fair Market Value shall be determined by
the Board acting in good faith and shall be evidenced by a Board Resolution.
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"GAAP" means, as of any date of determination, generally
accepted accounting principles set forth in the opinions and pronouncements of
the Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, the SEC or in such other statements by such other entity as may
be approved by a significant segment of the accounting profession of the United
States, which are in effect as of such date of determination and which are
consistently applied for all applicable periods.
"Global Notes" means one or more Regulation S Global Notes and
144A Global Notes.
"Guarantee" means, as applied to any obligation, (i) a guarantee
(other than by endorsement of negotiable instruments for collection in the
ordinary course of business), direct or indirect, in any manner, of any part or
all of such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, any
obligation (A) to pay amounts drawn down by letters of credit, (B) to purchase
or pay (or advance or supply funds for the purchase or payment of) such
obligation (whether arising by virtue of partnership arrangement, agreements to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (C) entered into for
purposes of assuring in any other manner the obligee of such obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); PROVIDED that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Holder" means a Person in whose name a Note is registered in
the Note Register.
"Indebtedness" means, with respect to any Person, without
duplication (whether or not the recourse of the lender is to the whole of the
assets of such Person or only to a portion thereof), (i) every liability of such
Person, whether or not contingent, (A) for borrowed money, (B) evidenced by
notes, bonds, debenture or other similar instruments (whether or not
negotiable), (C) for reimbursement of amounts expended under letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person, (D) issued or assumed as the deferred purchase price of property or
services, (E) relating to a Capitalized Lease Obligation and all Attributable
Debt in respect of Sale/Leaseback Transactions of such Person and (F) in respect
of an Interest Rate Obligation of such Person; (ii) every liability of others of
the kind described in the preceding clause (i) which such Person has Guaranteed
or which is otherwise its legal liability; or (iii) every obligation secured by
a Lien (other than (x) Permitted Liens of the types described in clauses (b),
(d) or (e) of the definition of Permitted Liens; PROVIDED that the obligations
secured would not constitute Indebtedness under clauses (i) or (ii) or (iii) of
this definition, and (y) Liens on Capital Stock or Indebtedness of any
Unrestricted Subsidiary) to which the property or assets of such Person are
subject, whether or not the obligations secured thereby shall have been assumed
by or shall otherwise be such Person's legal liability (the amount of such
obligation being deemed to be the lesser of the Fair Market Value of such
property or asset or the amount of the obligation so secured); (iv) all
Disqualified Stock of such Person, valued
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at the greater of its voluntary or involuntary maximum fixed repurchase or
redemption price (plus accrued and unpaid dividends to the date of
determination); and (v) any and all deferrals, renewals, extensions and
refundings of, or amendments, modifications or supplements to, any liability
of the kind described in any of the preceding clauses (i), (ii), (iii) or
(iv). In no event shall "Indebtedness" include trade payables and accrued
liabilities that are current liabilities incurred in the ordinary course of
business, excluding the current maturity of any obligation which would
otherwise constitute Indebtedness. For purposes of Section 10.11 and Section
10.13 hereof and the definition of "Events of Default," in determining the
principal amount of any Indebtedness to be incurred by the Company or a
Restricted Subsidiary or which is outstanding at any date, (i) the principal
amount of any Indebtedness which provides that an amount less than the
principal amount at maturity thereof shall be due upon any declaration of
acceleration thereof shall be the accreted value thereof at the date of
determination; (ii) the principal amount of any Indebtedness shall be reduced
by any amount of cash or Cash Equivalent collateral securing on a perfected
basis, and dedicated for disbursement exclusively to the payment of principal
of and interest on, such Indebtedness; and (iii) the amount of Indebtedness
of any Person at any date shall be the outstanding balance at such date of
all unconditional obligations as described above and the maximum liability of
any Guarantees at such date.
"Indebtedness to EBITDA Ratio" means, as at any date of
determination (the "Transaction Date"), the ratio of (i) Total Consolidated
Indebtedness (including all Permitted Indebtedness) as at the Transaction Date
to (ii) Consolidated Operating Cash Flow for the four full fiscal quarters
immediately preceding the Transaction Date for which financial statements are
available (such four full fiscal quarter period being referred to herein as the
"Measurement Period"). For purposes of calculating Consolidated Operating Cash
Flow for the relevant Measurement Period prior to a Transaction Date, (A) any
Person that is a Restricted Subsidiary on the Transaction Date (or would become
a Restricted Subsidiary on such Transaction Date in connection with the
transaction that requires the calculation of such Consolidated Operating Cash
Flow) shall be deemed to have been a Restricted Subsidiary at all times during
the Measurement Period, (B) any Person that is not a Restricted Subsidiary on
such Transaction Date (or would cease to be a Restricted Subsidiary on such
Transaction Date in connection with the transaction that requires the
calculation of Consolidated Operating Cash Flow) will be deemed not to have been
a Restricted Subsidiary at any time during the Measurement Period, and (C) if
the Company or any Restricted Subsidiary shall have in any manner (x) acquired
through an Asset Acquisition or (y) disposed of (including by way of an Asset
Sale or the termination or discontinuance of activities constituting such
operating business) any operating business during such Measurement Period or
after the end of such period and on or prior to the Transaction Date, such
calculation will be made on a PRO FORMA basis in accordance with GAAP as if, in
the case of an Asset Acquisition, such transaction had been consummated on the
first day of the Measurement Period and, in the case of an Asset Sale or other
disposition, termination or discontinuance of activities constituting such an
operating business, such transaction had been consummated prior to the first day
of the Measurement Period; PROVIDED, HOWEVER that such PRO FORMA adjustment
shall not give effect to the operating cash flow of any Person that would become
a Restricted Subsidiary on the Transaction Date in connection with the
transaction that requires the calculation of Consolidated Operating Cash Flow to
the extent that such Person's net income would be excluded from the calculation
of Consolidated Net Income pursuant to clause (vi) of the definition of
Consolidated Net Income.
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"Indenture" means this instrument as originally executed
(including all exhibits and schedules hereto) and as it may from time to time be
supplemented or amended by one or more indentures supplemental hereto entered
into pursuant to the applicable provisions hereof.
"Indenture Obligations" means the obligations of the Company and
any other obligor under this Indenture or under the Notes, to pay principal of,
premium, if any, and interest on the Notes when due and payable, whether at
maturity, by acceleration, call for redemption or repurchase or otherwise, and
all other amounts due or to become due under or in connection with this
Indenture or the Notes and the performance of all other obligations to the
Trustee (including, but not limited to, payment of all amounts due the Trustee
under Section 6.07 hereof) and the Holders of the Notes under this Indenture and
the Notes, according to the terms thereof.
"Independent Financial Advisor" means a United States investment
banking firm of national or regional standing in the United States (i) which
does not, and whose directors, officers and employees or Affiliates do not have,
a direct or indirect financial interest in the Company and (ii) which, in the
judgment of the Board, is otherwise independent and qualified to perform the
task for which it is to be engaged.
"Initial Notes" means the 131/2% Senior Discount Notes due 2008,
Series A, of the Company.
"Initial Purchasers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation.
"Institutional Accredited Investor" means an institution that is
an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act.
"interest" means, when used with respect to any Note, the amount
of all interest accruing on such Note, including all additional interest payable
on the Notes pursuant to the Registration Rights Agreement and all interest
accruing subsequent to the occurrence of any events specified in Sections
5.01(vii), (viii) and (ix) hereof or which would have accrued but for any such
event, whether or not such claims are allowable under applicable law.
"Interest Payment Date" means, when used with respect to any
Note, the Stated Maturity of an installment of cash interest on such Note, as
set forth in such Note.
"Interest Rate Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount and shall include, without limitation, interest rate
swaps, caps, floors, collars, forward interest rate agreements and similar
agreements.
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"Investment" means, with respect to any Person, any direct or
indirect advance, loan, account receivable (other than an account receivable
arising in the ordinary course of business), or other extension of credit
(including, without limitation, by means of any Guarantee) or any capital
contribution to (by means of transfers of cash or other property or assets to
others, payments for property or services for the account or use of others, or
otherwise), or any purchase or acquisition of capital stock, bonds, notes,
debentures or other securities or evidences of Indebtedness of any other Person.
The amount of any Investment shall be the original cost of such Investment, PLUS
the cost of all additions thereto, and MINUS the amount of any portion of such
Investment repaid to such Person in cash as a repayment of principal or a return
of capital, as the case may be, but without any other adjustments for increases
or decreases in value, or write-ups, write-downs or write-offs with respect to
such Investment. In determining the amount of any Investment involving a
transfer of any property or assets other than cash, such property shall be
valued at its Fair Market Value at the time of transfer.
"Issue Date" means the original date of issuance of the Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or
other), security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any property
of any kind whether or not filed, recorded or otherwise perfected under
applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell or give a security interest and any filing of or agreement to give any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction). A Person shall be deemed to own subject to a Lien any
property which such Person has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
"Market Capitalization" of any Person means, as of any day of
determination, the product of (i) the average Closing Price of a share of such
Person's Common Stock over the 20 consecutive trading days immediately preceding
such date and (ii) the number of shares of such Common Stock issued and
outstanding on such date. "Closing Price" on any trading day with respect to
the per share price of any shares of Common Stock means the last reported sale
price regular way or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices regular way, in either case
on the New York Stock Exchange or, if such shares of Common Stock are not listed
or admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the Nasdaq
National Market or, if such shares are not listed or admitted to trading on any
national securities exchange or quoted on The Nasdaq National Market but such
Person is a "Foreign Issuer" (as defined in Rule 3b-4(b) under the Exchange Act)
and the principal securities exchange on which such shares are listed or
admitted to trading is a "designated offshore securities market" (as defined in
Rule 902(b) under the Securities Act), the average of the reported closing bid
and asked prices regular way on such principal exchange or, if such shares are
not listed or admitted to trading on any national securities exchange or quoted
on the Nasdaq National Market and such Person and any securities markets in
which such Person's Common Stock trades does not meet any of the foregoing such
requirements, the average of the closing bid and asked prices in the
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over-the-counter market as furnished by any New York Stock Exchange member firm
that is selected from time to time by the Company for the purpose and is
reasonably acceptable to the Trustee.
"Maturity Date" means, with respect to any Note, the date
specified in such Note as the fixed date on which the principal of such Note is
due and payable.
"Moody's" means Moody's Investors Service, Inc. (and any
successor).
"Net Cash Proceeds" means, with respect to any Asset Sale, the
proceeds thereof received by the Company or any Restricted Subsidiary in the
form of cash (including assumed Indebtedness (other than Subordinated
Indebtedness) and other items deemed to be cash under the proviso to the first
sentence of Section 10.15 hereof) or Cash Equivalents including payments in
respect of deferred payment obligations when received in the form of cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) net of (i)
brokerage commissions and other fees, costs and expenses (including fees and
expenses of legal counsel and investment bankers) related to such Asset Sale,
(ii) provisions for all taxes paid or payable as a result of such Asset Sale,
(iii) amounts required to be paid to any Person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in or having a Lien on the
assets subject to the Asset Sale, (iv) with respect to Asset Sales by Restricted
Subsidiaries, the portion of such cash and Cash Equivalents attributable to any
Persons holding a minority interest in such Restricted Subsidiary and (v)
appropriate amounts to be provided by the Company or any Restricted Subsidiary,
as the case may be, as a reserve required in accordance with GAAP against any
liabilities associated with such Asset Sale and retained by the Company or any
Restricted Subsidiary, as the case may be, after such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as reflected in
an Officers' Certificate delivered to the Trustee.
"Non-U.S. Person" means any Person that is not a U.S. Person, as
such term is defined in Regulation S.
"Notes" shall have the meaning specified in the recitals of this
Indenture.
"Offering Memorandum" means the Offering Memorandum of the
Company, dated April 28, 1998, pursuant to which the Initial Notes were offered,
and any supplement thereto.
"Officer" means, with respect to the Company, the Chairman of
the Board, a Vice Chairman, the President, a Vice President, the Secretary, an
Assistant Secretary, the Treasurer or an Assistant Treasurer.
"Officers' Certificate" means, with respect to the Company, a
certificate signed by the Chairman of the Board, a Vice Chairman, the President
or a Vice President, and by the Secretary, an
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Assistant Secretary, the Treasurer or an Assistant Treasurer, of the Company
and delivered to the Trustee.
"144A Global Note" means a permanent global note in registered
form representing the aggregate principal amount of Notes sold in reliance on
Rule 144A.
"Opinion of Counsel" means a written opinion of legal counsel
who may be counsel for the Company, the Trustee or any Subsidiary Guarantor, as
applicable, and who shall be reasonably acceptable to the Trustee.
"Outstanding" means, as of the date of determination, all Notes
theretofore authenticated and delivered under this Indenture, except:
(i) Notes theretofore canceled by the Trustee or delivered
to the Trustee for cancellation;
(ii) Notes, or portions thereof, for whose payment or
redemption money in the necessary amount has been theretofore deposited with the
Trustee or any Paying Agent (other than the Company or any Affiliate thereof) in
trust or set aside and segregated in trust by the Company or any Affiliate
thereof (if the Company or such Affiliate shall act as Paying Agent) for the
Holders of such Notes; PROVIDED, HOWEVER, that if such Notes are to be redeemed,
notice of such redemption has been duly given pursuant to this Indenture or
provision therefor satisfactory to the Trustee has been made;
(iii) Notes with respect to which the Company has effected
defeasance or covenant defeasance as provided in Article Four, to the extent
provided in Sections 4.02 and 4.03 hereof; and
(iv) Notes in exchange for or in lieu of which other Notes
have been authenticated and delivered pursuant to this Indenture, other than any
such Notes in respect of which there shall have been presented to the Trustee
proof satisfactory to it that such Notes are held by a BONA FIDE purchaser in
whose hands the Notes are valid obligations of the Company;
PROVIDED, HOWEVER, that in determining whether the Holders of the requisite
aggregate principal amount of Outstanding Notes have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Notes owned by
the Company, any other obliger upon the Notes or any Affiliate of the Company or
such other obliger shall be disregarded and deemed not to be Outstanding, except
that, in determining whether the Trustee shall be protected in relying upon any
such request, demand, authorization, direction, notice, consent or waiver, only
Notes that a Responsible Officer of the Trustee knows to be so owned shall be so
disregarded. The Company shall notify the Trustee, in writing, when it
purchases or otherwise acquires Notes, of the aggregate principal amount of such
Notes so purchased or otherwise acquired; PROVIDED that any failure on the part
of the Company to provide the aforesaid notice to the Trustee shall not
constitute a Default under this Indenture. Notes so owned which have been
pledged in good faith may be regarded as Outstanding if the pledgee establishes
to the satisfaction of the Trustee the pledgee's right so to act with respect to
such Notes and that the pledgee is not the
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Company or any other obliger upon the Notes or any Affiliate of the Company
or such other obliger. If the Paying Agent holds, in its capacity as such,
on any Maturity Date or on any optional redemption date money sufficient to
pay all accrued interest and principal with respect to such Notes payable on
that date and is not prohibited from paying such money to the Holders thereof
pursuant to the terms of this Indenture, then on and after that date such
Notes cease to be Outstanding and interest on them ceases to accrue. Notes
may also cease to be outstanding to the extent expressly provided in Article
Four.
"Permitted Business" means any of the following: (i)
transmitting, providing services relating to or developing network and software
applications for the transmission and management of voice, data, video or other
information through owned or leased wireline or wireless transmission facilities
or over the internet; (ii) creating, developing, constructing, installing,
integrating, repairing, maintaining or marketing communications-related systems,
network equipment and wireless and wireline transmission facilities, software
and other related products; and (iii) evaluating, owning, operating,
participating in or pursuing any other business that is primarily related to
those identified in the foregoing clauses (i) and (ii).
"Permitted Business Investments" means an Investment in any
Person the primary business of which consists of a Permitted Business.
"Permitted Credit Facility" means any senior secured or
unsecured commercial term loan and/or revolving credit facilities (including any
letter of credit subfacility) entered into principally with commercial banks
and/or other financial institutions.
"Permitted Holders" means Brentwood Venture Capital, Enterprise
Partners, Kleiner Perkins Caulfield & Byers, The Sprout Group and Catherine M.
Hapka, and their respective Affiliates.
"Permitted Indebtedness" means the following Indebtedness (each
of which shall be given independent effect):
(a) Indebtedness under the Notes and the Indenture;
(b) Indebtedness (including Disqualified Stock) of the
Company and/or any Restricted Subsidiary outstanding, or committed but
undrawn, on the Issue Date and identified on SCHEDULE A to this
Indenture;
(c) (i) Indebtedness of any Restricted Subsidiary owed to
and held by the Company or a Wholly Owned Restricted Subsidiary and (ii)
Indebtedness of the Company, which is not secured by any Lien and is
subordinated to the Company's obligations with respect to the
Notes, owed to and held by any Restricted Subsidiary; PROVIDED that an
incurrence of Indebtedness shall be deemed to have occurred upon (x) any
sale or other disposition of any Indebtedness of the Company or a
Restricted Subsidiary referred to in this clause (c) to a Person other
than the Company or a Restricted Subsidiary, (y) any sale or other
disposition of
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Capital Stock of a Restricted Subsidiary which holds Indebtedness
of the Company or another Restricted Subsidiary such that
such Restricted Subsidiary ceases to be a Restricted Subsidiary or (z)
the Designation of a Restricted Subsidiary which holds Indebtedness of
the Company or another Restricted Subsidiary as an Unrestricted
Subsidiary;
(d) Interest Rate Obligations of the Company and/or any
Restricted Subsidiary relating to Indebtedness of the Company and/or
such Restricted Subsidiary, as the case may be (which Indebtedness (i)
bears interest at fluctuating interest rates and (ii) is otherwise
permitted to be incurred under Section 10.11 hereof), but only to the
extent that the notional amount of such Interest Rate Obligations does
not exceed the principal amount of the Indebtedness (and/or Indebtedness
subject to commitments) to which such Interest Rate Obligations relate;
(e) Indebtedness of the Company and/or any Restricted
Subsidiary in respect of performance bonds of the Company or any
Restricted Subsidiary or surety bonds provided by the Company or any
Restricted Subsidiary, in each case incurred in the ordinary course of
business;
(f) Indebtedness of the Company and/or any Restricted
Subsidiary to the extent it represents a replacement, renewal,
refinancing or extension (a "refinancing") of the Notes (during the
periods for which redemption is permitted under the terms of the
Indenture) or other outstanding Indebtedness of the Company and/or of
any Restricted Subsidiary incurred or outstanding pursuant to clause
(a), (b), (g) or (h) of this definition or the proviso in the first
paragraph of Section 10.11 hereof; PROVIDED that (i) no Restricted
Subsidiary may incur Indebtedness to refinance Indebtedness of the
Company (except for Guarantees issued in accordance with Section 10.22
hereof); (ii) if such Indebtedness being refinanced has an Average Life
to Stated Maturity equal to or longer than the Average Life to Stated
Maturity of the Notes, any such refinancing shall have an Average Life
to Stated Maturity longer than the Average Life to Stated Maturity of
the Notes and a final stated maturity for the payment of principal
thereof later than the final stated maturity of the Notes; (iii) if such
Indebtedness being refinanced has an Average Life to Stated Maturity
shorter than the Average Life to Stated Maturity of the Notes, any such
refinancing shall have an Average Life to Stated Maturity longer than,
and a final stated maturity later than, the Indebtedness being
refinanced; (iv) any such refinancing shall not exceed the sum of the
principal amount (or, if such Indebtedness provides for a lesser amount
to be due and payable upon a declaration of acceleration thereof, an
amount no greater than such lesser amount) of the Indebtedness being
refinanced, PLUS the amount of accrued and unpaid interest thereon, PLUS
the amount of any reasonably determined prepayment premium necessary to
accomplish such refinancing and such reasonable fees and expenses
incurred in connection therewith; (v) the Notes and Indebtedness that
ranks PARI PASSU with the Notes may be refinanced only with Indebtedness
that is made PARI PASSU with or subordinate in right of payment to the
Notes, and Subordinated Indebtedness may only be refinanced with
Subordinated Indebtedness; and (vi) the refinancing Indebtedness shall
be incurred by the obliger of the Indebtedness being refinanced or by
the Company;
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(g) Indebtedness of the Company such that, after giving
effect to the incurrence thereof, (i) the total aggregate principal
amount of Indebtedness incurred under this clause (g) and any
refinancings thereof otherwise incurred in compliance with this
Indenture would not exceed 200% of Total Incremental Equity, and (ii)
such Indebtedness does not mature prior to the final stated maturity of
the Notes and has an Average Life to Stated Maturity longer than the
Notes;
(h) Indebtedness of the Company or any Restricted Subsidiary
incurred under any Permitted Credit Facility and/or Indebtedness of the
Company represented by Debt Securities, and any refinancings of the
foregoing otherwise incurred in compliance with this Indenture, in an
aggregate principal amount not to exceed $40 million at any time
outstanding;
(i) Indebtedness of the Company or any Restricted Subsidiary
that is Purchase Money Indebtedness;
(j) Indebtedness in respect of (i) letters of credit,
bankers' acceptances or other similar instruments or obligations, issued
in connection with liabilities incurred in the ordinary course of
business or (ii) surety, judgment, appeal, performance and other similar
bonds, instruments or obligations provided in the ordinary course of
business; and
(k) in addition to the items referred to in clauses (a)
through (j) above, Indebtedness of the Company having an aggregate
principal amount not to exceed $5 million at any time outstanding.
"Permitted Investments" means (a) any Investment in the Company
or in a Wholly Owned Restricted Subsidiary of the Company or in a Person as a
result of which such Person becomes a Wholly Owned Restricted Subsidiary; (b)
Investments constituting Permitted Business Investments, the sum of which does
not exceed $25 million at any one time outstanding; (c) Cash Equivalents; (d)
Investments in prepaid expenses, negotiable instruments held for collection and
lease, utility and workers' compensation, performance and other similar
deposits; (e) Interest Rate Obligations incurred in compliance with Section
10.11 hereof; (f) loans and advances to employees made in the ordinary course of
business not to exceed $500,000 in the aggregate at any one time outstanding;
(g) bonds, notes, debentures or other securities (other than Capital Stock of
any Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary)
received as a result of Asset Sales permitted under Section 10.15 hereof; (h)
any Investment to the extent that the consideration therefor consists of Capital
Stock (other than Disqualified Stock) of the Company; and (i) the extension by
the Company of (x) trade credit to Subsidiaries of the Company represented by
accounts receivable, extended on usual and customary terms in the ordinary
course of business or (y) Guarantees of commitments for the purchase of goods or
services incurred in the ordinary course of business so long as such Guarantees,
to the extent constituting Indebtedness, are permitted to be incurred under
Section 10.11 hereof.
"Permitted Liens" means (a) Liens on property of a Person
existing at the time such Person is merged into or consolidated with the Company
or any Restricted Subsidiary or becomes a
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Restricted Subsidiary; PROVIDED that such Liens were in existence prior to
the contemplation of such merger, consolidation or acquisition and do not
secure any property or assets of the Company or any Restricted Subsidiary
other than the property or assets subject to the Liens prior to such merger
or consolidation or acquisition; (b) Liens imposed by law, such as carriers',
warehousemen's and mechanics' Liens and other similar Liens arising in the
ordinary course of business that secure payment of obligations not more than
60 days past due or that are being contested in good faith and by appropriate
proceedings; (c) Liens existing on the Issue Date (including Liens securing
Indebtedness permitted under clause (b) of the definition of Permitted
Indebtedness); (d) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith
by appropriate proceedings promptly instituted and diligently conducted;
PROVIDED that any reserve or other appropriate provision as shall be required
in conformity with GAAP shall have been made therefor; (e) easements, rights
of way, restrictions and other similar easements, licenses, restrictions on
the use of properties, or minor imperfections of title that, in the
aggregate, are not material in amount and do not in any case materially
detract from the properties subject thereto or interfere with the ordinary
conduct of the business of the Company or the Restricted Subsidiaries; (f)
Liens to secure the performance of statutory obligations surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in
the ordinary course of business (exclusive of obligations for the payment of
borrowed money); (g) Liens securing Indebtedness incurred under a Permitted
Credit Facility; PROVIDED, HOWEVER, that the incurrence of such Indebtedness
is permitted by Section 10.11 hereof; (h) Liens to secure any refinancing of
any Indebtedness secured by Liens permitted by this Indenture, but only to
the extent that such Liens do not extend to any other property or assets
(other than improvements thereto); (i) Liens to secure the Notes and Liens
created under this Indenture; (j) Liens securing Purchase Money Indebtedness;
(k) Liens on and pledges of Capital Stock of any Unrestricted Subsidiary
securing any Indebtedness of such Unrestricted Subsidiary; (l) Liens securing
reimbursement obligations with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the
products and proceeds thereof; (m) Liens to secure Capitalized Lease
Obligations permitted to be incurred under the Indenture; (n) Liens that do
not materially detract from the value of the property subject to such Liens,
that do not materially interfere with the ordinary conduct of the business of
the Company or any of its Restricted Subsidiaries, and that are made on
customary and usual terms applicable to similar assets; (o) pledges or
deposits by a Person under workmen's compensation laws, unemployment
insurance laws or similar legislation, or good faith deposits in connection
with bids, tenders, contracts (other than for the payment of Indebtedness) or
leases to which such Person is a party, or deposits to secure public or
statutory obligations of such Person, or deposits or cash or United States
government bonds to secure surety or appeal bonds to which such Person is a
party, or deposits as security for contested taxes or import duties or for
the payment of rent, in each case incurred in the ordinary course of
business; (p) Liens customary in the industry and incurred in the ordinary
course of business securing Interest Rate Obligations so long as the related
Indebtedness is, and is permitted to be under the Indenture, secured by a
Lien on the same property securing such Interest Rate Obligations; and (q)
Liens held by the Company on the assets or property of a Restricted
Subsidiary of the Company to secure Indebtedness of such Restricted
Subsidiary owing to and held by the Company.
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<PAGE>
"Person" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Predecessor Note" means, with respect to any particular Note,
every previous Note evidencing all or a portion of the same debt as that
evidenced by such particular Note; and, for the purposes of this definition, any
Note authenticated and delivered under Section 3.06 hereof in exchange for a
mutilated Note or in lieu of a lost, destroyed or stolen Note shall be deemed to
evidence the same debt as the mutilated, lost, destroyed or stolen Note.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's preferred or preference stock whether now outstanding or issued
after the Issue Date, and including, without limitation, all classes and series
of preferred or preference stock of such Person.
"Private Placement Legend" shall mean the first paragraph of the
legend initially set forth in the Initial Notes in the form set forth on Exhibit
A-l.
"Public Equity Offering" means an underwritten primary public
offering of Common Stock of the Company for cash pursuant to an effective
registration statement filed under the Securities Act.
"Purchase Agreement" means the Purchase Agreement, dated as of
April 28, 1998, by and among the Company and the Initial Purchasers, as the same
may be amended, supplemented or otherwise modified from time to time in
accordance with the terms thereof.
"Purchase Money Indebtedness" means Indebtedness of the Company
or any Restricted Subsidiary (including Acquired Indebtedness and Indebtedness
represented by Capitalized Lease Obligations, Attributable Debt in respect of
Sale/Leaseback Transactions, mortgage financings and purchase money obligations)
incurred at any time within 180 days of and for the purpose of financing all or
any part of the cost of, the construction, expansion, installation, acquisition
or improvement by the Company or any Restricted Subsidiary of any Permitted
Business Assets or not less than 662/3 percent of the outstanding Voting Stock
of a Person that becomes a Restricted Subsidiary the assets of which consist
primarily of Permitted Business Assets; PROVIDED that the proceeds of such
Indebtedness are expended for such purposes within such 180-day period; and
PROVIDED FURTHER that the amount of such Indebtedness does not exceed, as of the
date of incurrence of such Indebtedness, 100 percent of the lesser of the cost
or the Fair Market Value of such Permitted Business Assets.
"Qualified Institutional Buyer" or "QIB" shall have the meaning
specified in Rule 144A.
"Redemption Date" means, with respect to any Note to be
redeemed, the date fixed by the Company for such redemption pursuant to this
Indenture and the Notes.
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"Redemption Price" means, with respect to any Note to be
redeemed, the price fixed for such redemption pursuant to the terms of this
Indenture and the Notes.
"refinancing" has the meaning set forth in clause (f) of the
definition of "Permitted Indebtedness."
"Registrable Securities" means Transfer Restricted Notes, as
defined in the Registration Rights Agreement.
"Registration Rights Agreement" means the Notes Registration
Rights Agreement, dated as of May 5, 1998, between the Company and the Initial
Purchasers, as the same may be amended, supplemented or otherwise modified from
time to time in accordance with the terms thereof.
"Regular Record Date" means the Regular Record Date specified in
the Notes.
"Regulation S" means Regulation S under the Securities Act.
"Regulation S Global Note" means a permanent global note in
registered form representing the aggregate principal amount of Notes sold in
reliance on Regulation S.
"Responsible Officer" means, with respect to the Trustee, any
trust officer or assistant trust officer or any other officer of the Trustee
customarily performing functions similar to those performed by any of the above
designated officers and also means, with respect to a particular corporate trust
matter, any other officer of the Trustee to whom any corporate trust matter is
referred because of his or her knowledge of and familiarity with the particular
subject.
"Restricted Note" means a Note that constitutes a "restricted
security" within the meaning of Rule 144(a)(3) under the Securities Act;
PROVIDED, HOWEVER, that the Trustee shall be entitled to request and
conclusively rely on an Opinion of Counsel with respect to whether any Note
constitutes a Restricted Note.
"Restricted Payment" means any of the following: (i) the
declaration or payment of any dividend or any other distribution on any Capital
Stock of the Company or any Restricted Subsidiary or any other payment made to
the direct or indirect holders (in their capacities as such) of Capital Stock of
the Company or any Restricted Subsidiary (other than any dividends,
distributions or payments made to the Company or any Restricted Subsidiary and
dividends or distributions payable solely in Capital Stock (other than
Disqualified Stock) of the Company or in options, warrants or other rights to
purchase Capital Stock (other than Disqualified Stock) of the Company); (ii) the
purchase, redemption or other acquisition or retirement for value of any Capital
Stock of the Company or any Restricted Subsidiary (other than any such Capital
Stock owned by the Company or a Restricted Subsidiary); (iii) the purchase,
redemption, defeasance or other acquisition or retirement for value, or the
making of any principal payment on, prior to any scheduled repayment, scheduled
sinking fund payment or scheduled maturity, of any Subordinated Indebtedness
(other than any Subordinated
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Indebtedness held by a Wholly Owned Restricted Subsidiary); or (iv) the
making by the Company or any Restricted Subsidiary of any Investment (other
than a Permitted Investment) in any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that
has not been designated by the Board, by a Board Resolution delivered to the
Trustee, as an Unrestricted Subsidiary pursuant to and in compliance with
Section 10.20 hereof. Any such designation may be revoked by a Board Resolution
delivered to the Trustee, subject to the provisions of such covenant.
"Rule 144A" means Rule 144A under the Securities Act.
"S&P" means Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies (and any successor).
"Sale/Leaseback Transaction" of any Person means an arrangement
with any lender or investor or to which such lender or investor is a party
providing for the leasing by such Person of any property or assets of such
Person which has been or is being sold or transferred by such Person after its
acquisition thereof or the completion of construction or commencement of
operations thereof to such lender or investor or to any other Person to whom
funds have been or are to be advanced by such lender or investor on the security
of such property or asset.
"SEC" means the Securities and Exchange Commission, as from time
to time constituted, or if at any time after the execution of this Indenture
such agency is not existing and performing the applicable duties now assigned to
it, then the body or bodies performing such duties at such time.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated by the SEC thereunder.
"Shelf Registration Statement" shall have the meaning specified
in the Registration Rights Agreement.
"Special Record Date" means, with respect to the payment of any
Defaulted Interest, a date fixed by the Trustee pursuant to Section 3.07 hereof.
"Stated Maturity" means, with respect to any Note or any
installment of interest thereon, the dates specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable and, when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness, or any installment of interest, is
due and payable.
"Strategic Equity Investor" means any Person that, as of the
date of determination, has a Market Capitalization or Consolidated Net Worth of
at least $2.0 billion and derives a substantial portion of its revenues from a
business related to the Permitted Business.
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"Subordinated Indebtedness" means any Indebtedness of the
Company which is expressly subordinated in right of payment to any other
Indebtedness of the Company.
"Subsidiary" means, with respect to any Person, (a) any
corporation of which the outstanding Capital Stock having at least a majority of
the votes entitled to be cast in the election of directors shall at the time be
owned, directly or indirectly, by such Person, or (b) any other Person of which
at least a majority of voting interest is at the time, directly or indirectly,
owned by such Person.
"Subsidiary Guarantor" means each Restricted Subsidiary that
becomes a guarantor of the Notes pursuant to the provisions of Section 10.22
hereof, in each case until it is released from its Subsidiary Guarantee pursuant
to the terms thereof.
"Total Consolidated Indebtedness" means, at any date of
determination, an amount equal to the aggregate amount of all Indebtedness of
the Company and the Restricted Subsidiaries outstanding as of such date of
determination.
"Total Incremental Equity" means, at any time of determination,
the sum of, without duplication, (a) the aggregate net cash proceeds received by
the Company from capital contributions in respect of existing Capital Stock
(other than Disqualified Stock) or the issuance and sale of Capital Stock (other
than Disqualified Stock but including Capital Stock issued upon the conversion
of convertible Indebtedness or from the exercise of options, warrants or rights
to purchase Capital Stock (other than Disqualified Stock)) subsequent to the
Issue Date, other than to a Subsidiary of the Company, PLUS (b) 80 percent of
the Fair Market Value of property (other than cash and Cash Equivalents)
received by the Company after the Issue Date as a contribution of capital or
from the sale of its Capital Stock (other than Disqualified Stock) to a Person
that is not a Subsidiary of the Company, MINUS (c) any amounts included in
clause (a) above to the extent used to make a Restricted Payment pursuant to
clauses (2) or (3)(A)(x) of Section 10.13 hereof.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of
1939, as amended, as in force at the date as of which this Indenture was
executed, except as provided in Section 9.05 hereof; PROVIDED, HOWEVER, that in
the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939, as so amended.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture, until a successor Person shall have replaced such
Person pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Person.
"Unit Agent" means State Street Bank and Trust Company of
California, N.A., a national banking association, as unit agent for the Units,
and any successor unit agent.
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"Unrestricted Notes" means one or more Notes that do not and are
not required to bear the Private Placement Legend in the form set forth in
Exhibit A, including, without limitation, the Exchange Notes.
"Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such pursuant to and in compliance with Section 10.20 hereof. Any
such designation may be revoked by a Board Resolution delivered to the Trustee,
subject to the provisions of such covenant.
"U.S. Government Securities" means securities that are direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged.
"Voting Stock" means, with respect to any Person, the Capital
Stock of any class or kind ordinarily having the power to vote for the election
of directors or other members of the governing body of such Person.
"voting power" means, with respect to the Capital Stock of any
Person, the relative voting power in any general election of directors or other
members of the governing body of such Person.
"Warrant Agreement" means the Warrant Agreement, dated as of May
5, 1998, between the Company and State Street Bank and Trust Company of
California, N.A., as warrant agent, as the same may be amended, supplemented or
otherwise modified from time to time in accordance with its terms.
"Wholly Owned Restricted Subsidiary" means any Restricted
Subsidiary of which 100% of the outstanding Capital Stock is owned by the
Company or another Wholly Owned Restricted Subsidiary. For the purposes of this
definition, any directors' qualifying shares or investments by foreign nationals
mandated by applicable law shall be disregarded in determining the ownership of
a Restricted Subsidiary.
SECTION 1.02. OTHER DEFINITIONS.
<TABLE>
<CAPTION>
Defined in
Term Section
----- ----------
<S> <C>
"Act" 1.05
"Additional Interest" 10.23
"Additional Interest Payment Date" 10.23
"Affiliate Transaction" 10.14
"Agent" 3.02
"Agent Members" 3.16
"Asset Sale Offer" 10.15
"Asset Sale Offer Purchase Date" 10.15
</TABLE>
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<TABLE>
<CAPTION>
Defined in
Term Section
----- ----------
<S> <C>
"Assumed Indebtedness" 10.15
"assumed liabilities" 10.15
"Change of Control Date" 10.10
"Change of Control Offer" 10.10
"Change of Control Payment Date" 10.10
"covenant defeasance" 4.03
"Defaulted Interest" 3.07
"defeasance" 4.02
"Defeased Notes" 4.01
"Designation" 10.20
"Designation Amount" 10.20
"Event of Default" 5.01
"incur" 10.11
"Investment Company Act" 4.04
"Note Amount" 10.15
"Note Pro Rate Share of Unutilized
Net Cash Proceeds 10.15
"Note Register" 3.05
"Other Indebtedness" 10.15
"Paying Agent" 3.02
"Permitted Business Assets" 10.15
"Physical Notes" 2.01
"Registrar" 3.02
"Registration Default" 10.23
"Restricted Period" 3.17
"Revocation" 10.20
"Separability Date" 3.18
"Subsidiary Guarantee" 10.22
"surviving entity" 8.01
"Unit" 3.18
"Unutilized Net Cash Proceeds" 10.15
</TABLE>
SECTION 1.03. RULES OF CONSTRUCTION.
For all purposes of this Indenture, except as otherwise
expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article (including terms
referred to in Section 1.02 hereof) have the meanings assigned to them in this
Article, and include the plural as well as the singular;
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(b) all other terms used herein which are defined in the
Trust Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
(c) all accounting terms not otherwise defined herein have
the meanings assigned to them in accordance with GAAP as in effect on the Issue
Date;
(d) the words "herein" "hereof" and "hereunder" and other
words of similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision;
(e) all references to "$" or "dollars" refer to the lawful
currency of the United States of America; and
(f) the words "include," "included" and "including" as used
herein are deemed in each case to be followed by the phrase "without
limitation."
SECTION 1.04. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified
by, or covered by an opinion of, any specified Person, it is not necessary that
all such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other Persons as to other matters, and any such Person may certify or
give an opinion as to such matters in one or several documents.
Any certificate or opinion of an Officer may be based, insofar
as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such Officer knows that the certificate or
opinion or representations with respect to the matters upon which his
certificate or opinion is based are erroneous. Any such certificate or opinion
may be based, insofar as it relates to factual matters, upon a certificate or
opinion of, or representations by, an Officer or Officers of the Company,
stating that the information with respect to such factual matters is in the
possession of the Company, unless such counsel knows that the certificate or
opinion or representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or
more applications, requests, consents, certificates, statements, opinions or
other instruments under this Indenture, they may, but need not, be consolidated,
with proper identification of each matter covered therein, and form one
instrument.
SECTION 1.05. ACTS OF HOLDERS.
Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by an agent duly
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appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution (as provided below in this
Section 1.05) of any such instrument or of a writing appointing any such agent
shall be sufficient for any purpose of this Indenture and (subject to Section
6.01 hereof) conclusive in favor of the Trustee and the Company, if made in the
manner provided in this Section.
The fact and date of the execution by any Person of any such
instrument or writing may be proved in any reasonable manner which the Trustee
deems sufficient.
The ownership of Notes shall be proved by the Note Register.
Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of any Note shall bind every future Holder
of the same Note or the Holder of every Note issued upon the transfer thereof or
in exchange therefor or in lieu thereof to the same extent as the original
Holder, in respect of anything done, suffered or omitted to be done by the
Trustee, any Paying Agent, the Company or any other obliger upon the Notes in
reliance thereon, whether or not notation of such action is made upon such Note.
SECTION 1.06. NOTICES, ETC., TO THE TRUSTEE AND THE
COMPANY.
Any request, demand, authorization, direction, notice, consent,
waiver or other action of Holders or other document provided or permitted by
this Indenture to be made upon, given or furnished to, or filed with:
(a) the Trustee by any Holder or by the Company shall be
sufficient for every purpose hereunder if made, given, furnished or filed, in
writing, to or with the Trustee at: State Street Bank and Trust Company of
California, N.A., Library Tower, 633 West 5th Street, 12th Floor, Los Angeles,
California 90071, Attention: Corporate Trust Department, or at any other address
previously furnished in writing to the Holders and the Company by the Trustee;
or
(b) the Company by the Trustee or by any Holder shall be
sufficient for every purpose (except as otherwise expressly provided herein)
hereunder if in writing and mailed, first-class postage prepaid, to the Company
addressed to it at Rhythms NetConnections Inc., 7337 South Revere Parkway,
Englewood, Colorado 80112-3931, Attention: Chief Executive Officer, or at any
other address previously furnished in writing to the Trustee by the Company.
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SECTION 1.07. NOTICE TO HOLDERS; WAIVER.
Where this Indenture provides for notice to Holders of any
event, such notice shall be sufficiently given (unless otherwise expressly
provided herein) if in writing and mailed, first-class postage prepaid, to
each Holder affected by such event, at the address of such Holder as it
appears in the Note Register, not later than the latest date, and not earlier
than the earliest date, prescribed for the giving of such notice. In any
case where notice to Holders is given by mail, neither the failure to mail
such notice, nor any defect in any notice so mailed, to any particular Holder
shall affect the sufficiency of such notice with respect to other Holders.
Any notice when mailed to a Holder in the aforesaid manner shall be
conclusively deemed to have been received by such Holder whether or not
actually received by such Holder. Where this Indenture provides for notice in
any manner, such notice may be waived in writing by the Person entitled to
receive such notice, either before or after the event, and such waiver shall
be the equivalent of such notice. Waivers of notice by Holders shall be filed
with the Trustee, but such filing shall not be a condition precedent to the
validity of any action taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service
or by reason of any other cause, it shall be impracticable to mail notice of
any event as required by any provision of this Indenture, then any method of
giving such notice as shall be satisfactory to the Trustee shall be deemed to
be a sufficient giving of such notice.
SECTION 1.08. CONFLICT WITH TRUST INDENTURE ACT.
If any provision hereof limits, qualifies or conflicts with
any provision of the Trust Indenture Act or another provision which is
required or deemed to be included in this Indenture by any of the provisions
of the Trust Indenture Act, such provision or requirement of the Trust
Indenture Act shall control.
If any provision of this Indenture modifies or excludes any
provision of the Trust Indenture Act that may be so modified or excluded, the
latter provision shall be deemed to apply to this Indenture as so modified or
excluded, as the case may be.
SECTION 1.09. EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction
hereof.
SECTION 1.10. SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the Company
shall bind its respective successors and assigns, whether so expressed or not.
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SECTION 1.11. SEPARABILITY CLAUSE.
In case any provision in this Indenture or in the Notes
issued pursuant hereto shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.
SECTION 1.12. BENEFITS OF INDENTURE.
Nothing in this Indenture or in the Notes issued pursuant
hereto, express or implied, shall give to any Person (other than the parties
hereto and their successors hereunder, any Paying Agent and the Holders) any
benefit or any legal or equitable right, remedy or claim under this Indenture.
SECTION 1.13. GOVERNING LAW.
THIS INDENTURE, THE NOTES AND EACH SUBSIDIARY GUARANTEE, IF
ANY, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
SECTION 1.14. NO RECOURSE AGAINST OTHERS.
A director, officer, employee or stockholder, as such, of the
Company or any Subsidiary Guarantor shall not have any liability for any
obligations of the Company or such Subsidiary Guarantor under the Notes, any
Subsidiary Guarantee or this Indenture or for any claim based on, in respect
of or by reason of such obligations or their creation.
SECTION 1.15. INDEPENDENCE OF COVENANTS.
Except as otherwise expressly provided herein, all covenants
and agreements in this Indenture shall be given independent effect so that if
a particular action or condition is not permitted by any of such covenants,
the fact that it would be permitted by an exception to, or be otherwise
within the limitations of, another covenant shall not avoid the occurrence of
a Default if such action is taken or condition exists.
SECTION 1.16. EXHIBITS AND SCHEDULES.
All exhibits and schedules attached hereto are by this reference
made a part hereof with the same effect as if herein set forth in full.
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SECTION 1.17. COUNTERPARTS.
This Indenture may be executed in any number of counterparts
and by telecopier, each of which shall be an original; but such counterparts
shall together constitute but one and the same instrument.
SECTION 1.18. DUPLICATE ORIGINALS.
The parties may sign any number of copies of this Indenture.
Each signed copy shall be an original, but all of them together represent the
same agreement.
2. TWO
FORM OF NOTES
SECTION 2.01. FORM AND DATING.
The Notes and the Trustee's certificate of authentication
with respect thereto shall be as required by Section 3.03 hereof.
The definitive Notes shall be printed, typewritten,
lithographed or engraved or produced by any combination of these methods or
may be produced in any other manner permitted by the rules of any securities
exchange on which the Notes may be listed, all as determined by the Officers
executing such Notes, as evidenced by their execution of such Notes.
Each Note shall be dated the date of its issuance and shall
show the date of its authentication.
Notes offered and sold in reliance on Rule 144A and Notes
offered and sold in reliance on Regulation S shall be issued initially in the
form of one or more Global Notes, substantially in the form set forth in
EXHIBIT A-1, deposited with the Trustee, as custodian for the Depository,
duly executed by the Company and authenticated by the Trustee as hereinafter
provided and shall bear the legend set forth in EXHIBIT C. The aggregate
principal amount of the Global Notes may from time to time be increased or
decreased by adjustments made on the records of the Trustee, as custodian for
the Depository, as hereinafter provided.
Notes issued in exchange for interests in a Global Note
pursuant to Section 3.17 hereof may be issued in the form of permanent
certificated Notes in registered form in substantially the form set forth in
EXHIBIT A-1 with respect to the Initial Notes and EXHIBIT A-2 with respect to
Exchange Notes (in each case, the "Physical Notes").
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The Notes shall have notated thereon evidence of each
Subsidiary Guarantee, if any, in the form set forth in ANNEX A to EXHIBIT B;
PROVIDED, HOWEVER, that the failure of any Note to include such notation
shall not affect the validity or enforceability of such Subsidiary Guarantee
or such Note against any Subsidiary Guarantor.
3. THREE
THE NOTES
SECTION 3.01. TITLE AND TERMS.
The aggregate principal amount at maturity of Notes which may
be authenticated and delivered under this Indenture is limited to
$290,000,000 in aggregate principal amount at maturity of Notes, except for
Notes authenticated and delivered upon registration of transfer of, or in
exchange for, or in lieu of, other Notes pursuant to Section 3.03, 3.04,
3.05, 3.06, 9.06, 10.10 or 10.15 hereof or the optional redemption provisions
of the Notes.
The Stated Maturity of the principal of the Notes shall be
May 15, 2008. Cash interest on the Notes will not accrue prior to May 15,
2003. Thereafter, cash interest on the Notes shall accrue at the rate of
13 1/2% per annum from May 15, 2003 or from the most recent Interest Payment
Date to which interest has been paid or duly provided for, payable
semi-annually on May 15 and November 15, in each year, commencing on November
15,2003, to the registered Holders at the close of business on the May I or
November 1, respectively, immediately preceding such Interest Payment Dates,
until the principal thereof is paid or duly provided for.
At the election of the Company, the entire Indebtedness on
the Notes or certain of the Company's obligations and covenants and certain
Events of Default thereunder may be defeased as provided in Article Four.
SECTION 3.02. REGISTRAR AND PAYING AGENT.
The Company shall maintain an office or agency (which shall
be located in the Borough of Manhattan in The City of New York, State of New
York) where Notes may be presented or surrendered for registration of
transfer or for exchange (the "Registrar"), an office or agency (which shall
be located in the Borough of Manhattan in The City of New York, State of New
York) where Notes may be presented or surrendered for payment (the "Paying
Agent" or "Agent") and an office or agency where notices and demands to or
upon the Company in respect of the Notes and this Indenture may be served.
The Registrar and any co-Registrar shall keep a register of the Notes and of
their transfer and exchange. The Company may have one or more co-registrars
and one or more additional paying agents. The term "Paying Agent" or "Agent"
includes any additional paying agent. The Company may act as its own Paying
Agent. The Company may change the Paying Agent or Registrar without notice
to any Holder.
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The Company shall enter into an appropriate agency agreement
with any Agent not a party to this Indenture, which shall incorporate the
provisions of the Trust Indenture Act. The agreement shall implement the
provisions of this Indenture that relate to such Agent. The Company shall
notify the Trustee of the name and address of any such Agent. If the Company
fails to maintain a Registrar or Paying Agent, or fails to give the foregoing
notice, the Trustee shall act as such and shall be entitled to appropriate
compensation in accordance with Section 6.07 hereof.
The Company initially appoints the Trustee as the Registrar
and Paying Agent and agent for service of notices and demands in connection
with the Notes, until such time as the Trustee has resigned or a successor
has been appointed.
SECTION 3.03. EXECUTION AND AUTHENTICATION.
The Initial Notes and the Trustee's certificate of
authentication shall be substantially in the form of EXHIBIT A-1 hereto, and
the Exchange Notes and the Trustee's certificate of authentication relating
thereto shall be substantially in the form of EXHIBIT A-2 hereto, in each
case with such appropriate insertions, omissions, substitutions and other
variations as are permitted or required by this Indenture. The Notes may
have such letters, numbers or other marks of identification and such
notations, legends or endorsements required by law, stock exchange rule, rule
of the Depository or any clearing agency or usage. The Company shall approve
the form of the Notes and any notation, legend or endorsement thereon. Each
Note shall be dated the date of issuance and shall show the date of its
authentication.
The terms and provisions contained in the Notes annexed
hereto as EXHIBIT A-1 and EXHIBIT A-2 shall constitute, and are hereby
expressly made, a part of this Indenture and, to the extent applicable, the
Company and the Trustee, by their execution and delivery of this Indenture,
expressly agree to such terms and provisions and to be bound thereby.
Two Officers, or an Officer and an Assistant Secretary, of
the Company shall sign, or one Officer of the Company shall sign, and one
Officer or an Assistant Secretary of the Company (each of whom shall, in each
case, have been duly authorized by all requisite corporate actions) shall
attest to, the Notes for the Company by manual or facsimile signature and may
be imprinted or otherwise reproduced.
An officer of a Subsidiary Guarantor (who shall have been
duly authorized by all requisite corporate actions) shall sign by manual or
facsimile signature, which may be imprinted or otherwise reproduced, a
notation, in the form of ANNEX A to EXHIBIT B, in respect of the Subsidiary
Guarantee of such Subsidiary Guarantor, on the Notes transferred and
exchanged subsequent to the issuance of such Subsidiary Guarantee for so long
as it remains outstanding.
If an Officer or Assistant Secretary of the Company or an
officer of a Subsidiary Guarantor whose signature is on a Note or a notation,
as the case may be, was an officer or (in the case of the Company) Officer or
Assistant Secretary at the time of such execution but no longer holds that
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office or position at the time the Trustee authenticates the Note, then the
Note, the Subsidiary Guarantee, if any, and any notation thereon shall
nevertheless be valid.
A Note shall not be valid until an authorized signatory of
the Trustee manually signs the certificate of authentication on the Note.
The signature of such representative of the Trustee shall be conclusive
evidence that the Note has been authenticated under this Indenture.
The Trustee shall authenticate (i) Initial Notes for original
issue in an aggregate principal amount at maturity not to exceed $290,000,000
and (ii) Unrestricted Notes from time to time only in exchange for a like
principal amount at maturity of Initial Notes, upon a written order of the
Company in the form of an Officers' Certificate of the Company. Each such
written order shall specify the amount of Notes to be authenticated and the
date on which the Notes are to be authenticated, whether the Notes are to be
Initial Notes or Unrestricted Notes and whether (subject to Section 2.01 and
this Section 3.03) the Notes are to be issued as Physical Notes or Global
Notes and such other information as the Trustee may reasonably request. The
aggregate principal amount at maturity of Notes Outstanding at any time may
not exceed $290,000,000, except as provided in Section 3.06 hereof.
Notwithstanding the foregoing, all Notes issued under this
Indenture shall vote and consent together on all matters (as to which any of
such Notes may vote or consent) as one class and no series of Notes will have
the right to vote or consent as a separate class on any matter.
The Trustee may appoint an authenticating agent reasonably
acceptable to the Company to authenticate Notes. Unless otherwise provided
in the appointment, an authenticating agent may authenticate Notes whenever
the Trustee may do so. Each reference in this Indenture to authentication by
the Trustee includes authentication by such agent. An authenticating agent
has the same rights as an Agent to deal with the Company and Affiliates of
the Company.
The Notes shall be issuable in fully registered form only,
without coupons, in denominations of $1,000 and any integral multiple thereof.
SECTION 3.04. TEMPORARY NOTES.
Until definitive Notes are prepared and ready for delivery,
the Company may execute and upon a Company Order the Trustee shall
authenticate and deliver temporary Notes. The Company Order shall specify
the amount of temporary Notes to be authenticated and the date on which the
temporary Notes are to be authenticated. Temporary Notes shall be
substantially in the form of definitive Notes, in any authorized
denominations, but may have variations that the Company reasonably considers
appropriate for temporary Notes as conclusively evidenced by the Company's
execution of such temporary Notes.
If temporary Notes are issued, the Company will cause
definitive Notes to be prepared without unreasonable delay but in no event
later than the date that the Exchange Offer is
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consummated. After the preparation of definitive Notes, the temporary Notes
shall be exchangeable for definitive Notes upon surrender of the temporary
Notes at the office or agency of the Company designated for such purpose
pursuant to Section 10.02 hereof, without charge to the Holder. Upon
surrender for cancellation of any one or more temporary Notes, the Company
shall execute and the Trustee shall authenticate and deliver in exchange
therefor a like principal amount of definitive Notes of like tenor and of
authorized denominations. Until so exchanged the temporary Notes shall in
all respects be entitled to the same benefits under this Indenture as
definitive Notes.
SECTION 3.05. TRANSFER AND EXCHANGE.
The Company shall cause to be kept at the Corporate Trust
Office of the Trustee a register (the register maintained in such office and
in any other office or agency designated pursuant to Section 10.02 hereof
being sometimes referred to herein as the "Note Register") in which, subject
to such reasonable regulations as the Registrar may prescribe, the Company
shall provide for the registration of Notes and of transfers and exchanges of
Notes. The Trustee is hereby initially appointed Registrar for the purpose
of registering Notes and transfers of Notes as herein provided.
Subject to Sections 3.16 and 3.17, when Notes are presented
to the Registrar or a co-Registrar with a request from the Holder of such
Notes to register the transfer or exchange for an equal principal amount of
Notes of other authorized denominations, such Registrar or co-Registrar shall
register the transfer or make the exchange as requested if its requirements
for such transaction are met; PROVIDED, HOWEVER, that every Note presented or
surrendered for registration of transfer or exchange shall be duly endorsed
or be accompanied by a written instrument of transfer or exchange in form
satisfactory to the Company and the Registrar or co-Registrar, duly executed
by the Holder thereof or his attorney duly authorized in writing. Whenever
any Notes are so presented for exchange, at the Registrar's or co-Registrar's
written request, the Company shall execute, and the Trustee shall
authenticate and deliver, the Notes which the Holder making the exchange is
entitled to receive, and each Subsidiary Guarantor, if any, shall execute a
notation on such Notes with respect to its Subsidiary Guarantee. No service
charge shall be made to the Holder for any registration of transfer or
exchange. The Company may require from the Holder payment of a sum
sufficient to cover any transfer taxes or other governmental charge that may
be imposed in relation to a transfer or exchange, but this provision shall
not apply to any exchange pursuant to Section 10.10, 10.15 or 9.06 hereof (in
which events the Company will be responsible for the payment of all such
taxes which arise solely as a result of the transfer or exchange and do not
depend on the tax status of the Holder). The Trustee shall not be required
to exchange or register the transfer of any Note for a period of 15 days
immediately preceding the first mailing of notice of redemption of Notes to
be redeemed or of any Note selected, called or being called for redemption
except, in the case of any Note where public notice has been given that such
Note is to be redeemed in part, the portion thereof not to be redeemed.
All Notes issued upon any registration of transfer or
exchange of Notes shall be the valid obligations of the Company and each
Subsidiary Guarantor, if any, evidencing the same Indebtedness, and entitled
to the same benefits under this Indenture, as the Notes surrendered upon such
registration of transfer or exchange.
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Any Holder of a beneficial interest in a Global Note shall,
by acceptance of such beneficial interest, agree that transfers of beneficial
interests in such Global Notes may be effected only through a book-entry
system maintained by the Holder of such Global Note (or its agent), and that
ownership of a beneficial interest in the Note shall be required to be
reflected in a book-entry system.
SECTION 3.06. MUTILATED, DESTROYED, LOST AND STOLEN NOTES.
If a mutilated Note is surrendered to the Trustee or if the
Holder of a Note of any series claims that the Note has been lost, destroyed
or stolen, the Company and each Subsidiary Guarantor, if any, shall execute
and upon a Company Order, the Trustee shall authenticate and deliver a
replacement Note of like tenor and principal amount, bearing a number not
contemporaneously outstanding if the Holder of such Note furnishes to the
Company, each Subsidiary Guarantor, if any, and to the Trustee evidence
reasonably acceptable to them of the ownership and the destruction, loss or
theft of such Note and an indemnity bond shall be posted by such Holder,
sufficient in the judgment of the Company or the Trustee, as the case may be,
to protect the Company, each Subsidiary Guarantor, if any, the Trustee or any
Agent from any loss that any of them may suffer if such Note is replaced.
The Company may charge such Holder for the Company's expenses in replacing
such Note (including (i) expenses of the Trustee charged to the Company and
(ii) any tax or other governmental charge that may be imposed) and the
Trustee may charge the Company for the Trustee's expenses in replacing such
Note.
Every replacement Note issued pursuant to this Section in
lieu of any destroyed, lost or stolen Note shall constitute an original
additional contractual obligation of the Company and each Subsidiary
Guarantor, if any, whether or not the destroyed, lost or stolen Note shall be
at any time enforceable by anyone, and shall be entitled to all benefits of
this Indenture equally and proportionately with any and all other Notes duly
issued hereunder.
The provisions of this Section are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Notes.
SECTION 3.07. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED.
Interest on any Note which is payable, and is punctually paid
or duly provided for, on any Interest Payment Date shall be paid to the
Person in whose name that Note (or one or more Predecessor Notes) is
registered at the close of business on the Regular Record Date for such
interest.
Any interest on any Note which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date and
interest on such defaulted interest at the then applicable interest rate
borne by the Notes, to the extent lawful (such defaulted interest and
interest thereon herein collectively called "Defaulted Interest") shall
forthwith cease to be payable to the Holder on the Regular Record Date; and
such Defaulted Interest may be paid by the Company, at its election in each
case, as provided in subsection (a) or (b) below:
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(a) The Company may elect to make payment of any
Defaulted Interest to the Persons in whose names the Notes (or their
respective Predecessor Notes) are registered at the close of business on a
Special Record Date for the payment of such Defaulted Interest, which shall
be fixed in the following manner. The Company shall notify the Trustee in
writing of the amount of Defaulted Interest proposed to be paid on each Note
and the date of the proposed payment, and at the same time the Company shall
deposit with the Trustee an amount of money equal to the aggregate amount
proposed to be paid in respect of such Defaulted Interest or shall make
arrangements satisfactory to the Trustee for such deposit prior to the date
of the proposed payment, such money when deposited to be held in trust for
the benefit of the Persons entitled to such Defaulted Interest as provided in
this subsection (a). Thereupon the Trustee shall fix a Special Record Date
for the payment of such Defaulted Interest which shall be not more than 15
days and not less than 10 days prior to the date of the proposed payment and
not less than 10 days after the receipt by the Trustee of the notice of the
proposed payment. The Trustee shall promptly notify the Company in writing
of such Special Record Date. In the name and at the expense of the Company,
the Trustee shall cause notice of the proposed payment of such Defaulted
Interest and the Special Record Date therefor to be mailed, first-class
postage prepaid, to each Holder at its address as it appears in the Note
Register, not less than 10 days prior to such Special Record Date. Notice of
the proposed payment of such Defaulted Interest and the Special Record Date
therefor having been so mailed, such Defaulted Interest shall be paid to the
Persons in whose names the Notes (or their respective Predecessor Notes) are
registered on such Special Record Date and shall no longer be payable
pursuant to the following subsection (b).
(b) The Company may make payment of any Defaulted
Interest in any other lawful manner not inconsistent with the requirements of
any securities exchange or market on which the Notes may be listed, and upon
such notice as may be required by such exchange or market, if, after written
notice given by the Company to the Trustee of the proposed payment pursuant
to this subsection (b), such payment shall be deemed practicable by the
Trustee.
Subject to the foregoing provisions of this Section, each
Note delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Note shall carry the rights to interest
accrued and unpaid, and to accrue, which were carried by such other Note.
SECTION 3.08. PERSONS DEEMED OWNERS.
Prior to and at the time of due presentment for registration
of transfer, the Company, the Trustee and any agent of the Company or the
Trustee may treat the Person in whose name any Note is registered in the Note
Register as the owner of such Note for the purpose of receiving payment of
principal of, premium, if any, and (subject to Section 3.07 hereof) interest
on such Note and for all other purposes whatsoever, whether or not such Note
shall be overdue, and none of the Company, the Trustee or any agent of the
Company or the Trustee shall be affected by notice to the contrary.
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SECTION 3.09. CANCELLATION.
All Notes surrendered for payment, redemption, registration
of transfer or exchange shall be delivered to the Trustee and, if not already
canceled, shall be promptly canceled by it. The Company may at any time
deliver to the Trustee for cancellation any Notes previously authenticated
and delivered hereunder which the Company may have acquired in any manner
whatsoever, and all Notes so delivered shall be promptly canceled by the
Trustee. The Registrar, any co-Registrar and the Paying Agent shall forward
to the Trustee any Notes surrendered to them for registration of transfer or
exchange, redemption or payment. The Trustee and no one else shall cancel
all Notes surrendered for registration of transfer, exchange, payment,
replacement or cancellation. No Notes shall be authenticated in lieu of or
in exchange for any Notes canceled as provided in this Section 3.09, except
as expressly permitted by this Indenture. All canceled Notes held by the
Trustee shall be destroyed and certification of their destruction delivered
to the Company unless by a Company Order the Company shall direct that the
canceled Notes be returned to it. The Trustee shall provide the Company a
list of all Notes that have been canceled from time to time as requested by
the Company.
SECTION 3.10. COMPUTATION OF INTEREST.
Interest on the Notes shall be computed on the basis of a
360-day year of twelve 30-day months and, in the case of a partial month, the
actual number of days elapsed.
SECTION 3.11. LEGAL HOLIDAYS.
In any case where any Interest Payment Date, Redemption Date,
date established for the payment of Defaulted Interest or Stated Maturity of
any Note shall not be a Business Day, then (notwithstanding any other
provision of this Indenture or of the Notes) payment of principal, premium if
any, or interest need not be made on such date, but may be made on the next
succeeding Business Day with the same force and effect as if made on the
Interest Payment Date, Redemption Date, date established for the payment of
Defaulted Interest or at the Stated Maturity, as the case may be. In such
event, no interest shall accrue with respect to such payment for the period
from and after such Interest Payment Date, Redemption Date, date established
for the payment of Defaulted Interest or Stated Maturity, as the case may be,
to the next succeeding Business Day and, with respect to any Interest Payment
Date, interest for the period from and after such Interest Payment Date shall
accrue with respect to the next succeeding Interest Payment Date.
SECTION 3.12. CUSIP AND CINS NUMBERS.
The Company in issuing the Notes may use "CUSIP" and "CINS"
numbers (if then generally in use), and, if so, the Trustee shall use the
CUSIP or CINS numbers, as the case may be, in notices of redemption or
exchange as a convenience to Holders; PROVIDED, HOWEVER, that any such notice
may state that no representation is made as to the correctness or accuracy of
the CUSIP or CINS number, as the case may be, printed in the notice or on the
Notes, and that reliance may be placed only
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on the other identification numbers printed on the Notes. The Company shall
promptly notify the Trustee in writing of any change in the CUSIP or CINS
number of any series of Notes.
SECTION 3.13. PAYING AGENT TO HOLD MONEY IN TRUST.
Each Paying Agent shall hold in trust for the benefit of the
Holders or the Trustee all money held by the Paying Agent for the payment of
principal of, premium, if any, or interest on the Notes, and shall notify the
Trustee of any default by the Company in making any such payment. Money held
in trust by the Paying Agent need not be segregated except as required by
law, and in no event shall the Paying Agent be liable for any interest on any
money received by it hereunder. The Company at any time may require the
Paying Agent to pay all money held by it to the Trustee and account for any
funds disbursed, and the Trustee may at any time during the continuance of
any Event of Default, upon a Company Order to the Paying Agent, require such
Paying Agent to pay forthwith all money so held by it to the Trustee and to
account for any funds disbursed. Upon making such payment, the Paying Agent
shall have no further liability for the money delivered to the Trustee.
SECTION 3.14. [INTENTIONALLY OMITTED].
SECTION 3.15. DEPOSITS OF MONIES.
Prior to 11:00 a.m. New York City time on each Interest
Payment Date, maturity date, Redemption Date, Change of Control Payment Date,
date for the payment of Defaulted Interest and Asset Sale Offer Purchase
Date, the Company shall have deposited with the Paying Agent in immediately
available funds money sufficient to make cash payments, if any, due on such
Interest Payment Date, maturity date, Redemption Date, Change of Control
Payment Date, date for the payment of Defaulted Interest or Asset Sale Offer
Purchase Date, as the case may be, in a timely manner which permits the
Paying Agent to remit payment to the Holders on such Interest Payment Date,
maturity date, Redemption Date, Change of Control Payment Date, date for the
payment of Defaulted Interest or Asset Sale Offer Purchase Date, as the case
may be.
SECTION 3.16. BOOK-ENTRY PROVISIONS FOR GLOBAL NOTES.
(a) The Global Notes initially shall (i) be registered in
the name of the Depository or the nominee of such Depository, (ii) be
delivered to the Trustee as custodian for such Depository and (iii) bear
legends as set forth in EXHIBIT C.
Members of, or participants in, the Depository ("Agent
Members") shall have no rights under this Indenture with respect to any
Global Note held on their behalf by the Depository, or the Trustee as its
custodian, or under the Global Note, and the Depository may be treated by the
Company, the Trustee and any agent of the Company or the Trustee as the
absolute owner of the Global Note for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the Company, the
Trustee or any agent of the Company or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the
Depository or impair, as between the Depository and its
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Agent Members, the operation of customary practices governing the exercise of
the rights of a Holder of any Note.
(b) Transfers of Global Notes shall be limited to
transfers in whole, but not in part, to the Depository, its successors or
their respective nominees. Interests of beneficial owners in the Global
Notes may be transferred or exchanged for Physical Notes in accordance with
the rules and procedures of the Depository and the provisions of Sections
3.03 and 3.17 hereof. In addition, Physical Notes shall be transferred to
all beneficial owners in exchange for their beneficial interests in Global
Notes if (i) the Depository notifies the Company that it is unwilling or
unable to continue as Depository for any Global Note, or that it will cease
to be a "Clearing Agency" under the Exchange Act, and in either case a
successor Depository is not appointed by the Company within 90 days of such
notice or (ii) an Event of Default has occurred and is continuing and the
Registrar or co-Registrar has received a written request from the Depository
to issue Physical Notes.
(c) In connection with any transfer or exchange of a
portion of the beneficial interest in any Global Note to beneficial owners
pursuant to paragraph (b) of this Section 3.16, the Registrar or co-Registrar
shall (if one or more Physical Notes are to be issued) reflect on its books
and records the date and a decrease in the principal amount of the Global
Note in an amount equal to the principal amount of the beneficial interest in
the Global Note to be transferred, and the Company shall execute, and upon
receipt of a Company Order the Trustee shall authenticate and deliver, one or
more Physical Notes of like tenor and principal amount of authorized
denominations, and each Subsidiary Guarantor, if any, shall execute a
notation thereon in respect of its Subsidiary Guarantee.
(d) In connection with the transfer of Global Notes as an
entirety to beneficial owners pursuant to paragraph (b) of this Section 3.16,
the Global Notes shall be deemed to be surrendered to the Trustee for
cancellation, and the Company shall execute, and upon receipt of a Company
Order the Trustee shall authenticate and deliver, to each beneficial owner
identified by the Depository in exchange for its beneficial interest in the
Global Notes, an equal aggregate principal amount at maturity of Physical
Notes of like tenor of authorized denominations, and each Subsidiary
Guarantor, if any, shall execute a notation thereon in respect of its
Subsidiary Guarantee.
(e) Any Physical Note constituting a Restricted Note
delivered in exchange for an interest in a Global Note pursuant to
subparagraph (b), (c) or (d) of this Section 3.16 shall, except as otherwise
provided by Section 3.17 hereof, bear the Private Placement Legend.
(f) The Holder of any Global Note may grant proxies and
otherwise authorize any Person, including Agent Members and Persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Notes.
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SECTION 3.17. SPECIAL TRANSFER PROVISIONS.
(a) TRANSFERS TO NON-QIB INSTITUTIONAL ACCREDITED
INVESTORS. The following additional provisions shall apply with respect to
the registration of any proposed transfer of an Initial Note to any
Institutional Accredited Investor which is not a QIB:
(i) the Registrar or co-Registrar shall register the
transfer of any Initial Note, whether or not such Note bears the Private
Placement Legend, if (x) the requested transfer is after the second
anniversary of the Issue Date; PROVIDED, HOWEVER, that neither the Company
nor any Affiliate of the Company has held any beneficial interest in such
Note, or portion thereof, at any time on or prior to the second anniversary
of the Issue Date and such transfer can otherwise be lawfully made under the
Securities Act without registering such Initial Notes thereunder or (y) the
proposed transferee has delivered to the Registrar or co-Registrar a
certificate substantially in the form of EXHIBIT D hereto and any legal
opinions and certifications required thereby;
(ii) if the proposed transferor is an Agent Member seeking
to transfer an interest in a Global Note, upon receipt by the Registrar or
co-Registrar of (x) written instructions given in accordance with the
Depository's and the Registrar's or co-Registrar's procedures and (y) the
appropriate certificate if any, required by clause (y) of paragraph (i)
above, together with any required legal opinions and certifications, the
Registrar or co-Registrar shall register the transfer and reflect on its
books and records the date and a decrease in the principal amount of the
Global Note from which such interests are to be transferred in an amount
equal to the principal amount of the Notes to be transferred and the Company
shall execute, each Subsidiary Guarantor, if any, shall execute a notation on
and, upon a Company Order, the Trustee shall authenticate Physical Notes in a
principal amount equal to the principal amount of the Global Note to be
transferred.
(b) TRANSFERS TO NON-U.S. PERSONS. The following
additional provisions shall apply with respect to the registration of any
proposed transfer of an Initial Note to any Non-U.S. Person:
(i) the Registrar or co-Registrar shall register the
transfer of any Initial Note, whether or not such Note bears the Private
Placement Legend, if (x) the requested transfer is after the second
anniversary of the Issue Date; PROVIDED, HOWEVER, that neither the Company
nor any Affiliate of the Company has held any beneficial interest in such
Note, or portion thereof, at any time on or prior to the second anniversary
of the Issue Date and such transfer can otherwise be lawfully made under the
Securities Act without registering such Initial Notes thereunder or (y) the
proposed transferor has delivered to the Registrar or co-Registrar a
certificate substantially in the form of EXHIBIT E hereto;
(ii) if the proposed transferee is an Agent Member and the
Notes to be transferred consist of Physical Notes which after transfer are to
be evidenced by an interest in the Regulation S Global Note, upon receipt by
the Registrar or co-Registrar of (x) written instructions given in accordance
with the Depository's and the Registrar's or co-Registrar's procedures and
(y) the appropriate certificate, if any, required by clause (y) of paragraph
(i) above, together with any required legal opinions and certifications, the
Registrar or co-Registrar shall register the transfer and reflect on
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its books and records the date and an increase in the principal amount of the
Regulation S Global Note in an amount equal to the principal amount of
Physical Notes to be transferred, and the Trustee shall cancel the Physical
Notes so transferred;
(iii) if the proposed transferor is an Agent Member seeking
to transfer an interest in the 144A Global Note, upon receipt by the
Registrar or co-Registrar of (x) written instructions given in accordance
with the Depository's and the Registrar's or co-Registrar's procedures and
(y) the appropriate certificate, if any, required by clause (y) of paragraph
(i) above, together with any required legal opinions and certifications, the
Registrar or co-Registrar shall register the transfer and reflect on its
books and records the date and (A) a decrease in the principal amount of the
144A Global Note from which such interests are to be transferred in an amount
equal to the principal amount of the Notes to be transferred and (B) an
increase in the principal amount of the Regulation S Global Note in an amount
equal to the principal amount of the 144A Global Note to be transferred; and
(iv) until the 41st day after the Issue Date (the
"Restricted Period"), an owner of a beneficial interest in the Regulation S
Global Note may not transfer such interest to a transferee that is a U.S.
Person or for the account or benefit of a U.S. Person within the meaning of
Rule 902(k) of the Securities Act. During the Restricted Period, all
beneficial interests in the Regulation S Global Note shall be transferred
only through Cedel or Euroclear, either directly if the transferor and
transferee are participants in such systems, or indirectly through
organizations that are participants.
(c) TRANSFERS TO QIBS. The following provisions shall
apply with respect to the registration of any proposed transfer of an Initial
Note to a QIB (excluding Non-U.S. Persons):
(i) the Registrar or co-Registrar shall register the
transfer of any Initial Note, whether or not such Note bears the Private
Placement Legend, if (x) the requested transfer is after the second
anniversary of the Issue Date; PROVIDED, HOWEVER, that neither the Company
nor any Affiliate of the Company has held any beneficial interest in such
Note, or portion thereof, at any time on or prior to the second anniversary
of the Issue Date and such transfer can otherwise be lawfully made under the
Securities Act without registering such Initial Note thereunder or (y) such
transfer is being made by a proposed transferor who has checked the box
provided for on the form of Note stating, or has otherwise advised the
Company and the Registrar or co-Registrar in writing, that the sale has been
made in compliance with the provisions of Rule 144A to a transferee who has
signed the certification provided for on the form of Note stating, or has
otherwise advised the Company and the Registrar or co-Registrar in writing,
that it is purchasing the Note for its own account or an account with respect
to which it exercises sole investment discretion and that it and any such
account is a QIB within the meaning of Rule 144A, and is aware that the sale
to it is being made in reliance on Rule 144A and acknowledges that it has
received such information regarding the Company as it has requested pursuant
to Rule 144A or has determined not to request such information and that it is
aware that the transferor is relying upon its foregoing representations in
order to claim the exemption from registration provided by Rule 144A;
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(ii) if the proposed transferee is an Agent Member and the
Notes to be transferred consist of Physical Notes which after transfer are to
be evidenced by an interest in the 144A Global Note, upon receipt by the
Registrar or co-Registrar of written instructions given in accordance with
the Depository's and the Registrar's or co-Registrar's procedures, the
Registrar or co-Registrar shall register the transfer and reflect on its book
and records the date and an increase in the principal amount of the 144A
Global Note in an amount equal to the principal amount of Physical Notes to
be transferred, and the Trustee shall cancel the Physical Note so
transferred; and
(iii) if the proposed transferor is an Agent Member seeking
to transfer an interest in the Regulation S Global Note following the
expiration of the Restricted Period, upon receipt by the Registrar or
co-Registrar of written instructions given in accordance with the
Depository's and the Registrar's or co-Registrar's procedures, the Registrar
or co-Registrar shall register the transfer and reflect on its books and
records the date and (A) a decrease in the principal amount of the Regulation
S Global Note in an amount equal to the principal amount of the Notes to be
transferred and (B) an increase in the principal amount of the 144A Global
Note in an amount equal to the principal amount of the Regulation S Global
Note to be transferred.
(d) PRIVATE PLACEMENT LEGEND. Upon the registration of
transfer, exchange or replacement of Notes not bearing the Private Placement
Legend, the Registrar or co-Registrar shall deliver Notes that do not bear
the Private Placement Legend. Upon the registration of transfer, exchange or
replacement of Notes bearing the Private Placement Legend, the Registrar or
co-Registrar shall deliver only Notes that bear the Private Placement Legend
unless (i) the circumstances contemplated by paragraph (a)(i)(x) of this
Section 3.17 exist, (ii) there is delivered to the Registrar or co-Registrar
an Opinion of Counsel reasonably satisfactory to the Company and the Trustee
to the effect that neither such legend nor the related restrictions on
transfer are required in order to maintain compliance with the provisions of
the Securities Act or (iii) such Note has been sold pursuant to an effective
registration statement under the Securities Act.
(e) OTHER TRANSFERS. If a Holder proposes to transfer a
Note constituting a Restricted Note pursuant to any exemption from the
registration requirements of the Securities Act other than as provided for by
Section 3.17(a), (b) and (c) hereof, the Registrar or co-Registrar shall only
register such transfer or exchange if such transferor delivers an Opinion of
Counsel satisfactory to the Company and the Registrar or co-Registrar that
such transfer is in compliance with the Securities Act and the terms of this
Indenture; PROVIDED, HOWEVER, that the Company may, based upon the opinion of
its counsel, instruct the Registrar or co-Registrar by a Company Order not to
register such transfer in any case where the proposed transferee is not a
QIB, Non-U.S. Person or Institutional Accredited Investor.
(f) GENERAL. By its acceptance of any Note bearing the
Private Placement Legend, each Holder of such a Note acknowledges the
restrictions on transfer of such Note set forth in this Indenture and in the
Private Placement Legend and agrees that it will transfer such Note only as
provided in this Indenture.
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The Registrar and each co-Registrar shall retain copies of
all letters, notices and other written communications received pursuant to
Section 3.16 hereof or this Section 3.17. The Company shall have the right
to inspect and make copies of all such letters, notices or other written
communications at any reasonable time upon the giving of reasonable prior
written notice to the Registrar or co-Registrar.
SECTION 3.18. COMPONENTS OF UNIT.
The Notes shall initially be issued as part of a unit
("Unit"), each Unit consisting of $1,000 principal amount at maturity of
Notes and four Warrants. The Notes and the Warrants comprising a Unit shall
not be separately transferable until the "Separability Date," which means the
earliest to occur of: (i) November 1, 1998; (ii) the date on which a
registration statement with respect to the Exchange Offer is declared
effective under the Securities Act; (iii) the occurrence of a Change of
Control; and (iv) such earlier date as may be determined by Merrill Lynch &
Co. in its sole discretion. Transfers of the Units shall be made by the Unit
Agent in accordance with the restrictions set forth in Section 3.17 hereof.
The Unit Agent shall be entitled to the same benefits, indemnities and
privileges as those accorded to the Trustee under this Indenture.
4. FOUR
DEFEASANCE OR COVENANT DEFEASANCE
SECTION 4.01. COMPANY'S OPTION TO EFFECT DEFEASANCE OR
COVENANT DEFEASANCE.
The Company may, at its option by Board Resolution, at any
time, with respect to the Notes, elect to have either Section 4.02 or Section
4.03 hereof be applied to all of the Outstanding Notes (the "Defeased
Notes"), upon compliance with the conditions set forth below in this Article
Four.
SECTION 4.02. DEFEASANCE AND DISCHARGE.
Upon the Company's exercise under Section 4.01 hereof of the
option applicable to the Defeased Notes pursuant to this Section 4.02, the
Company shall be deemed to have been discharged from its obligations with
respect to the Defeased Notes on the date the conditions set forth below are
satisfied (hereinafter, "defeasance"). For this purpose, such defeasance
means that the Company shall be deemed to have paid and discharged the entire
indebtedness represented by the Defeased Notes, which shall thereafter be
deemed to be "Outstanding" only for the purposes of Section 4.05 and the
other Sections of this Indenture referred to in (a) and (b) below, and to
have satisfied all its other obligations under such Notes and this Indenture
insofar as such Notes are concerned (and the Trustee, at the expense of the
Company and upon Company Request, shall execute proper instruments
acknowledging the same), except for the following, which shall survive until
otherwise terminated or
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discharged hereunder: (a) the rights of Holders of Defeased Notes to receive,
solely from the trust fund described in Section 4.04 hereof and as more fully
set forth in such Section, payments in respect of the principal of, premium,
if any, and interest on such Notes when such payments are due, (b) the
Company's obligations with respect to such Defeased Notes under Sections
3.04, 3.05, 3.06, 10.02 and 10.03 hereof, (c) the rights, powers, trusts,
duties and immunities of the Trustee hereunder, including, without
limitation, the Trustee's rights under Section 6.07 hereof, and (d) this
Article Four. Subject to compliance with this Article Four, the Company may
exercise its option applicable to this Section 4.02 notwithstanding the prior
exercise of its option applicable to Section 4.03 hereof with respect to the
Notes.
SECTION 4.03. COVENANT DEFEASANCE.
Upon the Company's exercise under Section 4.01 hereof of the
option applicable to the Defeased Notes pursuant to this Section 4.03, the
Company shall be released from its obligations under any covenant or
provision contained in Sections 10.06 through 10.22, 10.25 and 10.26 hereof
and the provisions of Article Eight shall not apply, with respect to the
Defeased Notes, on and after the date the conditions set forth below are
satisfied (hereinafter, "covenant defeasance"), and the Defeased Notes shall
thereafter be deemed not to be "Outstanding" for the purposes of any
direction, waiver, consent or declaration or Act of Holders (and the
consequences of any thereof) in connection with such covenants, but shall
continue to be deemed "Outstanding" for all other purposes hereunder. For
this purpose, such covenant defeasance means that, with respect to the
Defeased Notes, the Company may omit to comply with and shall have no
liability in respect of any term, condition or limitation set forth in any
such Sections or Article, whether directly or indirectly, by reason of any
reference elsewhere herein to any such Section or Article or by reason of any
reference in any such Section or Article to any other provision herein or in
any other document and such omission to comply shall not constitute a Default
or an Event of Default under Section 5.01(iii) or (iv) hereof, but, except as
specified above, the remainder of this Indenture and such Defeased Notes
shall be unaffected thereby.
SECTION 4.04. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE.
The following shall be the conditions to application of
either Section 4.02 or Section 4.03 hereof to the Defeased Notes:
(1) The Company shall irrevocably have deposited or
caused to be deposited with the Trustee (or another trustee satisfying
the requirements of Section 6.09 hereof who shall agree to comply with
the provisions of this Article Four applicable to it) as trust funds in
trust for the purpose of making the following payments, specifically
pledged as security for, and dedicated solely to, the benefit of the
Holders of such Notes, (a) cash (in United States dollars) in an amount,
or (b) U.S. Government Securities which through the scheduled payment of
principal, premium, if any, and interest in respect thereof in
accordance with their terms will provide, not later than one day before
the due date of any payment, money in an amount, or (c) a combination
thereof, in any such case, sufficient, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered
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to the Trustee, to pay and discharge, and which shall be applied by the
Trustee (or other qualifying trustee) to pay and discharge, the
principal of, premium, if any, and interest on the Defeased Notes at the
Stated Maturity of such principal or installment of principal, premium,
if any, or interest; PROVIDED, HOWEVER, that the Trustee shall have been
irrevocably instructed to apply such cash or the proceeds of such U.S.
Government Securities to said payments with respect to the Notes;
(2) No Default shall have occurred and be continuing on the
date of such deposit (other than a Default or Event of Default with
respect to this Indenture resulting from the incurrence of Indebtedness
all or a portion of which will be used to defease the Notes concurrently
with such incurrence) or, insofar as Section 5.01(vii), (viii) or (ix)
hereof is concerned at any time during the period ending on the
ninety-first day after the date of such deposit;
(3) Neither the Company nor any Subsidiary of the Company is
an "insolvent person" within the meaning of any applicable Bankruptcy
Law on the date of such deposit or at any time during the period ending
on the ninety-first day after the date of such deposit;
(4) Such defeasance or covenant defeasance shall not cause
the Trustee for the Notes to have a conflicting interest in violation of
Section 6.08 hereof and for purposes of the Trust Indenture Act with
respect to any securities of the Company;
(5) Such defeasance or covenant defeasance shall not result
in a breach or violation of, or constitute a default under, this
Indenture (other than as permitted by clause (2) above) or any other
material agreement or instrument to which the Company is a party or by
which it is bound;
(6) In the case of an election under Section 4.02 hereof,
the Company shall have delivered to the Trustee an Opinion of Counsel
stating that (x) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (y) since the
date hereof, there has been a change in the applicable Federal income
tax law, in either case to the effect that, and based thereon such
opinion shall confirm that, the Holders of the Outstanding Notes will
not recognize income, gain or loss for Federal income tax purposes as a
result of such defeasance and will be subject to Federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such defeasance had not occurred;
(7) In the case of an election under Section 4.03 hereof,
the Company shall have delivered to the Trustee an Opinion of Counsel to
the effect that the Holders of the Outstanding Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such
covenant defeasance and will be subject to Federal income tax on the
same amounts, in the same manner and at the same times as would have
been the case if such covenant defeasance had not occurred;
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(8) The Company shall have delivered to the Trustee an
Opinion of Counsel to the effect that, immediately following the
ninety-first day after the deposit, the trust funds established pursuant
to this Article will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally under any applicable U.S. Federal or state
law;
(9) The Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit made by the Company
pursuant to its election applicable to Section 4.02 or 4.03 hereof was
not made by the Company with the intent of preferring the Holders over
the other creditors of the Company or with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others;
(10) The Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that (i)
all conditions precedent (other than conditions requiring the passage of
time) provided for relating to either the defeasance under Section 4.02
or the covenant defeasance under Section 4.03 (as the case may be) have
been complied with as contemplated by this Section 4.04 and (ii) if any
other Indebtedness of the Company shall then be outstanding or
committed, such defeasance or covenant defeasance will not violate the
provisions of the agreements or instruments evidencing such
Indebtedness; and
(11) Such defeasance or covenant defeasance shall not result
in a trust arising from such deposit constituting an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended (the "Investment Company Act").
Opinions required to be delivered under this Section may have
such qualifications as are customary for opinions of the type required and
reasonably acceptable to the Trustee.
SECTION 4.05. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS
TO BE HELD IN TRUST; OTHER MISCELLANEOUS
PROVISIONS.
Subject to the last paragraph of Section 10.03, all money and
U.S. Government Securities (including the proceeds thereof) deposited with
the Trustee (or other qualifying trustee, collectively for purposes of this
Section 4.05, the "Trustee") pursuant to Section 4.04 in respect of the
Defeased Notes shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Notes and this Indenture, to the
payment, either directly or through any Paying Agent (other than the Company)
as the Trustee may determine, to the Holders of such Notes of all sums due
and to become due thereon in respect of principal, premium, if any, and
interest, but such money need not be segregated from other funds except to
the extent required by law.
The Company shall pay and indemnify the Trustee and hold it
harmless against any tax, fee or other charge imposed on or assessed against
the U.S. Government Securities deposited pursuant to Section 4.04 or the
principal, premium, if any, and interest received in respect thereof other
than any such tax, fee or other charge which by law is for the account of the
Holders of the Defeased Notes.
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Anything in this Article Four to the contrary
notwithstanding, the Trustee shall deliver or pay to the Company from time to
time upon Company Request any money or U.S. Government Securities held by it
as provided in Section 4.04 which, in the opinion of an internationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee, are in excess of the amount
thereof which would then be required to be deposited to effect an equivalent
defeasance or covenant defeasance.
SECTION 4.06. REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any money
or U.S. Government Securities in accordance with Section 4.02 or 4.03 hereof,
as the case may be, by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, then the obligations of the Company under this Indenture and the
Notes shall be revived and reinstated as though no deposit had occurred
pursuant to Section 4.02 or 4.03 hereof, as the case may be, until such time
as the Trustee or Paying Agent is permitted to apply all such money and U.S.
Government Securities in accordance with Section 4.02 or 4.03 hereof, as the
case may be; PROVIDED, HOWEVER, that if the Company makes any payment of
principal, premium, if any, or interest on any Note following the
reinstatement of its obligations, the Company shall be subrogated to the
rights of the Holders of such Notes to receive such payment from the money
and U.S. Government Securities held by the Trustee or Paying Agent.
5. FIVE
REMEDIES
SECTION 5.01. EVENTS OF DEFAULT.
"Event of Default," wherever used herein, means any one of
the following events (whatever the reason for such Event of Default and
whether it shall be voluntary or involuntary or be effected by operation of
law or pursuant to any judgment, decree or order of any court or any order,
rule or regulation of any administrative or governmental body):
(i) default in the payment of interest on the Notes when it
becomes due and payable and continuance of such default for a period of
30 days or more; or
(ii) default in the payment of the principal of, or premium,
if any, on the Notes when due at maturity, upon redemption or otherwise;
or
(iii) default in the performance, or breach, of any covenant
described under Section 10.10, Section 10.15 or Article Eight; or
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(iv) default in the performance, or breach, of any
covenant in the Notes, this Indenture (other than defaults specified
in clause (i), (ii) or (iii) above), and continuance of such default
or breach for a period of 30 days or more after written notice to the
Company by the Trustee or to the Company and the Trustee by the
holders of at least 25% in aggregate principal amount at maturity of
the outstanding Notes (in each case, when such notice is deemed given
in accordance with this Indenture); or
(v) (a) failure to pay, following any applicable grace
period, any installment of principal due (whether at maturity or
otherwise) under one or more classes or issues of Indebtedness in an
aggregate principal amount of $5 million or more under which the
Company or any Restricted Subsidiary is obligated or (b) failure by
the Company or any Restricted Subsidiary to perform any other term,
covenant, condition or provision of one or more classes or issues of
Indebtedness in an aggregate principal amount of $5 million or more
under which the Company or such Restricted Subsidiary is obligated
and, in the case of this clause (b), such failure results in an
acceleration of the maturity thereof; or
(vi) one or more judgments, orders or decrees for the
payment of money of $5 million or more, either individually or in the
aggregate, shall be entered against the Company or any Restricted
Subsidiary or any of their respective properties and shall not be
discharged and there shall have been a period of 60 consecutive days
or more during which a stay of enforcement of such judgment or order,
by reason of pending appeal or otherwise, shall not be in effect; or
(vii) the Company or any Restricted Subsidiary pursuant to
or under or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case or proceeding;
(B) consents to the entry of a Bankruptcy Order in an
involuntary case or proceeding or the commencement of any
case against it;
(C) consents to the appointment of a Custodian of it
or for any substantial part of its property;
(D) makes a general assignment for the benefit of its
creditors;
(E) files an answer or consent seeking reorganization
or relief;
(F) shall admit in writing its inability to pay its
debts generally; or
(G) consents to the filing of a petition in
bankruptcy; or
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(viii) a court of competent jurisdiction in any involuntary
case or proceeding enters a Bankruptcy Order against the Company or
any Restricted Subsidiary, and such Bankruptcy Order remains unstayed
and in effect for 60 consecutive days; or
(ix) a Custodian shall be appointed out of court with respect
to the Company or any Restricted Subsidiary with respect to all or
any substantial part of the assets or properties of the Company or
any Restricted Subsidiary; or
(x) this Indenture or the Registration Rights Agreement
ceases to be in force and effect in all material respects (other than
with respect to the invalidity or alleged invalidity of any provision
in the Registration Rights Agreement regarding indemnification for
matters arising under the federal securities laws) or is declared
null and void or the Company denies that it has any further
obligation or liability thereunder or gives notice to that effect
(other than by reason of termination or release in accordance with
the terms thereof).
SECTION 5.02. ACCELERATION OF MATURITY, RESCISSION AND
ANNULMENT.
If an Event of Default (other than an Event of Default
specified in clause (vi), (vii), or (viii) of Section 5.01 hereof with
respect to the Company or any Restricted Subsidiary) occurs and is
continuing, then the Trustee or the holders of at least 25% in principal
amount at maturity of the then Outstanding Notes may, by written notice, and
the Trustee upon the request of the holders of not less than 25% in principal
amount at maturity of the then Outstanding Notes shall, declare the Default
Amount of all Outstanding Notes to be immediately due and payable and upon
any such declaration such amount shall become immediately due and payable. If
an Event of Default specified in clause (vi), (vii), or (viii) above with
respect to the Company or any Restricted Subsidiary occurs and is continuing,
then the Default Amount of all outstanding Notes shall IPSO FACTO become and
be immediately due and payable without any declaration or other act on the
part of the Trustee or any holder.
After a declaration of acceleration, the holders of a
majority in aggregate principal amount at maturity of the then Outstanding
Notes may, by notice to the Trustee, rescind such declaration of acceleration
if all existing Events of Default, other than nonpayment of the Default
Amount of the Notes that has become due solely as a result of such
acceleration, have been cured or waived and if the rescission of acceleration
would not conflict with any judgment or decree.
SECTION 5.03. COLLECTION OF INDEBTEDNESS AND SUITS FOR
ENFORCEMENT BY TRUSTEE.
The Company covenants that, if an Event of Default specified
in Section 5.01(i) or 5.01(ii) shall have occurred and be continuing, then
the Company will, upon demand of the Trustee, pay to the Trustee, for the
benefit of the Holders of such Notes, the whole amount then due and payable
on such Notes for principal, premium, if any, and interest, with interest
upon the overdue principal, premium, if any, and, to the extent that payment
of such interest shall be legally enforceable, upon overdue installments of
interest, at the rate then borne by the Notes; and, in addition thereto, such
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further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such
demand, the Trustee, in its own name and as trustee of an express trust, may,
but is not obligated under this paragraph to, institute a judicial proceeding
for the collection of the sums so due and unpaid and may, but is not
obligated under this paragraph to, prosecute such proceeding to judgment or
final decree, and may, but is not obligated under this paragraph to, enforce
the same against the Company, any Subsidiary Guarantor or any other obligor
upon the Notes and collect the moneys adjudged or decreed to be payable in
the manner provided by law out of the property of the Company, any Subsidiary
Guarantor or any other obliger upon the Notes, wherever situated.
If an Event of Default occurs and is continuing, the Trustee
may in its discretion, but is not obligated under this paragraph to, (i)
proceed to protect and enforce its rights and the rights of the Holders under
this Indenture by such appropriate private or judicial proceedings as the
Trustee shall deem most effectual to protect and enforce such rights, whether
for the specific enforcement of any covenant or agreement contained in this
Indenture or in aid of the exercise of any power granted herein or (ii)
proceed to protect and enforce any other proper remedy. No recovery of any
such judgment upon any property of the Company shall affect or impair any
rights, powers or remedies of the Trustee or the Holders.
SECTION 5.04. TRUSTEE MAY FILE PROOFS OF CLAIMS.
In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment, composition
or other judicial proceeding relative to the Company, any Subsidiary
Guarantor or any other obliger upon the Notes or the property of the Company,
any Subsidiary Guarantor or of such other obliger or their creditors, the
Trustee (irrespective of whether the principal of the Notes shall then be due
and payable as therein expressed or by declaration or otherwise and
irrespective of whether the Trustee shall have made any demand on the Company
or any Subsidiary Guarantor for the payment of overdue principal or interest)
shall be entitled and empowered, by intervention in such proceeding or
otherwise:
(a) to file and prove a claim for the whole amount of
principal, premium, if any, and interest owing and unpaid in respect of the
Notes and to file such other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee (including any claim for
the reasonable compensation, fees, expenses, disbursements and advances of
the Trustee, its agents and counsel) and of the Holders allowed in such
judicial proceeding, and
(b) to collect and receive any moneys or other property
payable or deliverable on any such claims and to distribute the same; and any
Custodian, in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the Holders,
to pay the Trustee any amount due it
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for the reasonable compensation, expenses, disbursements and advances of the
Trustee its agents and counsel, and any other amounts due the Trustee under
Section 6.07 hereof.
Nothing herein contained shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any Holder
any plan of reorganization, arrangement, adjustment or composition affecting
the Notes or the rights of any Holder thereof, or to authorize the Trustee to
vote in respect of the claim of any Holder in any such proceeding.
SECTION 5.05. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF
NOTES.
All rights of action and claims under this Indenture or the
Notes may be prosecuted and enforced by the Trustee without the possession of
any of the Notes or the production thereof in any proceeding relating
thereto, and any such proceeding instituted by the Trustee shall be brought
in its own name and as trustee of an express trust, and any recovery of
judgment shall, after provision for the payment of the reasonable
compensation, fees, expenses, disbursements and advances of the Trustee its
agents and counsel, be for the ratable benefit of the Holders of the Notes in
respect of which such judgment has been recovered.
SECTION 5.06. APPLICATION OF MONEY COLLECTED.
Any money collected by the Trustee pursuant to this Article
shall be applied in the following order, at the date or dates fixed by the
Trustee and, in case of the distribution of such money on account of
principal, premium, if any, or interest, upon presentation of the Notes and
the notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:
First: to the Trustee for amounts due under Section 6.07;
Second: to Holders for interest accrued on the Notes, ratably,
without preference or priority of any kind, according to the amounts due
and payable on the Notes for interest;
Third: to Holders to principal and premium, if any, amounts
owing under the Notes, ratably, without preference or priority of any
kind, according to the amounts due and payable on the Notes for
principal and premium, if any; and
Fourth: the balance, if any, to the Company or any other obliger
on the Notes, as their interests may appear, or as a court of competent
jurisdiction may direct.
The Trustee, upon prior written notice to the Company, may
fix a record date and payment date for any payment to Holders pursuant to
this Section 5.06.
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SECTION 5.07. LIMITATION ON SUITS.
No Holder of any Notes shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder,
unless
(a) such Holder has previously given written notice to
the Trustee of a continuing Event of Default;
(b) the Holders of not less than 25% in aggregate
principal amount at maturity of the then Outstanding Notes shall have made
written request to the Trustee to institute proceedings in respect of such
Event of Default in its own name as Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee
reasonable indemnity against the costs, expenses and liabilities to be
incurred hi compliance with such request which is satisfactory to the Trustee;
(d) the Trustee for 60 days after its receipt of such
notice, request and offer of indemnity has failed to institute any such
proceeding; and
(e) no direction inconsistent with such written request
has been given to the Trustee during such 60-day period by the Holders of a
majority in aggregate principal amount at maturity of the then Outstanding
Notes;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture, any Note or any Subsidiary Guarantee to affect, disturb or
prejudice the rights of any other Holders, or to obtain or to seek to obtain
priority or preference over any other Holders or to enforce any right under
this Indenture, any Note or any Subsidiary Guarantee, except in the manner
provided in this Indenture and for the equal and ratable benefit of all the
Holders.
SECTION 5.08. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE
PRINCIPAL, PREMIUM AND INTEREST.
Notwithstanding any other provision in this Indenture, the
Holder of any Note shall have the right, which is absolute and unconditional,
to receive cash payment of the principal of, premium, if any, and (subject to
Section 3.07 hereof) interest on such Note on the respective Stated
Maturities expressed in such Note (or, in the case of redemption, on the
respective Redemption Date) and to institute suit for the enforcement of any
such payment, and such rights shall not be impaired without the consent of
such Holder.
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SECTION 5.09. RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Holder has instituted any proceeding to
enforce any right or remedy under this Indenture or any Note and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Holder, then and in every such
case the Company, each Subsidiary Guarantor, if any, the Trustee and the
Holders shall, subject to any determination in such proceeding, be restored
severally and respectively to their former positions hereunder, and
thereafter all rights and remedies of the Trustee and the Holders shall
continue as though no such proceeding had been instituted.
SECTION 5.10. RIGHTS AND REMEDIES CUMULATIVE.
Except as provided in Section 3.06, no right or remedy herein
conferred upon or reserved to the Trustee or to the Holders is intended to be
exclusive of any other right or remedy, and every right and remedy shall, to
the extent permitted by law, be cumulative and in addition to every other
right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
SECTION 5.11. DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any
Note to exercise any right or remedy accruing upon any Event of Default shall
impair any such right or remedy or constitute a waiver of any such Event of
Default or an acquiescence therein. Every right and remedy given by this
Article Five or by law to the Trustee or to the Holders may be exercised from
time to time, and as often as may be deemed expedient, by the Trustee or by
the Holders, as the case may be.
SECTION 5.12. CONTROL BY MAJORITY.
The Holders of a majority in aggregate principal amount at
maturity of the then Outstanding Notes shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee, or exercising any trust or power conferred on the Trustee,
PROVIDED, HOWEVER, that:
(a) such direction shall not be in conflict with any rule
of law or with this Indenture or any Note or expose the Trustee to personal
liability;
(b) such direction shall not be unduly prejudicial to the
rights of another Holder; and
(c) the Trustee may take any other action deemed proper
by the Trustee, in its discretion, which is not inconsistent with such
direction.
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SECTION 5.13. WAIVER OF PAST DEFAULTS.
The Holders of not less than a majority in aggregate
principal amount at maturity of the then Outstanding Notes by notice to the
Trustee may on behalf of the Holders of all the Notes waive any past Default
or Event of Default hereunder and its consequences, except a Default or Event
of Default
(a) in the payment of the principal of, premium, if any,
or interest on any Note, or
(b) in respect of a covenant or provision hereof which
under Article Nine cannot be modified or amended without the consent of the
Holder of each Outstanding Note affected thereby.
Upon any such waiver, such Default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured,
for every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other Default or Event of Default or impair any right
consequent thereon.
SECTION 5.14. UNDERTAKING FOR COSTS.
All parties to this Indenture agree, and each Holder of any
Note by his acceptance thereof shall be deemed to have agreed, that any court
may in its discretion require, in any suit for the enforcement of any right
or remedy under this Indenture, or in any suit against the Trustee for any
action taken, suffered or omitted by it as Trustee, the filing by any party
litigant in such suit of an undertaking to pay the costs of such suit, and
that such court may in its discretion assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in such suit, having
due regard to the merits and good faith of the claims or defenses made by
such party litigant; but the provisions of this Section 5.14 shall not apply
to any suit instituted by the Trustee, to any suit instituted by any Holder,
or group of Holders, holding in the aggregate more than 10% in aggregate
principal amount at maturity of the then Outstanding Notes, or to any suit
instituted by any Holder for the enforcement of the payment of the principal
of, premium, if any, or interest on any Note on or after the respective
Stated Maturities expressed in such Note (or, in the case of redemption, on
or after the respective Redemption Dates).
SECTION 5.15. WAIVER OF STAY, EXTENSION OR USURY LAWS.
The Company covenants (to the extent that it may lawfully do
so) that it will not at any time insist upon, or plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay or extension
law or any usury or other law wherever enacted, now or at any time hereafter
in force, which would prohibit or forgive the Company from paying all or any
portion of the principal of, premium, if any, or interest on the Notes
contemplated herein or in the Notes or which may affect the covenants or the
performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not
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hinder, delay or impede the execution of any power herein granted to the
Trustee, but will suffer and permit the execution of every such power as
though no such law had been enacted.
6. SIX
THE TRUSTEE
SECTION 6.01. CERTAIN DUTIES AND RESPONSIBILITIES.
(a) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only
such duties as are specifically set forth in this Indenture and the TIA,
and no implied covenants or obligations shall be read into this
Indenture against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness
of the opinions expressed therein, upon certificates (including Officers
Certificates) or opinions (including Opinions of Counsel) furnished to
the Trustee and conforming to the requirements of this Indenture; but in
the case of any such certificates or opinions which by provision hereof
are specifically required to be furnished to the Trustee, the Trustee
shall be under a duty to examine the same to determine whether or not
they conform to the requirements of this Indenture.
(b) During the continuance of an Event of Default, the
Trustee is required to exercise such rights and powers vested in it under
this Indenture and use the same degree of care and skill in its exercise
thereof as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
(c) No provision of this Indenture shall be construed to
relieve the Trustee from liability for its own negligent action, its own
negligent failure to act, or its own willful misconduct, except that no
provision of this Indenture shall require the Trustee to expend or risk its
own funds or otherwise incur any financial liability in the performance of
any of its duties hereunder, or in the exercise of any of its rights or
powers, if it shall have reasonable grounds for believing that repayment of
such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
(d) Whether or not therein expressly so provided, every
provision of this Indenture relating to the conduct or affecting the
liability of or affording protection to the Trustee shall be subject to the
provisions of this Section 6.01.
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SECTION 6.02. NOTICE OF DEFAULTS.
Within 30 days after the occurrence of any Default, the
Trustee shall transmit by mail to all Holders, as their names and addresses
appear in the Note Register, notice of such Default hereunder known to the
Trustee, unless such Default shall have been cured or waived; PROVIDED,
HOWEVER that, except in the case of a Default or Event of Default in the
payment of the principal of, premium, if any, or interest on any Note or in
respect of Article Eight hereof, the Trustee shall be protected in
withholding such notice if and so long as a trust committee of Responsible
Officers of the Trustee in good faith determines that the withholding of such
notice is in the interest of the Holders.
SECTION 6.03. CERTAIN RIGHTS OF TRUSTEE.
Subject to Section 6.01 hereof and the provisions of Section
315 of the Trust Indenture Act:
(a) the Trustee may rely and shall be protected in acting
or refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order bond,
debenture, note, other evidence of indebtedness or other paper or document
believed by it to be genuine and to have been signed or presented by the
proper party or parties;
(b) the Trustee may request that any request or direction
of the Company mentioned herein be sufficiently evidenced by a Company
Request or Company Order and that any resolution of the Board be sufficiently
evidenced by a Board Resolution thereof;
(c) the Trustee may consult with counsel and any written
advice of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon in accordance
with such advice or Opinion of Counsel;
(d) the Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders pursuant to this Indenture, unless such
Holders shall have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which might be incurred by the
Trustee in compliance with such request or direction;
(e) the Trustee shall not be liable for any action taken
or omitted by it in good faith and believed by it to be authorized or within
the discretion, rights or powers conferred upon it by this Indenture other
than any liabilities arising out of its own negligence;
(f) the Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, approval, appraisal, bond, debenture, note,
coupon, security, other evidence of indebtedness or other paper or document
unless requested in writing so to do by the Holders of not less
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than a majority in aggregate principal amount at maturity of the Notes then
Outstanding; PROVIDED HOWEVER, that, if the payment within a reasonable time
to the Trustee of the costs, expenses or liabilities likely to be incurred by
it in the making of such investigation is, in the opinion of the Trustee, not
reasonably assured to the Trustee by the security afforded to it by the terms
of this Indenture the Trustee may require reasonable indemnity against such
expenses or liabilities as a condition to proceeding; the reasonable expenses
of every such investigation shall be paid by the Company or, if paid by the
Trustee or any predecessor Trustee, shall be repaid by the Company upon
demand; PROVIDED, FURTHER, the Trustee in its discretion may make such
further inquiry or investigation into such facts or matters as it may deem
fit, and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and
premises of the Company, personally or by agent or attorney;
(g) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys and the Trustee shall not be responsible for any
misconduct or negligence on the part of any agent or attorney appointed with
due care by it hereunder; and
(h) except with respect to Section 10.01, the Trustee
shall have no duty to inquire as to the performance of the Company's
covenants in Article Ten. In addition, the Trustee shall not be deemed to
have knowledge of any Default or Event of Default except (i) any Event of
Default occurring pursuant to Sections 5.01(i), 5.01(ii) or 10.01 or (ii) any
Default or Event of Default of which a Responsible Officer shall have
received written notification or obtained actual knowledge.
SECTION 6.04. TRUSTEE NOT RESPONSIBLE FOR RECITALS,
DISPOSITIONS OF NOTES OR APPLICATION OF PROCEEDS
THEREOF.
The recitals contained herein and in the Notes, except the
Trustee's certificates of authentication, shall be taken as the statements of
the Company, and the Trustee assumes no responsibility for their correctness.
The Trustee makes no representations as to the validity or sufficiency of
this Indenture or of the Notes, except that the Trustee represents that it is
duly authorized to execute and deliver this Indenture, authenticate the Notes
and perform its obligations hereunder and that the statements to be made by
it in any Statement of Eligibility and Qualification on Form T-l supplied to
the Company will be true and accurate subject to the qualifications set forth
therein. The Trustee shall not be accountable for the use or application by
the Company of Notes or the proceeds thereof.
SECTION 6.05. TRUSTEE AND AGENTS MAY HOLD NOTES;
COLLECTIONS; ETC.
The Trustee, any Paying Agent, Registrar or co-Registrar or
any other agent of the Company, in its individual or any other capacity, may
become the owner or pledges of Notes, with the same rights it would have if
it were not the Trustee, Paying Agent, Registrar or co-Registrar or such
other agent and, subject to Section 6.08 hereof and Sections 310 and 311 of
the Trust Indenture Act, may otherwise deal with the Company and receive,
collect, hold and retain collections from the
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Company with the same rights it would have if it were not the Trustee, Paying
Agent, Registrar or co-Registrar or such other agent.
SECTION 6.06. MONEY HELD IN TRUST.
All moneys received by the Trustee shall, until used or
applied as herein provided, be held in trust for the purposes for which they
were received, but need not be segregated from other funds except to the
extent required herein or by law. The Trustee shall not be under any
liability for interest on any moneys received by it hereunder.
SECTION 6.07. COMPENSATION AND INDEMNIFICATION OF TRUSTEE AND
ITS PRIOR CLAIM.
The Company covenants and agrees: (a) to pay to the Trustee
from time to time, and the Trustee shall be entitled to, reasonable
compensation for all services rendered by it hereunder (which shall not be
limited by any provision of law in regard to the compensation of a trustee of
an express trust); (b) to reimburse the Trustee and each predecessor Trustee
upon its request for all reasonable expenses, fees, disbursements and
advances incurred or made by or on behalf of it in accordance with any of the
provisions of this Indenture (including the reasonable compensation, fees,
and the expenses and disbursements of its counsel and of all agents and other
Persons not regularly in its employ), except any such expense, disbursement
or advance as may arise from its negligence or bad faith; and (c) to
indemnify the Trustee and each predecessor Trustee for, and to hold it
harmless against, any loss, liability or expense incurred without negligence
or bad faith on its part, arising out of or in connection with the acceptance
or administration of this Indenture or the trusts hereunder and its duties
hereunder, including enforcement of this Section 6.07. The obligations of
the Company under this Section to compensate and indemnify the Trustee and
each predecessor Trustee and to pay or reimburse the Trustee and each
predecessor Trustee for expenses, fees, disbursements and advances shall
constitute an additional obligation hereunder and shall survive the
satisfaction and discharge of this Indenture. To secure the obligations of
the Company to the Trustee under this Section 6.07, the Trustee shall have a
prior Lien upon all property and funds held or collected by the Trustee as
such, except funds and property paid by the Company and held in trust for the
benefit of the Holders of particular Notes.
SECTION 6.08. CONFLICTING INTERESTS.
The Trustee shall be subject to and comply with the
provisions of Section 310(b) of the Trust Indenture Act.
SECTION 6.09. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.
There shall at all times be a Trustee hereunder which shall be
eligible to act as Trustee under Trust Indenture Act Sections 310(a)(1) and (2)
and which shall have (or, in the case of a Trustee that is an Affiliate of a
bank holding company, its Affiliated bank holding company shall have) a
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combined capital and surplus of at least $25,000,000 and a corporate trust
office or agency in the Borough of Manhattan in The City of New York, State
of New York. If such corporation publishes reports of condition at least
annually, pursuant to law or to the requirements of any Federal, state,
territorial or District of Columbia supervising or examining authority, then
for the purposes of this Section, the combined capital and surplus of such
corporation shall be deemed to be its combined capital and surplus as set
forth in its most recent report of condition so published. If at any time
the Trustee shall cease to be eligible in accordance with the provisions of
this Section, the Trustee shall resign immediately in the manner and with the
effect hereinafter specified in this Article.
SECTION 6.10. RESIGNATION AND REMOVAL; APPOINTMENT OF
SUCCESSOR TRUSTEE.
(a) No resignation or removal of the Trustee and no
appointment of a successor Trustee pursuant to this Article shall become
effective until the acceptance of appointment by the successor Trustee under
Section 6.11.
(b) The Trustee, or any trustee or trustees hereinafter
appointed, may at any time resign by giving written notice thereof to the
Company at least 20 Business Days prior to the date of such proposed
resignation. Upon receiving such notice of resignation, the Company shall
promptly appoint a successor trustee by written instrument executed by
authority of the Board, a copy of which shall be delivered to the resigning
Trustee and a copy to the successor Trustee. If an instrument of acceptance
by a successor Trustee shall not have been delivered to the Trustee within 20
Business Days after the giving of such notice of resignation, the resigning
Trustee may, or (if an instrument of acceptance by a successor Trustee shall
not have been delivered to the Trustee within 30 Business Days after the
giving of such notice of resignation) any Holder who has been a bona fide
Holder of a Note for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for
the appointment of a successor Trustee. Such court may thereupon, after such
notice, if any, as it may deem proper, appoint a successor Trustee.
(c) The Trustee may be removed at any time by an Act of
the Holders of a majority in aggregate principal amount at maturity of the
then Outstanding Notes, delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with the provisions of
Section 310(b) of the Trust Indenture Act in accordance with Section
6.08 hereof after written request therefor by the Company or by any
Holder who has been a bona fide Holder of a Note for at least six
months, or
(2) the Trustee shall cease to be eligible under Section
6.09 hereof and shall fail to resign after written request therefor by
the Company or by any Holder who has been a bona fide Holder of a Note
for at least six months, or
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(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose or
rehabilitation, conservation or liquidation,
then in any case, (i) the Company by a Board Resolution may remove the
Trustee, or (ii) subject to Section 5.14, the Holder of any Note who has been
a bona fide Holder of a Note for at least six months may, on behalf of
himself and all others similarly situated, petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a
successor Trustee. Such court may thereupon, after such notice, if any, as
it may deem proper and prescribe, remove the Trustee and appoint a successor
Trustee.
(e) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of Trustee for
any cause, the Company, by a Board Resolution, shall promptly appoint a
successor Trustee. If, within one year after such resignation, removal or
incapability, or the occurrence of such vacancy, a successor Trustee shall be
appointed by Act of the Holders of a majority in aggregate principal amount
at maturity of the then Outstanding Notes delivered to the Company and the
retiring Trustee, the successor Trustee so appointed shall, forthwith upon
its acceptance of such appointment, become the successor Trustee and
supersede the successor Trustee appointed by the Company. If no successor
Trustee shall have been so appointed by the Company or the Holders of the
Notes and accepted appointment in the manner hereinafter provided, the Holder
of any Note who has been a bona fide Holder for at least six months may,
subject to Section 5.14, on behalf of himself and all others similarly
situated, or the resigning Trustee may, petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and
each removal of the Trustee and each appointment of a successor Trustee by
mailing written notice of such event by first-class mail, postage prepaid, to
the Holders of Notes as their names and addresses appear in the Note
Register. Each notice shall include the name of the successor Trustee and the
address of its Corporate Trust Office.
SECTION 6.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
Every successor Trustee appointed hereunder shall execute,
acknowledge and deliver to the Company and to the retiring Trustee an
instrument accepting such appointment, and thereupon the resignation or
removal of the retiring Trustee shall become effective and such successor
Trustee, without any further act, deed or conveyance, shall become vested
with all the rights, powers, trusts and duties of the retiring Trustee as if
originally named as Trustee hereunder; but, nevertheless, on the written
request of the Company or the successor Trustee, upon payment of amounts due
it pursuant to Section 6.07, such retiring Trustee shall duly assign,
transfer and deliver to the successor Trustee all moneys and property at the
time held by it hereunder and shall execute and deliver an instrument
transferring to such successor Trustee all the rights, powers, duties and
obligations of the retiring Trustee. Upon request of any such successor
Trustee, the Company shall execute any and all
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instruments for more fully and certainly vesting in and confirming to such
successor Trustee all such rights and powers. Any Trustee ceasing to act
shall, nevertheless, retain a prior claim upon all property or funds held or
collected by such Trustee to secure any amounts then due it pursuant to the
provisions of Section 6.07.
No successor Trustee with respect to the Notes shall accept
appointment as provided in this Section 6.11 unless at the time of such
acceptance such successor Trustee shall be eligible to act as Trustee under
this Article.
Upon acceptance of appointment by any successor Trustee as
provided in this Section 6.11, the successor shall give notice thereof to the
Holders of the Notes, by mailing such notice to such Holders at their
addresses as they shall appear on the Note Register. If the acceptance of
appointment is substantially contemporaneous with the resignation, then the
notice called for by the preceding sentence may be combined with the notice
called for by Section 6.10. If the Company fails to give such notice within
10 days after acceptance of appointment by the successor Trustee, the
successor Trustee shall cause such notice to be given at the expense of the
Company.
SECTION 6.12. MERGER, CONVERSION, AMALGAMATION, CONSOLIDATION
OR SUCCESSION TO BUSINESS.
Any corporation into which the Trustee may be merged or
converted or with which it may be consolidated or amalgamated, or any
corporation resulting from any merger, conversion, amalgamation or
consolidation to which the Trustee shall be a party, or any corporation
succeeding to all or substantially all of the corporate trust business of the
Trustee (including the trust created by this Indenture), shall be the
successor of the Trustee hereunder without the execution or filing of any
paper or any further act on the part of any of the parties hereto, provided
such corporation shall be eligible under this Article Six to serve as Trustee
hereunder.
In case at the time such successor to the Trustee under this
Section 6.12 shall succeed to the trusts created by this Indenture any of the
Notes shall have been authenticated but not delivered, any such successor to
the Trustee may adopt the certificate of authentication of any predecessor
Trustee and deliver such Notes so authenticated; and, in case at that time
any of the Notes shall not have been authenticated, any successor to the
Trustee under this Section 6.12 may authenticate such Notes either in the
name of any predecessor hereunder or in the name of the successor Trustee;
and in all such cases such certificate shall have the full force which it is
anywhere in the Notes or in this Indenture provided that the certificate of
the Trustee shall have been authenticated.
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7. SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 7.01. PRESERVATION OF INFORMATION; COMPANY TO FURNISH
TRUSTEE NAMES AND ADDRESSES OF HOLDERS.
(a) The Trustee shall preserve the names and addresses of
the Holders and otherwise comply with TIA Section 312(a). If the Trustee is
not the Registrar or co-Registrar, the Company shall furnish or cause the
Registrar or co-Registrar to furnish to the Trustee before each Interest
Payment Date, and at such other times as the Trustee may reasonably request
in writing, a list in such form and as of such date as the Trustee may
reasonably require of the names and addresses of the Holders. Neither the
Company nor the Trustee shall be under any responsibility with regard to the
accuracy of such list.
(b) The Company will furnish or cause to be furnished to
the Trustee:
(i) semi-annually, not more than 15 days after each Regular
Record Date, a list, in such form as the Trustee may reasonably require,
of the names and addresses of the Holders as of such Regular Record
Date; and
(ii) at such other times as the Trustee may reasonably
request in writing, within 30 days after receipt by the Company of any
such request, a list of similar form and content as of a date not more
than 15 days prior to the time such list is furnished;
PROVIDED, HOWEVER, that if and so long as the Trustee shall be the Registrar
or co-Registrar, no such list need be furnished pursuant to this Subsection
7.01(b).
SECTION 7.02. COMMUNICATIONS OF HOLDERS.
Holders may communicate with other Holders with respect to
their rights under this Indenture or under the Notes pursuant to Section
312(b) of the Trust Indenture Act. The Company and the Trustee and any and
all other Persons benefited by this Indenture shall have the protection
afforded by Section 312(c) of the Trust Indenture Act.
SECTION 7.03. REPORTS BY TRUSTEE.
Within 60 days after May 15th of each year commencing with
the first May 15th following the date of this Indenture, the Trustee shall
mail to all Holders, as their names and addresses appear in the Note
Register, a brief report dated as of such May 15th, in accordance with and to
the extent required under Section 313 of the Trust Indenture Act. At the
time of its mailing to Holders, a copy of each such report shall be filed by
the Trustee with the Company, the SEC and, if required by the rules of any
such stock exchange or market, with each stock exchange or market on which
the
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Notes are listed. The Company shall notify the Trustee when the Notes are
listed on any stock exchange or market.
8. EIGHT
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
SECTION 8.01. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN
TERMS.
The Company will not (i) consolidate or combine with or merge
with or into or, directly or indirectly, sell, assign, convey, lease,
transfer or otherwise dispose of all or substantially all of its properties
and assets to any Person or Persons in a single transaction or through a
series of transactions, or (ii) permit any of the Restricted Subsidiaries to
enter into any such transaction or series of transactions if it would result
in the disposition of all or substantially all of the properties or assets of
the Company and the Restricted Subsidiaries on a consolidated basis, unless,
in the case of either (i) or (ii), (a) the Company shall be the continuing
Person or, if the Company is not the continuing Person, the resulting,
surviving or transferee Person (the "surviving entity") shall be a company
organized and existing under the laws of the United States or any State or
territory thereof; (b) the surviving entity (if other than the Company) shall
expressly assume all of the obligations of the Company under the Notes and
this Indenture, and shall execute a supplemental indenture to effect such
assumption which supplemental indenture shall be delivered to the Trustee and
shall be in form and substance reasonably satisfactory to the Trustee; (c)
immediately after giving effect to such transaction or series of transactions
on a PRO FORMA basis (including, without limitation, any Indebtedness
incurred or anticipated to be incurred in connection with or in respect of
such transaction or series of transactions), (I) the Company or the surviving
entity (assuming such surviving entity's assumption of the Company's
obligations under the Notes and this Indenture), as the case may be, would be
able to incur $1.00 of Indebtedness (other than Permitted Indebtedness) under
the proviso of Section 10.11, and (II) the Company or the surviving entity,
as the case may be, would have a Consolidated Net Worth equal to or greater
than the Consolidated Net Worth of the Company immediately prior to such
transaction or series of transactions; (d) immediately after giving effect to
such transaction or series of transactions on a PRO FORMA basis (including,
without limitation, any Indebtedness incurred or anticipated to be incurred
in connection with or in respect of such transaction or series of
transactions), no Default shall have occurred and be continuing; and (e) the
Company or the surviving entity, as the case may be, shall have delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel stating that
such transaction or series of transactions, and, if a supplemental indenture
is required in connection with such transaction or series of transactions to
effectuate such assumption, such supplemental indenture, complies with this
covenant and that all conditions precedent in this Indenture relating to the
transaction or series of transactions have been satisfied.
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SECTION 8.02. SUCCESSOR SUBSTITUTED.
Upon any consolidation or merger or any sale, assignment,
conveyance, lease, transfer or other disposition of all or substantially all
of the assets of the Company in accordance with the foregoing in which the
Company or the Restricted Subsidiary, as the case may be, is not the
continuing corporation, then the successor corporation formed by such a
consolidation or into which the Company or such Restricted Subsidiary is
merged or to which such transfer is made, will succeed to, and be substituted
for, and may exercise every right and power of, the Company or such
Restricted Subsidiary, as the case may be, under this Indenture and the Notes
with the same effect as if such successor corporation had been named as the
Company or such Restricted Subsidiary therein; and thereafter, except in the
case of (i) any lease or (ii) any sale, assignment, conveyance, transfer,
lease or other disposition to a Restricted Subsidiary of the Company, the
Company shall be discharged from all obligations and covenants under this
Indenture and the Notes.
For all purposes of this Indenture (including the provisions
of this Article Eight and Sections 10.11, 10.13 and 10.16 hereof) and the
Notes, Subsidiaries of any surviving entity will, upon such transaction or
series of related transactions, become Restricted Subsidiaries or
Unrestricted Subsidiaries as provided pursuant to Section 10.20 hereof, and
all Indebtedness, and all Liens on property or assets, of the surviving
entity and the Restricted Subsidiaries (except Indebtedness, or Liens on
property or assets, of the Company and the Restricted Subsidiaries in
existence immediately prior to such transaction or series of related
transactions) shall be deemed to have been incurred upon such transaction or
series of related transactions.
9. NINE
SUPPLEMENTAL INDENTURES AND WAIVERS
SECTION 9.01. SUPPLEMENTAL INDENTURES, AGREEMENTS AND WAIVERS
WITHOUT CONSENT OF HOLDERS.
Without the consent of any Holders, the Company and any
Subsidiary Guarantor, when authorized by a Board Resolution, and the Trustee,
together, at any time and from time to time, may amend, waive, modify or
supplement this Indenture or the Notes for any of the following purposes:
(a) to evidence the succession of another Person to the
Company, and the assumption by any such successor of the covenants of the
Company in the Notes and this Indenture;
(b) to add to the covenants of the Company for the
benefit of the Holders, or to surrender any right or power herein conferred
upon the Company in the Notes or this Indenture;
(c) to cure any ambiguity, or to correct or supplement
any provision in this Indenture or in the Notes which may be defective or
inconsistent with any other provision herein or to make any
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other provisions with respect to matters or questions arising under this
Indenture or the Notes; PROVIDED, HOWEVER, that, in each case, such
provisions shall not adversely affect the legal rights of the Holders;
(d) to comply with the requirements of the SEC in order
to effect or maintain the qualification of this Indenture under the Trust
Indenture Act, as contemplated by Section 9.05 hereof or otherwise;
(e) to evidence and provide the acceptance of the
appointment of a successor Trustee hereunder;
(f) to mortgage, pledge, hypothecate or grant a security
interest in any property or assets in favor of the Trustee for the benefit of
the Holders as security for the payment and performance of the Indenture
Obligations;
(g) to provide for issuance of the Exchange Notes, which
will have terms substantially identical in all material respects to the
Initial Notes (except that the transfer restrictions contained in the Initial
Notes will be modified or eliminated, as appropriate), and which will be
treated together with any outstanding Initial Notes, as a single issue of
securities;
(h) to add or release a Subsidiary Guarantor in
compliance with the provisions of Section 10.22 hereof; or
(i) to make any other change that does not adversely
affect in any material respect the legal rights of any Holder;
PROVIDED, HOWEVER, that the Company has delivered to the Trustee an Opinion
of Counsel stating that such change, agreement or waiver complies with the
provisions of this Section 9.01.
SECTION 9.02. SUPPLEMENTAL INDENTURES, AGREEMENTS AND WAIVERS
WITH CONSENT OF HOLDERS.
With the written consent of the Holders of not less than a
majority in aggregate principal amount at maturity of the Outstanding Notes
delivered to the Company and the Trustee, the Company, when authorized by a
Board Resolution, together with the Trustee, may amend, waive, modify or
supplement any other provision of this Indenture or the Notes; PROVIDED,
HOWEVER, that no such amendment, waiver, modification or supplement may,
without the written consent of the Holder of each Outstanding Note affected
thereby:
(i) reduce the principal amount of, change the fixed
maturity of, or alter the redemption provisions of, the Notes,
(ii) change the currency in which any Notes or amounts owing
thereon is payable,
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(iii) reduce the percentage of the aggregate principal amount
at maturity Outstanding of Notes which must consent to an amendment,
supplement or waiver or consent to take any action under this Indenture
or the Notes,
(iv) impair the right to institute suit for the enforcement
of any payment on or with respect to the Notes,
(v) waive a Default in payment with respect to the Notes,
other than a waiver consisting of the rescission of any declaration of
acceleration with respect to the Notes effected in compliance with
Section 5.02,
(vi) reduce the rate or change the time for payment of
interest on the Notes,
(vii) following the occurrence of a Change of Control or an
Asset Sale, alter the Company's obligation to purchase the Notes in
accordance with this Indenture or waive any Default in the performance
thereof, or
(viii) affect the ranking of the Notes in a manner adverse to
the Holders of the Notes.
Upon the written request of the Company accompanied by a
Board Resolution authorizing the execution of any such supplemental indenture
or other agreement, instrument or waiver, and upon the filing with the
Trustee of evidence of the consent of Holders as aforesaid, the Trustee shall
join with the Company in the execution of such supplemental indenture or
other agreement, instrument or waiver.
It shall not be necessary for any Act of Holders under this
Section to approve the particular form of any proposed supplemental indenture
or other agreement, instrument or waiver, but it shall be sufficient if such
Act shall approve the substance thereof.
SECTION 9.03. EXECUTION OF SUPPLEMENTAL INDENTURES,
AGREEMENTS AND WAIVERS.
In executing, or accepting the additional trusts created by,
any supplemental indenture, agreement, instrument or waiver permitted by this
Article Nine or the modifications thereby of the trusts created by this
Indenture, the Trustee shall be entitled to receive, and (subject to Section
6.01 hereof) shall be fully protected in relying upon, an Opinion of Counsel
and an Officers' Certificate from each obligor under the Notes entering into
such supplemental indenture, agreement, instrument or waiver, each stating
that the execution of such supplemental indenture, agreement, instrument or
waiver (a) is authorized or permitted by this Indenture and (b) does not
violate the provisions of any agreement or instrument evidencing any other
Indebtedness of the Company or any other Subsidiary of the Company. The
Trustee may, but shall not be obligated to, enter into any such supplemental
indenture, agreement, instrument or waiver which affects the Trustee's own
rights, duties or immunities under this Indenture, the Notes or otherwise.
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SECTION 9.04. EFFECT OF SUPPLEMENTAL INDENTURES.
Upon the execution of any supplemental indenture under this
Article Nine, this Indenture and/or the Notes, if applicable, shall be
modified in accordance therewith, and such supplemental indenture shall form
a part of this Indenture and/or the Notes, if applicable, as the case may be,
for all purposes; and every Holder of Notes theretofore or thereafter
authenticated and delivered hereunder shall be bound thereby.
SECTION 9.05. CONFORMITY WITH TRUST INDENTURE ACT.
Every supplemental indenture executed pursuant to this
Article Nine shall conform to the requirements of the Trust Indenture Act as
then in effect.
SECTION 9.06. REFERENCE IN NOTES TO SUPPLEMENTAL INDENTURES.
Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article, may, and shall if required
by the Trustee, bear a notation in form approved by the Trustee as to any
matter provided for in such supplemental indenture. If the Company shall so
determine, new Notes so modified as to conform, in the opinion of the Trustee
and the Board, to any such supplemental indenture may be prepared and
executed by the Company and authenticated and delivered by the Trustee upon a
Company Order in exchange for Outstanding Notes.
In addition, Notes authenticated and delivered after the
execution of any supplemental indenture in compliance with Section 10.22 and
this Article shall, if required by the Trustee, bear a notation substantially
in the form annexed hereto as ANNEX A to EXHIBIT B, and new Notes bearing
such notation shall be prepared and executed by the Company, with such
notation executed by the Subsidiary Guarantors, if any. The Trustee, upon a
Company Order, shall thereafter authenticate and deliver such Notes in
exchange for Outstanding Notes.
SECTION 9.07. RECORD DATE.
The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Holders entitled to consent to any
supplemental indenture, agreement or instrument or any waiver, and shall
promptly notify the Trustee of any such record date. If a record date is
fixed those Persons who were Holders at such record date (or their duly
designated proxies), and only those Persons, shall be entitled to consent to
such supplemental indenture, agreement or instrument or waiver or to revoke
any consent previously given, whether or not such Persons continue to be
Holders after such record date. No such consent shall be valid or effective
for more than 90 days after such record date.
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SECTION 9.08. REVOCATION AND EFFECT OF CONSENTS.
Until an amendment or waiver becomes effective, a consent to it
by a Holder of a Note is a continuing consent by the Holder and every subsequent
Holder of a Note or portion of a Note that evidences the same debt as the
consenting Holder's Note, even if a notation of the consent is not made on any
Note. However, any such Holder, or subsequent Holder, may revoke the consent as
to his Note or portion of a Note if the Trustee receives the notice of
revocation before the date the amendment or waiver becomes effective. An
amendment or waiver shall become effective in accordance with its terms and
thereafter bind every Holder.
10. TEN
COVENANTS
SECTION 10.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.
The Company will duly and punctually pay the principal of,
premium, if any, and interest on the Notes in accordance with the terms of the
Notes, this Indenture and the Registration Rights Agreement.
Notwithstanding anything to the contrary contained in this
Indenture, the Company may, to the extent it is required to do so by law, deduct
or withhold income or other similar taxes imposed by the United States of
America from principal, premium or interest payments hereunder.
SECTION 10.02. MAINTENANCE OF OFFICE OR AGENCY.
The Company will maintain in the Borough of Manhattan in The
City of New York, State of New York, an office or agency where Notes may be
presented or surrendered for payment, where Notes may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Company in respect of the Notes and this Indenture may be served. The
office of the Trustee at its Corporate Trust Office will be such office or
agency of the Company, unless the Company shall designate and maintain some
other office or agency for one or more of such purposes. The Company will give
prompt written notice to the Trustee of any change in the location of any such
office or agency. If at any time the Company shall fail to maintain any such
required office or agency or shall fail to furnish the Trustee with the address
thereof, such presentations, surrenders, notices and demands may be made or
served at the Corporate Trust Office of the Trustee, and the Company hereby
appoints the Trustee as its agent to receive all such presentations, surrenders,
notices and demands.
The Company may also from time to time designate one or more
other offices or agencies (in or outside of The City of New York, State of New
York) where the Notes may be presented or surrendered for any or all such
purposes, and may from time to time rescind such designation; provided, however,
that no such designation or rescission shall in any manner relieve the
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Company of its obligation to maintain an office or agency in The City of New
York, State of New York for such purposes. The Company will give prompt
written notice to the Trustee of any such designation or rescission and any
change in the location of any such other office or agency.
SECTION 10.03. MONEY FOR NOTE PAYMENTS TO BE HELD IN TRUST.
If the Company shall at any time act as its own Paying Agent, it
will, on or before each due date of the principal of, premium, if any, or
interest on any of the Notes, segregate and hold in trust for the benefit of the
Holders entitled thereto a sum sufficient to pay the principal, premium, if any,
or interest so becoming due until such sums shall be paid to such Persons or
otherwise disposed of as herein provided, and will promptly notify the Trustee
of its action or failure so to act.
If the Company is not acting as Paying Agent, the Company will,
on or before each due date of the principal of, premium, if any, or interest on,
any Notes, deposit with a Paying Agent a sum in same day funds sufficient to pay
the principal, premium, if any, or interest so becoming due, such sum to be held
in trust for the benefit of the Holders entitled to such principal, premium or
interest, and (unless such Paying Agent is the Trustee) the Company will
promptly notify the Trustee of such action or any failure so to act.
If the Company is not acting as Paying Agent, the Company will
cause each Paying Agent other than the Trustee to execute and deliver to the
Trustee an instrument in which such Paying Agent will agree with the Trustee,
subject to the provisions of this Section 10.03, that such Paying Agent will:
(a) hold all sums held by it for the payment of the
principal of, premium, if any, or interest on Notes in trust for the benefit of
the Holders entitled thereto until such sums shall be paid to such Holders or
otherwise disposed of as herein provided;
(b) give the Trustee notice of any Default by the Company
(or any other obligor upon the Notes) in the making of any payment of principal
of, premium, if any, or interest on the Notes;
(c) at any time during the continuance of any such payment
Default, upon the written request of the Trustee, forthwith pay to the Trustee
all sums so held in trust by such Paying Agent; and
(d) acknowledge, accept and agree to comply in all aspects
with the provisions of this Indenture relating to the duties, rights and
liabilities of such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the
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Company or such Paying Agent; and, upon such payment by any Paying Agent to
the Trustee, such Paying Agent will be released from all further liability
with respect to such money.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal of, premium,
if any, or interest on any Note and remaining unclaimed for two years after such
principal, premium, if any, or interest has become due and payable shall be paid
to the Company upon receipt of a Company Request therefor, or (if then held by
the Company) will be discharged from such trust; and the Holder of such Note
will thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, will thereupon cease; PROVIDED, HOWEVER, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, at the option of the Company
in the New York Times or the Wall Street Journal (national edition), notice that
such money remains unclaimed and that, after a date specified therein, which
shall not be less than 30 days from the date of such publication, any unclaimed
balance of such money then remaining shall be repaid to the Company.
SECTION 10.04. CORPORATE EXISTENCE.
Subject to Article Eight, the Company will do or cause to be
done all things necessary to preserve and keep in full force and effect the
corporate existence, rights (charter and statutory), licenses and franchises of
the Company and each of the Restricted Subsidiaries; PROVIDED, HOWEVER, that the
Company will not be required to preserve any such right, license or franchise if
the Board shall determine that the preservation thereof is no longer desirable
in the conduct of the business of the Company and the Restricted Subsidiaries as
a whole and that the loss thereof is not adverse in any material respect to the
Holders; PROVIDED, FURTHER, that the foregoing will not prohibit a sale,
transfer or conveyance of a Restricted Subsidiary of the Company or any of its
assets in compliance with the terms of this Indenture.
SECTION 10.05. PAYMENT OF TAXES AND OTHER CLAIMS.
The Company will pay or discharge or cause to be paid or
discharged, before the same shall become delinquent, (a) all material taxes,
assessments and governmental charges levied or imposed (i) upon the Company or
any of the Restricted Subsidiaries or (ii) upon the income, profits or property
of the Company or any of the Restricted Subsidiaries and (b) all material lawful
claims for labor, materials and supplies, which, if unpaid, could reasonably be
expected to become a Lien upon the property of the Company or any of the
Restricted Subsidiaries; PROVIDED, HOWEVER, that the Company will not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim (x) whose amount, applicability or validity is being
contested in good faith by appropriate proceedings properly instituted and
diligently conducted or (y) if the failure to so pay, discharge or cause to be
paid or discharged could not reasonably be expected to have a Material Adverse
Effect (as such term is defined in the Purchase Agreement).
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SECTION 10.06. MAINTENANCE OF PROPERTIES.
The Company will cause all material properties owned by the
Company or any of the Restricted Subsidiaries that are used or held for use in
the conduct of their respective businesses to be maintained and kept in good
condition, repair and working order (subject to ordinary wear and tear) and
supplied with all necessary equipment and will cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as in
the judgment of the Company may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all times;
PROVIDED, HOWEVER, that nothing in this Section 10.06 will prevent the Company
from discontinuing the maintenance of any of such properties if such
discontinuance is, in the judgment of the Company, desirable in the conduct of
its business or the business of any of the Restricted Subsidiaries and is not
disadvantageous in any material respect to the Holders.
SECTION 10.07. INSURANCE.
The Company will at all times keep all of its and the Restricted
Subsidiaries' properties which are of an insurable nature insured with insurers
(including appropriate self-insurance), believed by the Company in good faith to
be financially sound and responsible, against loss or damage to the extent that,
in the good faith judgment of the Board, property of similar character is
usually and customarily so insured by corporations similarly situated and owning
like properties.
SECTION 10.08. BOOKS AND RECORDS.
The Company will keep proper books of record and account, in
which full and correct entries will be made of all financial transactions and
the assets and business of the Company and each Restricted Subsidiary of the
Company in compliance with GAAP.
SECTION 10.09. PROVISION OF SEC REPORTS.
Whether or not the Company is subject to Section 13(a) or 15(d)
of the Exchange Act or any successor provision of law, the Company shall furnish
without cost to each Holder, and file with the Trustee, (i) within 135 days
after the end of each fiscal year of the Company, financial information with
respect to the Company that would be required to be contained in an Annual
Report on Form 10-K for such year filed by the Company with the SEC (whether or
not the Company is then required to file such Form with the SEC), including (x)
audited financial statements of the Company, including the report of the
Company's independent auditors thereon, and (y) a discussion of the Company's
financial condition and results of operations that complies with Item 303 of
Regulation S-K of the SEC, (ii) within 60 days after the end of each of the
first three fiscal quarters of each fiscal year of the Company, financial
information with respect to the Company that would be required to be contained
in a Quarterly Report on Form 10-Q filed by the Company with the SEC (whether or
not the Company is then required to file such Form with the SEC), including a
discussion of the Company's financial condition and results of operations that
complies with Item 303 of Regulation S-K of the SEC and (iii) on a timely basis,
any information concerning the Company or any Restricted Subsidiary required to
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be contained in a Current Report on Form 8-K (whether or not the Company is
then required to file such Form with the SEC). Until such time as the
Company is otherwise required to file periodic reports with the SEC under the
Exchange Act (or any successor provision of law), the Company shall file with
the SEC (if permitted by SEC practice and applicable law and regulations),
for public availability, a copy of the annual and quarterly financial
information and other information prepared by it for distribution to Holders
and filing with the Trustee.
For so long as any Notes remain Outstanding, the Company shall
furnish to securities analysts and prospective investors, upon their request,
information of the type required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act, and, to any beneficial holder of Notes, if not
obtainable from the SEC, information of the type that would be filed with the
SEC pursuant to the foregoing provisions, upon the request of any such Holder.
Delivery of the foregoing reports, information and documents to
the Trustee is for informational purposes only and the Trustee's receipt of such
shall not constitute constructive notice of the Trustee of any information
contained therein or determinable from information contained therein, including
the Company's compliance with any of its covenants hereunder (as to which the
Trustee is entitled to rely exclusively on Officers' Certificates).
The Company will also comply with the other provisions of
Section 314(a) of the Trust Indenture Act.
SECTION 10.10. CHANGE OF CONTROL.
Upon the occurrence of a Change of Control (the date of such
occurrence being the "Change of Control Date"), the Company shall make an offer
to purchase (the "Change of Control Offer"), on a Business Day (the "Change of
Control Payment Date") not later than 60 days following the Change of Control
Date, all Notes then outstanding at a purchase price equal to 101% of the
Accreted Value thereof as of such Change of Control Payment Date, plus accrued
and unpaid interest thereon, if any, to, such Change of Control Payment Date.
Notice of a Change of Control Offer shall be mailed to holders of Notes not less
than 30 days nor more than 60 days before the Change of Control Payment Date.
Notice of a Change of Control Offer shall be mailed by the
Company to the Holders at their last registered addresses with a copy to the
Trustee and the Paying Agent. The Change of Control Offer shall remain open
from the time of mailing for at least 20 Business Days and until 5:00 p.m., New
York City time, on the Change of Control Payment Date. The notice, which shall
govern the terms of the Change of Control Offer, shall include such disclosures
as are required by law and shall state:
(a) that the Change of Control Offer is being made pursuant
to this Section 10.10 and that all Notes validly tendered into the Change of
Control Offer and not withdrawn will be accepted for payment;
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(b) the purchase price (including the amount of accrued
interest, if any) for each Note, the Change of Control Payment Date and the date
on which the Change of Control Offer expires;
(c) that any Note not tendered for payment will remain
Outstanding and continue to accrue Accreted Value (if the Change of Control
Offer occurs prior to May 15, 2003) and, subsequent to May 15, 2003, will accrue
interest in accordance with the terms thereof;
(d) that, unless the Company shall default in the payment of
the purchase price, any Note accepted for payment pursuant to the Change of
Control Offer shall cease to accrete Accreted Value or, if the Change of Control
Payment Date is after May 15, 2003, shall cease to accrue interest, in either
case after the Change of Control Payment Date;
(e) that Holders electing to have Notes purchased pursuant
to a Change of Control Offer will be required to surrender their Notes to the
Paying Agent at the address specified in the notice prior to 5:00 p.m., New York
City time, on the Change of Control Payment Date and must complete any form
letter of transmittal proposed by the Company and acceptable to the Trustee and
the Paying Agent;
(f) that a Holder that tenders a Note pursuant to a Change
of Control Offer will be entitled to withdraw such Note if the Paying Agent
receives, not later than 5:00 p.m., New York City time, on the Change of Control
Payment Date, a facsimile transmission or letter setting forth the name of such
Holder, the principal amount at maturity of Note the Holder tendered for
purchase, the Note certificate number (if any) and a statement that such Holder
is withdrawing his election to have such Note purchased;
(g) that a Holder may tender all or any portion of a Note
owned by such Holder pursuant to the Change of Control Offer, subject to the
requirement that any portion of a Note tendered must be tendered in an integral
multiple of $1,000 in principal amount at maturity, and that any Holder that
tenders a portion of a Note will be issued a Note of like tenor equal in
principal amount at maturity to the portion of the Note not tendered;
(h) the instructions that Holders must follow in order to
tender their Notes; and
(i) information concerning the business of the Company, the
most recent annual and quarterly reports of the Company filed with the SEC
pursuant to the Exchange Act (or, if the Company is not required to file any
such reports with the SEC at that time, the comparable information prepared
pursuant to Section 10.09), a description of material developments in the
Company's business and such other information concerning the circumstances and
relevant facts regarding such Change of Control and Change of Control Offer
(including, without limitation, pro forma financial information giving effect to
such Change of Control) as would, in the good faith judgment of the Company, be
material to a Holder in connection with the decision of such Holder as to
whether or not it should tender Notes pursuant to the Change of Control Offer.
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On the Change of Control Payment Date, the Company shall (i)
accept for payment all Notes, or portions thereof, validly tendered and not
withdrawn pursuant to the Change of Control Offer, (ii) deposit with the Paying
Agent money, in immediately available funds, sufficient to pay the purchase
price of all Notes, or portions thereof, so tendered and accepted and (iii)
deliver to the Trustee the Notes so accepted together with an Officers'
Certificate setting forth the registered numbers of such Notes. The Paying
Agent shall, with the funds so deposited with it by the Company, promptly mail
or deliver to each Holder that validly tendered and did not withdraw Notes, or
any portion thereof, an amount equal to the purchase price for the portion so
tendered, and the Trustee shall promptly authenticate and mail or deliver to
such Holder a new Note of like tenor equal in principal amount at maturity to
that portion, if any, of any Note surrendered by such Holder but not tendered
pursuant to the Change of Control Offer. The Company will publicly announce or
otherwise notify the Holders of the results of the Change of Control Offer as
soon as practicable following the Change of Control Payment Date. The Company
shall not be required to make a Change of Control Offer following a Change of
Control if a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements applicable to a Change
of Control Offer otherwise required to be made by the Company and purchases all
Notes validly tendered and not withdrawn under such Change of Control Offer.
If the Company is required to make a Change of Control Offer,
the Company (or any such third party) shall comply with all applicable tender
offer laws and regulations, including, to the extent applicable, Section 14(e)
and Rule 14e-1 under the Exchange Act, and any other applicable securities laws
and regulations. To the extent that the provisions of any such securities laws
or regulations conflict with the provisions of this Section 10.10, the Company
will comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under this Section 10.10 solely by
virtue of such compliance.
SECTION 10.11. LIMITATION ON ADDITIONAL INDEBTEDNESS.
The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create, incur, assume, issue, Guarantee
or in any manner become directly or indirectly liable for or with respect to,
contingently or otherwise, the payment of (collectively, to "incur") any
Indebtedness (including any Acquired Indebtedness), except for Permitted
Indebtedness (including Acquired Indebtedness to the extent it would constitute
Permitted Indebtedness); PROVIDED, that (i) the Company will be permitted to
incur Indebtedness (including Acquired Indebtedness) and (ii) a Restricted
Subsidiary will be permitted to incur Acquired Indebtedness, if, in either case,
after giving PRO FORMA effect to such incurrence (including the application of
the net proceeds therefrom), the Indebtedness to EBITDA Ratio would be less than
or equal to 6 to 1, in the case of any such incurrence on or before June 30,
2001, or less than or equal to 5 to 1, in the case of any such incurrence
thereafter.
Indebtedness of any Person or any of its Subsidiaries existing
at the time such Person becomes a Restricted Subsidiary (or is merged into or
consolidated with the Company or any Restricted Subsidiary), whether or not such
Indebtedness was incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary (or being merged into or consolidated
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with the Company or any Restricted Subsidiary) shall be deemed incurred at the
time such Person becomes a Restricted Subsidiary or merges into or consolidates
with the Company or any Restricted Subsidiary.
For purposes of determining compliance with this Section 10.11,
in the event that an item of Indebtedness may be incurred by meeting the
criteria of one or more items of Permitted Indebtedness, the Company may, in its
sole discretion, classify and divide such item of Indebtedness among more than
one of such items of Permitted Indebtedness.
SECTION 10.12. STATEMENT BY OFFICERS AS TO DEFAULT.
The Company will deliver to the Trustee, within 120 days after
the end of each fiscal year of the Company ending after the date hereof, a
written statement signed by the chairman or the chief executive officer and by
the principal financial officer or principal accounting officer of the Company,
stating (i) that a review of the activities of the Company during the preceding
fiscal year has been made under the supervision of the signing Officers with a
view to determining whether the Company has kept, observed, performed and
fulfilled its obligations under this Indenture, and (ii) that, to the knowledge
of each Officer signing such certificate, the Company has kept, observed,
performed and fulfilled in all material respects each and every covenant and
condition contained in this Indenture and is not in default in the performance
or observance of any of the terms, provisions, conditions and covenants hereof
(or, if a Default shall have occurred, describing all such Defaults of which
such Officers have knowledge, their status and what action the Company is taking
or proposes to take with respect thereto). When any Default under this
Indenture has occurred and is continuing, or if the Trustee or any Holder or the
trustee for or the holder of any other evidence of Indebtedness of the Company
or any Restricted Subsidiary gives any notice or takes any other action with
respect to a claimed Default (other than with respect to Indebtedness (other
than Indebtedness evidenced by the Notes) in the principal amount of less than
$5 million), the Company will promptly notify the Trustee of such Default,
notice or action and will deliver to the Trustee by registered or certified mail
or by telegram, or facsimile transmission followed by hard copy by registered or
certified mail an Officers' Certificate specifying such event, notice or other
action within five Business Days after the Company becomes aware of such
occurrence and what action the Company is taking or proposes to take with
respect thereto.
SECTION 10.13. LIMITATION ON RESTRICTED PAYMENTS.
The Company will not, and will not permit any of the Restricted
Subsidiaries to, make, directly or indirectly, any Restricted Payment unless:
(i) no Default shall have occurred and be continuing at the
time of or upon giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted
Payment, the Company would be able to incur $1.00 of Indebtedness under
the proviso of Section 10.11 hereof; and
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(iii) immediately after giving effect to such Restricted
Payment, the aggregate amount of all Restricted Payments declared or
made on or after the Issue Date does not exceed an amount equal to the
sum of, without duplication, (a) 50% of Consolidated Net Income
accrued on a cumulative basis during the period beginning on the first
day of the first fiscal quarter immediately subsequent to the Issue Date
and ending on the last day of the fiscal quarter of the Company
immediately preceding the date of such proposed Restricted Payment (or,
if such cumulative Consolidated Net Income of the Company for such
period is a deficit, minus 100% of such deficit) for which financial
statements are available, in any event determined by excluding income
resulting from transfers of assets by the Company or a Restricted
Subsidiary to an Unrestricted Subsidiary, PLUS (b) the aggregate net
cash proceeds received by the Company either (x) as capital
contributions to the Company after the Issue Date or (y) from the
issuance and sale of its Capital Stock (other than Disqualified Stock)
or options, warrants or other rights to acquire its Capital Stock (other
than Disqualified Stock), in each case on or after the Issue Date to a
Person who is not a Subsidiary of the Company, PLUS (c) the aggregate
net proceeds received by the Company from the issuance (other than to a
Subsidiary of the Company) on or after the Issue Date of its Capital
Stock (other than Disqualified Stock) upon the conversion of, or in
exchange for, Indebtedness of the Company or upon the exercise of
options, warrants or other rights of the Company, PLUS (d) in the case
of the disposition or repayment (in whole or in part) of any Investment
constituting a Restricted Payment made after the Issue Date, an amount
equal to the lesser of the return of capital with respect to the
applicable portion of such Investment and the cost of the applicable
portion of such Investment, in either case, less the cost of the
disposition of such Investment, PLUS (e) in the case of any Revocation
with respect to a Subsidiary of the Company that was made subject to a
Designation after the Issue Date, an amount equal to the lesser of the
Designation Amount with respect to such Subsidiary or the Fair Market
Value of the Investment of the Company and the Restricted Subsidiaries
in such Subsidiary at the time of Revocation, MINUS (f) 50% of the
principal amount of any Indebtedness incurred pursuant to clause (g) of
the definition of "Permitted Indebtedness." For purposes of the
preceding clauses (b) (y) and (c), as applicable, (A) the value of the
aggregate net proceeds received by the Company upon the issuance of
Capital Stock either upon the conversion of convertible Indebtedness or
in exchange for outstanding Indebtedness or upon the exercise of
options, warrants or rights will be the net cash proceeds received upon
the issuance of such Indebtedness, options, warrants or rights plus the
incremental amount received, if any, by the Company upon the conversion,
exchange or exercise thereof, (B) there shall be excluded in all cases
any issuance and sale of Capital Stock financed, directly or indirectly,
using funds (I) borrowed from the Company or any Subsidiary until and to
the extent such borrowing is repaid or (II) contributed, extended,
Guaranteed or advanced by the Company or any Subsidiary (including,
without limitation, direct contributions by the Company in respect of
any employee stock ownership or benefit plan) and (C) there shall be
excluded in all cases any issuance and sale of Capital Stock in one or
more Public Equity Offerings or to Strategic Equity Investors to the
extent the net cash proceeds are used, prior to May 15, 2001, to redeem
Notes as permitted under the optional redemption provisions of the
Notes. The Company may not redeem Notes pursuant to the optional
redemption provisions of the Notes referred to in the immediately
preceding sentence
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from net cash proceeds received by the Company from the issuance on
or after the Issue Date of its Capital Stock if such net cash
proceeds have ever been included in a determination of the amount
of Restricted Payments that may be made by the Company pursuant to
this Section 10.13, unless the Company would have been able to make
such Restricted Payment without including such net cash proceeds in
such determination.
For purposes of determining the amount expended for Restricted
Payments, cash distributed shall be valued at the face amount thereof and
property other than cash shall be valued at its Fair Market Value.
The provisions of this Section 10.13 shall not prohibit the
following (each of which shall be given independent effect):
(1) the payment of any dividend or other distribution within
60 days after the date of declaration thereof if at such date of declaration
such payment would be permitted by the provisions of this Indenture:
(2) the purchase, redemption, retirement or other
acquisition of any shares of Capital Stock of the Company in exchange for, or
out of the net cash proceeds of the substantially concurrent issue and sale
(other than to a Subsidiary of the Company) of, shares of Capital Stock of the
Company (other than Disqualified Stock); PROVIDED that any such net cash
proceeds are excluded from clause (iii)(b) above;
(3) so long as no Default shall have occurred and be
continuing, the purchase, redemption, retirement, defeasance or other
acquisition of Subordinated Indebtedness (A) made by exchange for, or out of the
net cash proceeds of, a substantially concurrent issue and sale (other than to a
Subsidiary of the Company) of (x) Capital Stock (other than Disqualified Stock)
of the Company, PROVIDED that any such net cash proceeds are excluded from
clause (iii) (b) above; or (y) other Subordinated Indebtedness to the extent
that (I) its stated maturity for the payment of principal thereof is not prior
to the 91st day after the final Stated Maturity of the Notes, (II) its principal
amount does not exceed the principal amount (or, if such Subordinated
Indebtedness being refinanced provides for an amount less than the principal
amount thereof to be due and payable upon an acceleration thereof, such lesser
amount) of the Subordinated Indebtedness being refinanced, PLUS any premium
required to be paid in connection with such refinancing pursuant to the terms of
such Subordinated Indebtedness being refinanced, PLUS the amount of expenses of
the Company incurred in connection with such refinancing, and (III) such new
Subordinated Indebtedness is subordinated to the Notes to the same extent as the
Subordinated Indebtedness being refinanced, or (B) with Unutilized Cash Proceeds
remaining after completion of an Asset Sale pursuant to the fifth paragraph of
Section 10.15 hereof;
(4) so long as no Default shall have occurred and be
continuing, purchases or redemptions of Capital Stock (including cash
settlements of stock options) held by employees, officers or directors upon or
following termination (whether by reason of death, disability or otherwise) of
their
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employment with the Company or one of its Subsidiaries; PROVIDED that
payments shall not exceed $500,000 in any fiscal year in the aggregate;
(5) payments or distributions to dissenting stockholders
pursuant to applicable law, pursuant to or in contemplation of merger,
consolidation or transfer of assets that complies with the provisions of the
Indenture relating to mergers, consolidations or transfers of substantially all
of the assets of the Company;
(6) any purchase of any fractional share of Common Stock of
the Company in connection with an exercise of the Warrants and any repurchase of
Warrants pursuant to a Repurchase Offer (as defined in the Warrant Agreement);
and
(7) Restricted Payments in addition to those otherwise
permitted pursuant to this Section 10.13 in an aggregate amount not to exceed
$2.0 million.
In determining the amount of Restricted Payments permissible
under this Section 10.13, amounts expended pursuant to clauses (1), (4) and (7)
above shall be included, without duplication, as Restricted Payments.
SECTION 10.14. LIMITATION ON TRANSACTIONS WITH AFFILIATES.
The Company shall not, and shall not permit, cause or suffer any
Restricted Subsidiary to, directly or indirectly, conduct any business, sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into any contract, agreement,
loan, advance or Guarantee or engage in any other transaction (or series of
related transactions which are similar or part of a common plan) with or for the
benefit of any of their respective Affiliates or any beneficial owner of 10% or
more of the Common Stock of the Company or any officer, director of the Company
or any Subsidiary (each, an "Affiliate Transaction"), unless the terms of the
Affiliate Transaction are set forth in writing and are no less favorable to the
Company or such Restricted Subsidiary, as the case may be, than would be
available in a comparable transaction with an unaffiliated third party. Each
Affiliate Transaction (or series of related Affiliate Transactions)
involving aggregate payments and/or other consideration having Fair Market Value
(i) in excess of $1 million shall be approved by a majority of the Board, such
approval to be evidenced by a Board Resolution stating that the Board has
determined that such transaction or transactions comply with the foregoing
provisions, (ii) in excess of $5 million shall further require the approval of a
majority of the Disinterested Directors and (iii) in excess of $10 million shall
further require that the Company obtain a written opinion from an Independent
Financial Advisor stating that the terms of such Affiliate Transaction (or
series of related Affiliate Transactions) are fair to the Company or the
Restricted Subsidiary, as the case may be, from a financial point of view;
PROVIDED, that this clause (iii) shall not apply to purchases of goods and/or
services in the ordinary course of the Company's business, and on terms no less
favorable to the Company than those customarily granted to purchasers of such
goods and/or services, from Paradyne Corporation or Xylan Corporation. For
purposes of this Section 10.14, any Affiliate Transaction approved by a majority
of the Disinterested Directors or as to which a written
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opinion has been obtained from an Independent Financial Advisor, on the basis
set forth in the preceding sentence, shall be deemed to be on terms that are
no less favorable to the Company or such Restricted Subsidiary, as the case
may be, than would be available in a comparable transaction with an
unaffiliated third party and, therefore, shall be permitted under this
Section 10.14.
Notwithstanding the foregoing, the restrictions set forth in
this Section 10.14 shall not apply to (i) transactions with or among, or solely
for the benefit of, the Company and/or any of the Restricted Subsidiaries,
PROVIDED that in any such case, no officer, director or beneficial owner of 10%
or more of any class of Capital Stock of the Company shall beneficially own any
Capital Stock of any such Restricted Subsidiary, (ii) transactions pursuant to
agreements and arrangements existing on the Issue Date and specified on a
schedule to the Indenture, (iii) any Restricted Payment made in compliance with
Section 10.13, (iv) the payment of reasonable and customary regular fees to
directors of the Company or any Restricted Subsidiary who are not employees of
the Company or any Restricted Subsidiary, (v) employment agreements, stock
option agreements and indemnification arrangements entered into by the Company
or any of its Restricted Subsidiaries in the ordinary course of business and
consistent with industry practice, (vi) the granting and performance of
registration rights for securities of the Company, (vii) loans and advances to
officers, directors and employees of the Company or any Restricted Subsidiary
for travel, entertainment, moving and other relocation expenses, in each case
made in the ordinary course of business and consistent with industry practice,
and (viii) any Permitted Investment.
SECTION 10.15. DISPOSITION OF PROCEEDS OF ASSET SALES
The Company will not, and will not permit any Restricted
Subsidiary to, make any Asset Sale unless (a) the Company or such Restricted
Subsidiary, as the case may be, receives consideration at the time of such Asset
Sale at least equal to the Fair Market Value of the shares or assets sold or
otherwise disposed of and (b) at least 75% of such consideration consists of
cash or Cash Equivalents; PROVIDED that the following shall be treated as cash
for purposes of this Section 10.15: (x) the amount of Indebtedness (other than
Subordinated Indebtedness) of the Company or any Restricted Subsidiary that is
actually assumed by the transferee of assets disposed of in such Asset Sale
pursuant to an agreement that fully and unconditionally releases the Company or
such Restricted Subsidiary from further liability ("Assumed Indebtedness") and
(y) the amount of any notes or other obligations that within 30 days of receipt
are converted into cash (to the extent of the cash (after payment of any costs
of disposition) so received). Notwithstanding the immediately preceding
sentence, the Company and its Restricted Subsidiaries may consummate an Asset
Sale without complying with clause (b) of the immediately preceding sentence if
at least 75% of the consideration for such Asset Sale consists of any
combination of cash, Cash Equivalents and Permitted Business Assets (or in
Capital Stock of any Person that will become a Restricted Subsidiary as a result
of such investment if all or substantially all of the properties and assets of
such Person are Permitted Business Assets); PROVIDED that any non-cash
consideration (other than Permitted Business Assets received by the Company or
any of its Restricted Subsidiaries in connection with such Asset Sale) that is
converted into or sold or otherwise disposed of for cash or Cash Equivalents
within 270 days after such Asset Sale and any Permitted Business Assets
constituting cash or Cash Equivalents received by the
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Company or any Restricted Subsidiary shall constitute Net Cash Proceeds
subject to the provisions of this Section 10.15. The Company or the
applicable Restricted Subsidiary, as the case may be, may (i) apply the Net
Cash Proceeds from such Asset Sale, within 270 days of the receipt thereof,
to the permanent reduction (whether by means of repayment, release pursuant
to clause (x) of the first sentence of this Section 10.15 or otherwise) of
(A) Indebtedness of any Restricted Subsidiary and/or (B) indebtedness of the
Company ranking senior to or PARI PASSU with the Notes, and, in each case,
permanently reduce the amount of the commitments thereunder by the amount of
the Indebtedness so repaid, and/or (ii) apply such Net Cash Proceeds, within
270 days of the receipt thereof, to an investment in properties and assets
that will be used in the same or a related line of business as that being
conducted by the Company or any Restricted Subsidiary at the time of such
Asset Sale (collectively, "Permitted Business Assets") (or in Capital Stock
of any Person that will become a Restricted Subsidiary as a result of such
investment if all or substantially all of the properties and assets of such
Person are Permitted Business Assets).
To the extent all or part of the Net Cash Proceeds of any Asset
Sale are not applied within 270 days of such Asset Sale as described in clause
(i) or (ii) of the preceding paragraph (such Net Cash Proceeds, the "Unutilized
Net Cash Proceeds"), the Company shall, within 20 Business Days after such 270th
day, make an offer to purchase (an "Asset Sale Offer") all outstanding Notes up
to a maximum Accreted Value (expressed as a multiple of $1,000) equal to the
Note Pro Rata Share of Unutilized Net Cash Proceeds, at a purchase price in cash
equal to 100% of the Accreted Value thereof on any purchase date, plus accrued
and unpaid interest, if any, to such purchase date; PROVIDED, HOWEVER, that an
Asset Sale Offer may be deferred by the Company until there are Unutilized Net
Cash Proceeds equal to at least $5.0 million, at which time the entire amount of
such Unutilized Net Cash Proceeds (and not just the amount in excess of $5.0
million) shall be applied as required pursuant to this paragraph and the next
following paragraph.
If any other Indebtedness of the Company which ranks PARI PASSU
with the Notes (the "Other Indebtedness") requires that an offer to repurchase
such Indebtedness be made upon the consummation of an Asset Sale, then the
Company may apply the Unutilized Net Cash Proceeds otherwise required to be
applied to an Asset Sale Offer to offer to purchase such Other Indebtedness and
to an Asset Sale Offer so long as the amount of such Unutilized Net Cash
Proceeds applied to repurchase the Notes is not less than the Note Pro Rata
Share of Unutilized Net Cash Proceeds. Any offer to purchase such Other
Indebtedness shall be made at the same time as the Asset Sale Offer, and the
purchase date in respect of any such offer to purchase and the Asset Sale Offer
shall occur on the same day.
For purposes of this Section 10.15, "Note Pro Rata Share of
Unutilized Net Cash Proceeds" means the amount of the Unutilized Net Cash
Proceeds equal to the product of (x) the Unutilized Net Cash Proceeds and (y) a
fraction, the numerator of which is the aggregate Accreted Value of, and all
accrued interest thereon to the purchase date on, all Notes (or portions
thereof) validly tendered and not withdrawn pursuant to an Asset Sale Offer
related to such Unutilized Net Cash Proceeds (the "Note Amount") and the
denominator of which is the sum of the Note Amount and the lesser of (i) the
aggregate principal face amount, and all accrued interest thereon to the
purchase date,
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or (ii) the accreted value as of the purchase date of all Other Indebtedness
(or portions thereof) validly tendered and not withdrawn pursuant to a
concurrent offer to purchase such Other Indebtedness made at the time of such
Asset Sale Offer.
Each Asset Sale Offer shall remain open for a period of 20
Business Days or such longer period as may be required by law. To the extent
that the Accreted Value, plus accrued interest thereon, if any, to the
payment date, of Notes validly tendered and not withdrawn pursuant to an
Asset Sale Offer is less than the Unutilized Net Cash Proceeds or the Note
Pro Rata Share of Unutilized Net Cash Proceeds, as the case may be, the
Company or any Restricted Subsidiary may use such excess for general
corporate purposes, including the repayment or repurchase of Indebtedness.
If the Accreted Value, plus accrued interest thereon, if any, to the payment
date, of Notes validly tendered and not withdrawn by holders thereof exceeds
the amount of Notes which can be purchased with the Unutilized Net Cash
Proceeds or the Note Pro Rata Share of Unutilized Net Cash Proceeds, as the
case may be, then the Notes to be purchased will be selected on A PRO RATA
basis. Upon completion of such Asset Sale Offer and offer for any Other
Indebtedness, the amount of Unutilized Net Cash Proceeds shall be reset to
zero.
Notice of an Asset Sale Offer shall be mailed by the Company
not more than 20 Business Days after the obligation to make such Asset Sale
Offer arises to the Holders of Notes at their last registered addresses with
a copy to the Trustee and the Paying Agent. The Asset Sale Offer shall
remain open from the time of mailing for at least 20 Business Days and until
5:00 p.m., New York City time, on the date fixed for purchase of Notes
validly tendered and not withdrawn, which date shall be not later than the
30th Business Day following the mailing of such Asset Sale Offer (the "Asset
Sale Offer Purchase Date"). The notice, which shall govern the terms of the
Asset Sale Offer, shall include such disclosures as are required by law and
shall state:
(a) that the Asset Sale Offer is being made pursuant to this
Section 10.15 and that all Notes validly tendered into the Asset Sale
Offer and not withdrawn will be accepted for payment; PROVIDED, HOWEVER,
that if the aggregate Accreted Value of Notes tendered in an Asset Sale
Offer, plus accrued interest, if any, thereon to the Asset Sale Offer
Purchase Date of such offer exceeds the aggregate amount of the Note Pro
Rata Share of Unutilized Net Cash Proceeds, the Trustee shall select the
Notes to be purchased on a PRO RATA basis (with such adjustments as may
be deemed appropriate by the Trustee so that only Notes in denominations
of $1,000 or multiples thereof shall be purchased);
(b) the purchase price (including the amount of accrued
interest, if any) for each Note, the Asset Sale Offer Purchase Date and
the date on which the Asset Sale Offer expires;
(c) that any Note not tendered for payment will remain
Outstanding and continue to accrete Accreted Value (if the Asset Sale
Offer occurs prior to May 15, 2003) and, subsequent to May 15, 2003,
will accrue interest in accordance with the terms thereof;
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(d) that, unless the Company shall default in the payment of
the purchase price, any Note accepted for payment pursuant to the Asset
Sale Offer shall cease to accrete Accreted Value or, if the Asset Sale
Offer Purchase Date is after May 15, 2003, shall cease to accrue
interest, in either case after the Asset Sale Offer Purchase Date;
(e) that Holders electing to have Notes purchased pursuant
to the Asset Sale Offer will be required to surrender their Notes to the
Paying Agent at the address specified in the notice prior to 5:00 p.m.,
New York City time, on the Asset Sale Offer Purchase Date and must
complete any form letter of transmittal proposed by the Company and
acceptable to the Trustee and the Paying Agent;
(f) that a Holder of Notes will be entitled to withdraw its
Notes from the Asset Sale Offer if the Paying Agent receives, not later
than 5:00 p.m., New York City time, on the Asset Sale Offer Purchase
Date, a facsimile transmission or letter setting forth the name of such
Holder, the principal amount at maturity of each Note such Holder
delivered for purchase that such Holder elects to withdraw, the Note
certificate number (if any) and a statement that such Holder is
withdrawing his election to have such Notes (or a specified portion
thereof) purchased;
(g) that Holders whose Notes are purchased only in part will
be issued Notes of like tenor equal in principal amount at maturity to
the unpurchased portion of the Notes surrendered;
(h) the instructions that Holders must follow in order to
validly tender their Notes; and
(i) information concerning the business of the Company, the
most recent annual and quarterly reports of the Company filed with the
Commission pursuant to the Exchange Act (or, if the Company is not
required to file any such reports with the SEC at that time, the
comparable information prepared pursuant to Section 10.09), a
description of material developments in the Company's business, and such
other information concerning the circumstances and relevant facts
regarding such Asset Sale (including, without limitation, pro forma
financial information giving effect to such Asset Sale) and Asset Sale
Offer as would, in the good faith judgment of the Company, be material
to a Holder of Notes in connection with the decision of such Holder as
to whether or not it should tender Notes pursuant to the Asset Sale
Offer.
On the Asset Sale Offer Purchase Date, the Company shall (i)
accept for payment Notes or portions thereof validly tendered and not withdrawn
pursuant to the Asset Sale Offer, subject to pro ration under the circumstances
and in the manner described in clause (a) of the preceding paragraph, (ii)
deposit with the Paying Agent money, in immediately available funds, sufficient
to pay the purchase price of all Notes or portions thereof so accepted by the
Company and (iii) deliver to the Trustee the Notes so accepted (in whole or in
part) together with an Officers' Certificate setting forth
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the registered numbers of such Notes. The Paying Agent shall, with the funds
so deposited with it by the Company, promptly mail or deliver to the Holders
of Notes so accepted payment in an amount equal to the purchase price
therefor, and the Trustee shall promptly authenticate and mail or deliver to
such Holders new Notes of like tenor equal in principal amount at maturity to
the unpurchased portion of the Notes surrendered in the Asset Sale Offer and
not purchased by the Company. The Company will publicly announce or
otherwise notify the Holders of the results of the Asset Sale Offer as
promptly as practicable following the Asset Sale Offer Purchase Date.
If the Company is required to make an Asset Sale Offer, the
Company shall comply with all applicable tender offer rules, including to the
extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any
other applicable securities laws and regulations. To the extent that the
provisions of any such securities laws or regulations conflict with the
provisions of this Section 10.15, the Company will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under this Section 10.15 solely by virtue of such compliance.
SECTION 10.16. LIMITATION ON LIENS SECURING CERTAIN
INDEBTEDNESS.
The Company will not, and will not permit any Restricted
Subsidiary to, create, incur, assume or suffer to exist any Liens of any kind
against or upon any of the property or assets of the Company or any Restricted
Subsidiary, whether now owned or hereafter acquired, or any proceeds therefrom,
which secure either (x) Subordinated Indebtedness, unless the Notes are secured
by a Lien on such property, assets or proceeds that is senior in priority to the
Liens securing such Subordinated Indebtedness, or (y) Indebtedness of (A) the
Company that is not Subordinated Indebtedness, or (B) any Restricted Subsidiary,
unless in each case the Notes are equally and ratably secured with the Liens
securing such other Indebtedness, except, in the case of this clause (y),
Permitted Liens.
SECTION 10.17. LIMITATION ON STATUS AS INVESTMENT COMPANY.
The Company will not, and will not permit any of its
Subsidiaries or Affiliates to, conduct its business in a fashion that would
cause the Company to be required to register as an "investment company" (as that
term is defined in the Investment Company Act), or otherwise become subject to
regulation under the Investment Company Act. For purposes of establishing the
Company's compliance with this provision, any exemption that is or would become
available under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act
will be disregarded.
SECTION 10.18. LIMITATION ON ISSUANCES AND SALES OF CAPITAL
STOCK OF RESTRICTED SUBSIDIARIES.
The Company will not sell, and will not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell any shares of Capital Stock
(or any options, warrants or other rights to purchase such Capital Stock) of a
Restricted Subsidiary, except (i) any sale or issuance of Capital Stock to the
Company or a Wholly Owned Restricted Subsidiary, (ii) any sale or issuance of
Common Stock to directors as director qualifying shares, but only to the extent
required under applicable law,
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(iii) any sale or other disposition of all, but not less than all, of the
issued and outstanding Capital Stock of any Restricted Subsidiary owned by
the Company and the Restricted Subsidiaries or (iv) any sale or issuance of
Capital Stock of a Restricted Subsidiary (other than pursuant to clauses (i)
or (ii)) if such Restricted Subsidiary would no longer be a Restricted
Subsidiary immediately after such transaction and any Investment in such
Person remaining after giving effect to such sale or issuance would have been
permitted to be made under Section 10.13 hereof, and, in the case of both
(iii) and (iv), in compliance with Section 10.15 hereof.
SECTION 10.19. LIMITATION ON DIVIDENDS AND OTHER PAYMENT
RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES.
The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise enter into or cause
to become effective any encumbrance or restriction of any kind on the ability of
any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make
any other distributions on its Capital Stock or any other interest or
participation in, or measured by, its profits to the extent owned by the Company
or any Restricted Subsidiary, (b) pay any Indebtedness owed to the Company or
any Restricted Subsidiary, (c) make any Investment in the Company or any
Restricted Subsidiary or (d) transfer any of its properties or assets to the
Company or to any Restricted Subsidiary, except for (i) any encumbrance or
restriction in existence on the Issue Date, (ii) customary non-assignment
provisions, (iii) any encumbrances or restriction pertaining to an asset subject
to a Lien to the extent set forth in the security documentation governing such
Lien, (iv) any encumbrance or restriction applicable to a Restricted Subsidiary
at the time that it becomes a Restricted Subsidiary that is not created in
contemplation thereof, (v) any encumbrance or restriction existing under any
agreement that refinances or replaces an agreement containing a restriction
permitted by clause (iv) above; PROVIDED that the terms and conditions of any
such encumbrance or restriction are not materially less favorable to the holders
of Notes than those under or pursuant to the agreement being replaced or the
agreement evidencing the Indebtedness refinanced, (vi) any encumbrance or
restriction imposed upon a Restricted Subsidiary pursuant to an agreement which
has been entered into for the sale or disposition of all or substantially all of
the Capital Stock or assets of such Restricted Subsidiary or any Asset Sale to
the extent limited to the Capital Stock or assets in question, and (vii) any
customary encumbrance or restriction applicable to a Restricted Subsidiary that
is contained in an agreement or instrument governing or relating to Permitted
Indebtedness contained in any Debt Securities or Permitted Credit Facility;
PROVIDED that the terms and conditions of any such encumbrance or restriction
contained in any Debt Securities are no more restrictive than those contained in
this Indenture; PROVIDED, FURTHER, that the provisions of such agreement or
instrument permit the payment of interest and principal and mandatory
repurchases pursuant to the terms of this Indenture and the Notes and other
Indebtedness (other than Subordinated Indebtedness) that is solely an obligation
of the Company; and PROVIDED, FURTHER, that such agreement or instrument may
contain customary covenants regarding the merger of or sale of all or any
substantial part of the assets of the Company or any Restricted Subsidiary,
customary restrictions on transactions with affiliates and customary
subordination provisions governing indebtedness owed to the Company or any
Restricted Subsidiary.
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SECTION 10.20. LIMITATION ON DESIGNATIONS OF UNRESTRICTED
SUBSIDIARIES.
The Company will not designate any Subsidiary of the Company
(other than a newly created Subsidiary in which the Company has made an
Investment of $1,000 or less) as an "Unrestricted Subsidiary" under this
Indenture (a Designation") unless:
(a) no Default shall have occurred and be continuing at the
time of or after giving effect to such Designation; and
(b) the Company would be permitted under this Indenture to
make an Investment at the time of such Designation (assuming the
effectiveness of such Designation) in an amount (the "Designation
Amount") equal to the Fair Market Value of the interest of the Company
and its Restricted Subsidiaries in such Subsidiary on such date.
In the event of any such Designation, the Company shall be
deemed to have made an Investment constituting a Restricted Payment pursuant to
Section 10.13 hereof for all purposes of this Indenture in an amount equal to
the Designation Amount. Neither the Company nor any Restricted Subsidiary shall
at any time (x) provide a Guarantee of, or similar credit support for, or
subject any of its properties or assets (other than the Capital Stock of any
Unrestricted Subsidiary) to the satisfaction of, any Indebtedness of any
Unrestricted Subsidiary (including any undertaking, agreement or instrument
evidencing such Indebtedness), (y) be directly or indirectly liable for any
Indebtedness of any Unrestricted Subsidiary or (z) be directly or indirectly
liable for any other Indebtedness which provides that the holder thereof may
(upon notice, lapse of time or both) declare a default thereon (or cause the
payment thereof to be accelerated or payable prior to its final scheduled
maturity) upon the occurrence of a default with respect to any other
Indebtedness that is Indebtedness of an Unrestricted Subsidiary (including any
corresponding right to take enforcement action against such Unrestricted
Subsidiary), except in the case of clause (x) or (y) to the extent otherwise
permitted under this Indenture, including without limitation under Section 10.13
hereof.
The Company will not revoke any Designation of a Subsidiary as
an Unrestricted Subsidiary (a "Revocation") unless:
(a) no Default shall have occurred and be continuing at the
time of and after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately following such Revocation would, if
incurred at such time, have been permitted to be incurred for all
purposes of this Indenture.
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All Designations and Revocations must be evidenced by Board
Resolutions and Officers' Certificates delivered to the Trustee certifying
compliance with the foregoing provisions.
SECTION 10.21. COMPLIANCE CERTIFICATES AND OPINIONS.
Upon any application or request by the Company to the Trustee to
take any action under any provision of this Indenture, the Company, each
Subsidiary Guarantor, if any, and any other obligor on the Notes will furnish to
the Trustee an Officers' Certificate stating that all conditions precedent, if
any, provided for in this Indenture (including any covenants compliance with
which constitutes a condition precedent) relating to the proposed action have
been complied with, and an Opinion of Counsel stating that in the opinion of
such counsel all such conditions precedent, if any, have been complied with,
except that, in the case of any such application or request as to which the
furnishing of such documents, certificates and/or opinions is specifically
required by any provision of this Indenture relating to such particular
application or request, no additional certificate or opinion need be furnished.
Every Officers' Certificate or Opinion of Counsel with respect
to compliance with a condition or covenant provided for in this Indenture will
include:
(i) a statement that each individual signing such
certificate or opinion has read such covenant or condition and the
definitions herein relating thereto;
(ii) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(iii) a statement that, in the opinion of each such
individual, he has made such examination or investigation as is
necessary to enable him to express an informed opinion as to whether
such covenant or condition has been complied with; and
(iv) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
SECTION 10.22. LIMITATION ON ISSUANCES OF GUARANTEES BY
RESTRICTED SUBSIDIARIES.
The Company will not permit any Restricted Subsidiary, directly
or indirectly, to Guarantee the payment of any other Indebtedness of the Company
unless such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for the Guarantee of the
payment of the Notes by such Restricted Subsidiary (a "Subsidiary Guarantee"),
which Subsidiary Guarantee shall be senior to or PARI PASSU with such Restricted
Subsidiary's Guarantee of such other Indebtedness; PROVIDED that this paragraph
shall not apply to any Guarantee of Indebtedness described in clause (h) of the
definition of "Permitted Indebtedness." Notwithstanding the foregoing, any such
Subsidiary Guarantee shall provide by its terms that it shall be automatically
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and unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the Company's
stock in, or all or substantially all the assets of, such Restricted Subsidiary,
which sale, exchange or transfer is made in compliance with the applicable
provisions of the Indenture, (ii) the Designation of such Restricted Subsidiary
as an Unrestricted Subsidiary in compliance with Section 10.20 hereof or (iii)
the release of such Restricted Subsidiary from all of its obligations under all
of its Guarantees of Indebtedness of the Company. A form of such Subsidiary
Guarantee is set forth as EXHIBIT B hereto.
At the time of the delivery to the Trustee of a Subsidiary
Guarantee by a Restricted Subsidiary pursuant to this Section 10.22, such
Restricted Subsidiary shall also deliver to the Trustee an Opinion of Counsel
and Officers' Certificate to the effect that such Subsidiary Guarantee has been
duly authorized and executed by such Restricted Subsidiary and constitutes the
legal, valid, binding and enforceable obligations of such Restricted Subsidiary
(subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally).
SECTION 10.23. REGISTRATION RIGHTS
(a) Simultaneously with the execution and delivery of this
Indenture, the Company shall enter into the Registration Rights Agreement.
(b) In the event that (a) the Exchange Offer Registration
Statement is not filed with the SEC on or prior to the 90th calendar day
following the Closing Time, (b) the Exchange Offer Registration Statement is not
declared effective on or prior to the 150th calendar day following the Closing
Time, (c) the Exchange Offer is not consummated on or prior to the 30th calendar
day after the date on which the Exchange Offer Registration Statement is
declared effective, (d) if required under the Registration Rights Agreement, a
Shelf Registration Statement with respect to the Notes is not declared effective
on or prior to the 60th calendar day following the date on which the obligation
to file such registration statement arises or (e) the Exchange Offer
Registration Statement or the Shelf Registration Statement is declared effective
but thereafter ceases to be effective or usable except in accordance with
Section 2(d)(iii) of the Registration Rights Agreement (each such event referred
to in clauses (a) through (e) above, a "Registration Default"), then the Company
shall pay as liquidated damages interest ("Additional Interest") on the
Restricted Notes as to which the Registration Default exists. If a Registration
Default exists with respect to Restricted Notes, the Company will, with respect
to the first 90-day period (or portion thereof) while such Registration Default
is continuing immediately following the occurrence of such Registration Default,
make cash payments at a rate of 0.50% per annum multiplied by the Accreted Value
of the Restricted Notes as of the date such payment is required to be made. The
rate of such cash payment shall increase by an additional 0.50% per annum at the
beginning of each subsequent 90-day period (or portion thereof) while such
Registration Default is continuing until such Registration Default is cured, up
to a maximum rate of 1.5% per annum. Upon the cure of a Registration Default in
accordance with Section 2(e) of the Registration Rights Agreement, the accrual
of Additional Interest on the Restricted Notes with respect to such Registration
Default will cease.
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Additional Interest shall be computed based on the actual
number of days elapsed in each 90-day period in which Additional Interest
accrues on the Notes.
The Company shall notify the Trustee within three Business
Days after the occurrence of each Registration Default. Additional Interest
payable with respect to any Restricted Note shall be due and payable on each
May 15 and November 15 (each an "Additional Interest Payment Date") if
Additional Interest has accrued on such Restricted Note during the
semi-annual period immediately preceding such Additional Interest Payment
Date, to the Person in whose name such Restricted Note (or one or more
Predecessor Notes) is registered at the close of business on the May l or
November l, whether or not a Business Day, next preceding such Additional
Interest Payment Date. Each obligation to pay Additional Interest shall be
deemed to accrue from and including the day following the occurrence of the
applicable Registration Default. Additional Interest shall be paid by
depositing with the Trustee, in trust for the benefit of the Holders of
Notes, prior to 11:00 a.m. New York City time on the applicable Additional
Interest Payment Date, immediately available funds sufficient to pay the
Additional Interest then due.
SECTION 10.24. [INTENTIONALLY OMITTED].
SECTION 10.25. BUSINESS ACTIVITIES.
The Company shall not, and shall not permit any Restricted
Subsidiary to, engage in any business other than the Permitted Business.
SECTION 10.26. LIMITATION ON SALE/LEASEBACK TRANSACTIONS.
The Company shall not, and shall not permit its Restricted
Subsidiaries to, directly or indirectly, enter into, assume, Guarantee or
otherwise become liable with respect to any Sale/Leaseback Transaction.
However, the Company or any Restricted Subsidiary may enter into any such
transaction if (i) the Company or such Restricted Subsidiary would be
permitted under Sections 10.11 and 10.16 hereof to incur secured Indebtedness
in an amount equal to the Attributable Debt with respect to such transaction;
(ii) the consideration received by the Company or such Restricted Subsidiary
from such transaction is at least equal to the Fair Market Value of the
property being transferred; and (iii) to the extent that such transaction
constitutes an Asset Sale, the Net Cash Proceeds received by the Company or
such Restricted Subsidiary from such transaction are applied in accordance
with Section 10.15 hereof.
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11. ELEVEN
SATISFACTION AND DISCHARGE
SECTION 11.01. SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture shall be discharged and will cease to be of
further effect (except as to surviving rights or registration of transfer or
exchange of Notes herein expressly provided for) as to all outstanding Notes
and the Trustee, on written demand of and at the expense of the Company,
shall execute proper instruments acknowledging satisfaction and discharge of
this Indenture, when either
(a) all Notes theretofore authenticated and delivered (other
than (A) Notes which have been destroyed, lost or stolen and which have
been replaced or paid as provided in Section 3.06 hereof and (B) Notes
for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust, as provided in Section 10.03)
have been delivered to the Trustee for cancellation; or
(b)(i) all such Notes not theretofore delivered to the Trustee
for cancellation have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Trustee in
trust an amount of money in dollars sufficient to pay and discharge the
entire Indebtedness on such Notes not theretofore delivered to the
Trustee for cancellation, for the principal of, premium, if any, and
interest to the date of such deposit;
(ii) the Company has paid or caused to be paid all other sums
payable hereunder by the Company; and
(iii) the Company has delivered to the Trustee (A) irrevocable
instructions to apply the deposited money toward payment of the Notes at
the Stated Maturities and the Redemption Dates thereof, and (B) an
Officers' Certificate and an Opinion of Counsel each stating that all
conditions precedent herein provided for relating to the satisfaction
and discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this
Indenture, the obligations of the Company to the Trustee under Section 6.07 and,
if money shall have been deposited with the Trustee pursuant to subclause
(b)(ii) of this Section 11.01, the obligations of the Trustee under Section
11.02 and the last paragraph of Section 10.03, shall survive.
SECTION 11.02. APPLICATION OF TRUST MONEY.
Subject to the provisions of the last paragraph of Section
10.03, all money deposited with the Trustee pursuant to Section 11.01 shall be
held in trust and applied by it, in accordance with the provisions of the Notes
and this Indenture, to the payment, either directly or through any Paying
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Agent (including the Company acting as its own Paying Agent) as the Trustee
may determine, to the Persons entitled thereto, of the principal of, premium
if any, on and interest on the Notes for whose payment such money has been
deposited with the Trustee.
12. TWELVE
REDEMPTION
SECTION 12.01. NOTICES TO THE TRUSTEE.
If the Company elects to redeem Notes pursuant to Paragraph 3
of the reverse side of the Initial Notes or Paragraph 2 of the reverse side
of the Exchange Notes, it shall notify the Trustee of the Redemption Date,
the Redemption Price and the principal amount of Notes to be redeemed.
The Company shall notify the Trustee of any redemption at
least 30 days before the Redemption Date by an Officers' Certificate, stating
that such redemption will comply with the provisions hereof and of the Notes.
SECTION 12.02. SELECTION OF NOTES TO BE REDEEMED.
In the event that less than all of the Notes are to be
redeemed at any time, selection of such Notes for redemption will be made by
the Trustee in compliance with any applicable requirements of the principal
national securities exchange, if any, on which the Notes are listed or, if
the Notes are not then listed on a national securities exchange (or if the
Notes are so listed but the exchange does not impose requirements with
respect to the selection of debt securities for redemption), on a PRO RATA
basis, by lot or by such method as the Trustee in its sole discretion shall
deem fair and appropriate; PROVIDED, HOWEVER, that any redemption pursuant to
the provisions relating to redemptions from the proceeds of one or more
Public Equity Offerings and/or (b) the sale of Capital Stock (other than
Disqualified Stock) to Strategic Equity Investors shall be made on A PRO RATA
basis or on as nearly a PRO RATA basis as practicable (subject to the
Depository's procedures). No Notes of a principal amount at maturity of
$1,000 or less shall be redeemed in part.
The Trustee shall promptly notify the Company and the
Registrar and each co-Registrar in writing of the Notes selected for
redemption and, in the case of any Notes selected for partial redemption, the
principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context
otherwise requires, all provisions relating to redemption of Notes shall
relate, in the case of any Note redeemed or to be redeemed only in part, to
the portion of the Accreted Value of such Note which has been or is to be
redeemed.
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SECTION 12.03. NOTICE OF REDEMPTION.
Notice of redemption shall be given by first-class mail,
postage prepaid, mailed not less than 30 nor more than 60 days prior to the
Redemption Date, to each Holder of Notes to be redeemed, at the address of
such Holder appearing in the Note Register maintained by the Registrar or
co-Registrar.
All notices of redemption shall identify the Notes to be
redeemed and shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) that, unless the Company defaults in paying the
Redemption Price, any Note called for redemption shall cease to accrete
Accreted Value or, if the Redemption Date is after May l5, 2003, shall
cease to accrue interest, in either case on and after the Redemption
Date, and the only remaining right of the Holders of such Notes is to
receive payment of the Redemption Price upon surrender to the Paying
Agent of the Notes redeemed;
(d) if any Note is to be redeemed in part, the portion of
the principal amount at maturity (equal to $1,000 or any integral
multiple thereof) of such Note to be redeemed and that on and after the
Redemption Date, upon surrender for cancellation of such Note to the
Paying Agent, a new Note or Notes in the aggregate principal amount at
maturity equal to the unredeemed portion thereof will be issued without
charge to the Holder;
(e) that Notes called for redemption must be surrendered to
the Paying Agent to collect the Redemption Price and the name and
address of the Paying Agent; and
(f) the CUSIP or CINS number, if any, relating to such
Notes.
Notice of redemption of Notes to be redeemed at the election of
the Company shall be given by the Company or, at the Company's written request,
by the Trustee in the name and at the expense of the Company.
SECTION 12.04. EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed, Notes called for
redemption become due and payable on the Redemption Date and at the
Redemption Price. Upon surrender to the Paying Agent, such Notes called for
redemption shall be paid at the Redemption Price (including accrued interest,
if any, to the Redemption Date), but interest installments whose Stated
Maturity is on or prior to such Redemption Date will be payable on the
relevant Interest Payment Dates to the Holders of record at the close of
business on the relevant Regular Record Dates referred to in the Notes.
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SECTION 12.05. DEPOSIT OF REDEMPTION PRICE.
On or prior to 11:00 a.m. New York City time on any
Redemption Date, the Company shall deposit with the Paying Agent an amount of
money in same day funds sufficient to pay the Redemption Price of all the
Notes or portions thereof which are to be redeemed on that date (including
any accrued interest to the Redemption Date), other than Notes or portions
thereof called for redemption on that date which have been delivered by the
Company to the Trustee for cancellation.
If the Company complies with the preceding paragraph, then,
unless the Company defaults in the payment of such Redemption Price, any Note
called for redemption shall cease to accrete Accreted Value or, if the
Redemption Date is after May 15, 2003, shall cease to accrue interest, in
either case on and after the applicable Redemption Date, whether or not such
notes are presented for payment, and the only remaining right of the Holders
of such Notes is to receive payment of the Redemption Price upon surrender to
the Paying Agent of the Notes. If any Note called for redemption shall not
be so paid upon surrender thereof for redemption, the principal, premium, if
any, and, to the extent lawful, accrued interest thereon shall until paid,
bear interest from the Redemption Date at the rate provided in the Notes.
SECTION 12.06. NOTES REDEEMED OR PURCHASED IN PART.
Upon surrender to the Paying Agent of a Note which is to be
redeemed in part, the Company shall execute and upon Company Order the
Trustee shall authenticate and deliver to the Holder of such Note, without
service charge, a new Note or Notes, of any authorized denomination as
requested by such Holder in aggregate principal amount at maturity equal to,
and in exchange for, the unredeemed portion of the principal amount at
maturity of the Note so surrendered that is not redeemed.
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed as of the day and year first above written.
RHYTHMS NETCONNECTIONS INC., as Issuer
By: /s/ Scott C. Chandler
--------------------------------
Name: Scott C. Chandler
-------------------------------
Title: Chief Financial Officer
------------------------------
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, N.A., as Trustee
By: /s/ Scott C. Emmons
--------------------------------
Name: Scott C. Emmons
-------------------------------
Title: Assistant Vice President
------------------------------
<PAGE>
EXHIBIT A-1
[FORM OF NOTE]
[FACE OF NOTE]
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE OR OTHER
SECURITIES LAWS AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY
ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR
(B) IT IS NOT A U.S. PERSON, IS NOT ACQUIRING THESE SECURITIES FOR THE
ACCOUNT OR BENEFIT OF A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN
OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES
ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE
144(k) TAKING INTO ACCOUNT THE PROVISIONS OF RULE I 44(d), IF APPLICABLE,
UNDER THE SECURITIES ACT (THE "RESALE RESTRICTION TERMINATION DATE") RESELL
OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO RHYTHMS NETCONNECTIONS INC.
(THE "COMPANY") OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL
BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) OUTSIDE THE
UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER
THE SECURITIES ACT, (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR (E) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, AND (3) AGREES
THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE COMPANY AND THE
TRUSTEE SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (1)
PURSUANT TO CLAUSE (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF
COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM,
AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF
TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS
COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL
BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION
TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED
STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S
UNDER THE SECURITIES ACT.
This Note is issued with original issue discount for purposes of Section 1271
et seq. of the Internal Revenue Code of 1986, as amended. For each $1,000
principal amount at maturity of this Note, the
A-1-1
<PAGE>
issue price is $518.50 and the amount of original issue discount is $481.50.
The issue date of this Note is May 5, 1998 and the yield to maturity is
13.5%.
A-1-2
<PAGE>
RHYTHMS NETCONNECTIONS INC.
______________________
GLOBAL NOTE
13 1/2% SENIOR DISCOUNT NOTES DUE 2008, SERIES A
CUSIP No.___________ $________
REGISTERED No.
RHYTHMS NETCONNECTIONS, INC., a corporation incorporated
under the laws of the State of Delaware (herein called the "Company," which
term includes any successor corporation under the Indenture hereinafter
referred to), for value received, hereby promises to pay to ____________, or
registered assigns, the principal sum of ___________ Dollars ($_________) on
May 15, 2008, at the office or agency of the Company referred to below, and
to pay interest thereon on May 15 and November 15 (each an "Interest Payment
Date"), of each year, commencing on November 15, 2003, accruing from May 15,
2003 or from the most recent Interest Payment Date to which interest has been
paid or duly provided for, at the rate of 13 1/2% per annum, until the
principal hereof is paid or duly provided for. Interest shall be computed on
the basis of a 360-day year of twelve 30-day months.
The interest so payable, and punctually paid or duly provided
for, on any Interest Payment Date will, as provided in the Indenture referred
to on the reverse hereof, be paid to the Person in whose name this Note (or
one or more Predecessor Notes) is registered at the close of business on the
May 1 or November 1 (each a "Regular Record Date"), whether or not a Business
Day, as the case may be, next preceding such Interest Payment Date. Any such
interest not so punctually paid, or duly provided for, and interest on such
defaulted interest at the then applicable interest rate borne by the Notes,
to the extent lawful, shall forthwith cease to be payable to the Holder on
such Regular Record Date, and may be paid to the Person in whose name this
Note (or one or more Predecessor Notes) is registered at the close of
business on a Special Record Date for the payment of such defaulted interest
to be fixed by the Trustee, notice of which shall be given to Holders of
Notes not less than 10 days prior to such Special Record Date, or may be paid
at any time in any other lawful manner not inconsistent with the requirements
of any securities exchange or market on which the Notes may be listed, and
upon such notice as may be required by such exchange or market, all as more
fully provided in such Indenture.
Payment of the principal of, premium, if any, and interest on
this Note will be made at the office or agency of the Company maintained for
that purpose in the Borough of Manhattan in The City of New York, State of
New York, or at such other office or agency of the Company as may be
maintained for such purpose, in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts; PROVIDED, HOWEVER, that payment
A-1-3
<PAGE>
of interest may be made at the option of the Company by check mailed to the
address of the Person entitled thereto as such address shall appear on the
Note Register. However, payment by wire transfer of immediately available
funds to an account within the United States of America will be required with
respect to payments in respect of all Global Notes and to all other holders
which shall have provided written wire instructions to the Company or Paying
Agent by the record date preceding the payment date.
Reference is hereby made to the further provisions of this
Note set forth on the reverse hereof.
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual
signature, this Note shall not be entitled to any benefit under this
Indenture, or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed.
Dated:__________ __, 1998 RHYTHMS NETCONNECTIONS INC.
By:
-----------------------------
Name:
Title:
By:
-----------------------------
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 13 1/2% Senior Discount Notes due 2008,
Series A, referred to in the within-mentioned Indenture.
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, N.A., as Trustee
By:
----------------------------------
Authorized Signatory
A-1-4
<PAGE>
[REVERSE OF NOTE]
1. INDENTURE. This Note is one of a duly authorized issue of
Notes of the Company designated as its 13 1/2% Senior Discount Notes due 2008,
Series A (herein called the "Initial Notes"). The Notes are limited (except
as otherwise provided in the Indenture referred to below) in aggregate
principal amount at maturity to $290,000,000, which may be issued under an
indenture (herein called the "Indenture") dated as of May 5, 1998, by and
between the Company and State Street Bank and Trust Company of California,
N.A., as trustee (herein called the "Trustee," which term includes any
successor Trustee under the Indenture), to which Indenture and all indentures
supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties, obligations and immunities
thereunder of the Company, the Trustee and the Holders of the Notes, and of
the terms upon which the Notes are, and are to be, authenticated and
delivered. The Notes include the Initial Notes and the Unrestricted Notes
(including the Exchange Notes referred to below), issued in exchange for the
Initial Notes pursuant to the Registration Rights Agreement. The Initial
Notes and the Unrestricted Notes, including the Exchange Notes, are treated
as a single class of securities under the Indenture.
All capitalized terms used in this Note which are defined in
the Indenture and not otherwise defined herein shall have the meanings
assigned to them in the Indenture.
The terms of the Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act
of 1939 (15 U.S.C. Sections 77aaa-77bbbb) (the "TIA"), as in effect on the
date of the Indenture. Notwithstanding anything to the contrary herein, the
Notes are subject to all such terms, and Holders of Notes are referred to the
Indenture and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of
this Note or of the Indenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of,
premium, if any, and interest on this Note at the times, place, and rate, and
in the coin or currency, herein prescribed.
2. UNITS. This Note has initially been issued as part of a unit
("Unit"), each Unit consisting of $1,000 principal amount at maturity of
Notes and four Warrants, each Warrant entitling the holder to purchase 1.7
shares of the Company's Common Stock, subject to certain adjustments. The
Warrants have been issued pursuant to a Warrant Agreement dated as of May 5,
1998 (as amended from time to time, the "Warrant Agreement"), between the
Company and State Street Bank and Trust Company of California, N.A., as
warrant agent. Pursuant to the Indenture and the Warrant Agreement, the
Warrants and the Notes will not be separately transferable until the
"Separability Date," which means the earliest to occur of: (i) November 1,
1998; (ii) the date on which a registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to a registered
exchange offer for the Notes is declared effective under the Securities Act;
(iii) the occurrence of a Change of Control; and (iv) such earlier date as
may be determined by Merrill Lynch & Co. in its sole discretion.
A-1-5
<PAGE>
3. REGISTRATION RIGHTS. The Holder of this Note is entitled to
the benefits of a Registration Rights Agreement, dated May 5, 1998, between
the Company and the Initial Purchasers (as amended from time to time, the
"Registration Rights Agreement"). Pursuant to the Registration Rights
Agreement, the Company is obligated to consummate an exchange offer pursuant
to which the Holders of Initial Notes shall have the right to exchange the
Initial Notes for 13 1/2% Senior Discount Notes due 2008, Series B, of the
Company (herein called the "Exchange Notes"), which will have been registered
under the Securities Act, in like principal amount and having identical terms
as the Initial Notes (other than as set forth in this paragraph and paragraph
2 above). The Holders of Initial Notes shall be entitled to receive, as
liquidated damages, certain additional interest payments in the event such
exchange offer is not consummated within a specified period and upon certain
other conditions, all pursuant to and in accordance with the terms of the
Registration Rights Agreement and the Indenture.
4. REDEMPTION. The Notes will be redeemable, at the option of
the Company, in whole or in part, on or after May 15, 2003 upon not less than
30 nor more than 60 days' written notice at the redemption prices (expressed
as percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon, if any, to the applicable redemption date, if redeemed
during the twelve-month period beginning on May 15 of each of the years
indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003 . . . . . . . . 106.750%
2004 . . . . . . . . 104.500%
2005 . . . . . . . . 102.250%
2006 and thereafter 100.000%
</TABLE>
In addition, at any time on or prior to May 15, 2001, the Company
may, other than in any circumstances resulting in a Change of Control,
redeem, at its option, up to a maximum of 35% of the originally-issued
aggregate principal amount at maturity of Notes at a redemption price
(determined as of the applicable redemption date) equal to 113.5% of the
Accredited Value of the Notes so redeemed, with the net cash proceeds of (a)
one or more Public Equity Offerings and/or (b) the sale, subsequent to the
Issue Date, of Capital Stock (other than Disqualified Stock) in one or more
transactions to Strategic Equity Investors, resulting in gross cash proceeds
to the Company of at least $25 million in the aggregate; PROVIDED that not
less than 65% of the originally-issued aggregate principal amount at maturity
of Notes is outstanding immediately following such redemption. Any such
redemption must be effected upon not less than 30 nor more than 60 days'
notice given within 30 days after the consummation of a Public Equity
Offering or sale to one or more Strategic Equity Investors the net proceeds
from which, together with any net proceeds from any prior Public Equity
Offerings or sales
A-1-6
<PAGE>
to Strategic Equity Investors, are to be used to effect an optional
redemption in accordance with this paragraph.
5. OFFERS TO PURCHASE. Sections 10.10 and 10.15 of the
Indenture provide that upon the occurrence of a Change of Control and
following certain Asset Sales, and subject to certain conditions and
limitations contained therein, the Company shall make an offer to purchase
all or a portion of the Notes at the purchase prices and in accordance with
the procedures set forth in the Indenture.
6. DEFAULTS AND REMEDIES. If an Event of Default occurs and is
continuing, the Default Amount of all outstanding Notes may be declared due
and payable in the manner and with the effect provided in this Indenture.
7. DEFEASANCE. The Indenture contains provisions (which
provisions apply to this Note) for defeasance at any time of (a) the entire
indebtedness of the Company on this Note and (b) certain restrictive
covenants and related Defaults and Events of Default, in each case upon
compliance by the Company with certain conditions set forth therein.
8. AMENDMENTS AND WAIVERS. The Indenture permits, with certain
exceptions as provided therein, the amendment thereof and the modification of
the rights and obligations of the Company and the rights of the Holders under
the Indenture at any time by the Company and the Trustee with the consent of
the Holders of not less than a majority in aggregate principal amount at
maturity of the Notes at the time Outstanding. The Indenture also contains
provisions permitting the Holders of specified percentages in aggregate
principal amount at maturity of the Notes at the time Outstanding, on behalf
of the Holders of all the Notes, to waive compliance by the Company with
certain provisions of the Indenture and certain past Defaults under the
Indenture and this Note and their consequences. Any such consent or waiver
by or on behalf of the Holder of this Note shall be conclusive and binding
upon such Holder and upon all future Holders of this Note and of any Note
issued upon the registration of transfer hereof or in exchange herefor or in
lieu hereof whether or not notation of such consent or waiver is made upon
this Note.
9. DENOMINATIONS, TRANSFER AND EXCHANGE. The Notes are issuable
only in registered form without coupons in denominations of $1,000 and any
integral multiple thereof. As provided in the Indenture and subject to
certain limitations therein set forth, the Notes are exchangeable for a like
aggregate principal amount of Notes of a different authorized denomination,
as requested by the Holder surrendering the same.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Note is registrable on
the Note Register, upon surrender of this Note for registration of transfer
at the office or agency of the Company maintained for such purpose in the
Borough of Manhattan in The City of New York, State of New York, or at such
other office or agency of the Company as may be maintained for such purpose,
duly endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Registrar or co-Registrar duly executed
by, the Holder hereof or his attorney duly authorized in writing, and
thereupon one or more
A-1-7
<PAGE>
new Notes, of authorized denominations and for the same aggregate principal
amount at maturity, will be issued to the designated transferee or
transferees.
No service charge shall be made for any registration of
transfer or exchange or redemption of Notes, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
10. PERSONS DEEMED OWNERS. Prior to and at the time of due
presentment of this Note for registration of transfer, the Company, the
Trustee and any agent of the Company or the Trustee may treat the Person in
whose name this Note is registered as the owner hereof for all purposes,
whether or not this Note shall be overdue, and neither the Company, the
Trustee nor any agent shall be affected by notice to the contrary.
11. GOVERNING LAW. THE INDENTURE, THIS NOTE AND EACH SUBSIDIARY
GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
The Company will furnish to any Holder of a Note upon written
request and without charge a copy of the Indenture and the Registration
Rights Agreement unless the same is publicly available from the SEC.
Requests may be made to: Rhythms NetConnections Inc., 7337 South Revere
Parkway, Englewood, Colorado 80112-3931; Attention: Secretary.
ASSIGNMENT FORM
If you the holder want to assign this Note, fill in the form below and have
your signature guaranteed:
I or we assign and transfer this Note to
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
(Print or type assignee's name and address (including zip code) and social
security or tax ID number)
A-1-8
<PAGE>
and irrevocably appoint
-----------------------------------------------------
- -----------------------------------------------------------------------------
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for such agent.
In connection with any transfer of this Note occurring prior to the date
which is the earlier of (i) the date of the declaration by the SEC of the
effectiveness of a registration statement under the Securities Act of 1933,
as amended (the "Securities Act"), covering resales of this Note (which
effectiveness shall not have been suspended or terminated at the date of the
transfer) and (ii) the date two years (or such shorter period of time as
permitted by Rule 144 under the Securities Act or any successor provision
thereunder) after the later of the original issuance date appearing on the
face of this Note (or any Predecessor Note) or the last date on which the
Company or any Affiliate of the Company was the owner of this Note (or any
Predecessor Note), the undersigned confirms that it has not utilized any
general solicitation or general advertising in connection with the transfer
and that:
A-1-9
<PAGE>
[CHECK ONE]
[ ] (a) this Note is being transferred in compliance with the
exemption from registration under the Securities Act
provided by Rule 144A thereunder.
OR
[ ] (b) this Note is being transferred other than in accordance
with (a) above and documents, including (i) a transferee
certificate substantially in the form of Exhibit D to
the Indenture in the case of a transfer to non-QIB
Accredited Investors or (ii) a transferor certificate
substantially in the form of Exhibit E to the Indenture
in the case of a transfer pursuant to Regulation S, are
being furnished which comply with the conditions of
transfer set forth in this Note and the Indenture.
If none of the foregoing boxes is checked and, in the case of (b) above, if the
appropriate document is not attached or otherwise furnished to the Trustee, the
Trustee or Registrar or co-Registrar shall not be obligated to register this
Note in the name of any Person other than the Holder hereof unless and until the
conditions to any such transfer of registration set forth herein and in Sections
3.16 and 3.17 of the Indenture shall have been satisfied.
- -----------------------------------------------------------------------------
Date: Your signature:
------------- -------------------------------------
(Sign exactly as your name appears on
the other side of this Note)
By:
----------------------------------
NOTICE: To be executed by an
executive officer
Signature Guarantee:
-------------------
A-1-10
<PAGE>
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED
The undersigned represents and warrants that it is purchasing
this Note for its own account or an account with respect to which it
exercises sole investment discretion and that it and any such account is a
"qualified institutional buyer" within the meaning of Rule 144A under the
Securities Act and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding
the Company as the undersigned has requested pursuant to Rule 144A (including
the information specified in Rule 144A(d)(4)) or has determined not to
request such information and that it is aware that the transferor is relying
upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
Dated: Name of
------------------- Purchaser:
--------------------------------------
NOTICE: To be executed by an executive
officer
A-1-11
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant
to Section 10.10 or 10.15 of the Indenture, check the appropriate box:
Section 10.10 [ ] Section 10.15 [ ]
If you wish to have a portion of this Note purchased by the
Company pursuant to Section 10.10 or 10.15 of the Indenture, state the Accreted
Value (or percentage of principal amount at maturity):
$ or %
---------- ---
Date: Your signature:
------------------ -------------------------------------
(Sign exactly as your name appears on
the other side of this Note)
By:
----------------------------------
NOTICE: To be executed by an
executive officer
Signature Guarantee:
--------------------------
A-1-12
<PAGE>
EXHIBIT A-2
This Note is issued with original issue discount for purposes of Section 1271
et seq. of the Internal Revenue Code of 1986, as amended. For each $1,000
principal amount at maturity of this Note, the issue price is $518.50 and the
amount of original issue discount is $481.50. The issue date of this Note is
May 5, 1998 and the yield to maturity is 13.5%.
RHYTHMS NETCONNECTIONS INC.
______________________
GLOBAL NOTE
13 1/2% SENIOR DISCOUNT NOTES DUE 2008, SERIES B
CUSIP No. $
REGISTERED No.
RHYTHMS NETCONNECTIONS INC., a corporation incorporated under
the laws of the State of Delaware (herein called the "Company," which term
includes any successor corporation under the Indenture hereinafter referred
to), for value received, hereby promises to pay to __________, or registered
assigns, the principal sum of ______________________________ ($)___________)
on May 15, 2008, at the office or agency of the Company referred to below,
and to pay interest thereon on May 15 and November 15 (each an "Interest
Payment Date"), of each year, commencing on November 15, 2003, accruing from
May 15, 2003 or from the most recent Interest Payment Date to which interest
has been paid or duly provided for, at the rate of 13 1/2% per annum, until
the principal hereof is paid or duly provided for. Interest shall be
computed on the basis of a 360-day year of twelve 30-day months.
The interest so payable, and punctually paid or duly provided
for, on any Interest Payment Date will, as provided in the Indenture referred
to on the reverse hereof, be paid to the Person in whose name this Note (or
one or more Predecessor Notes) is registered at the close of business on the
May 1 or November 1 (each a "Regular Record Date"), whether or not a Business
Day, as the case may be, next preceding such Interest Payment Date. Any such
interest not so punctually paid, or duly provided for, and interest on such
defaulted interest at the then applicable interest rate borne by the Notes,
to the extent lawful, shall forthwith cease to be payable to the Holder on
such Regular Record Date, and may be paid to the Person in whose name this
Note (or one or more Predecessor Notes) is registered at the close of
business on a Special Record Date for the payment of such defaulted interest
to be fixed by the Trustee, notice of which shall be given to Holders of
Notes not less than 10 days prior to such Special Record Date, or may be paid
at any time in any other lawful manner not
A-2-1
<PAGE>
inconsistent with the requirements of any securities exchange or market on
which the Notes may be listed, and upon such notice as may be required by
such exchange or market, all as more fully provided in such Indenture.
Payment of the principal of, premium, if any, and interest on
this Note will be made at the office or agency of the Company maintained for
that purpose in the Borough of Manhattan in The City of New York, State of
New York, or at such other office or agency of the Company as may be
maintained for such purpose, in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts; PROVIDED, HOWEVER, that payment of interest may be made at the
option of the Company by check mailed to the address of the Person entitled
thereto as such address shall appear on the Note Register. However, payment
by wire transfer of immediately available funds to an account within the
United States of America will be required with respect to payments in respect
of all Global Notes and to all other holders which shall have provided
written wire instructions to the Company or Paying Agent by the record date
preceding the payment date.
Reference is hereby made to the further provisions of this
Note set forth on the reverse hereof.
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual
signature, this Note shall not be entitled to any benefit under this
Indenture, or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed.
Dated: RHYTHMS NETCONNECTIONS INC.
By:
-------------------------------------
Name:
Title:
By:
-------------------------------------
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 13 1/2% Senior Discount Notes due 2008,
Series B, referred to in the within-mentioned Indenture.
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, N.A., as Trustee
A-2-2
<PAGE>
By:
----------------------------
Authorized Signatory
A-2-3
<PAGE>
[REVERSE OF NOTE]
1. INDENTURE. This Note is one of a duly authorized issue of Notes
of the Company designated as its 131/2% Senior Discount Notes due 2008, Series B
(herein called the "Exchange Notes"). The Notes are limited (except as
otherwise provided in the Indenture referred to below) in aggregate principal
amount at maturity to $290,000,000, which may be issued under an indenture
(herein called the "Indenture") dated as of May 5, 1998, by and between the
Company and State Street Bank and Trust Company of California, N.A., as trustee
(herein called the "Trustee," which term includes any successor Trustee under
the Indenture), to which Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the respective rights, limitations
of rights, duties, obligations and immunities thereunder of the Company, the
Trustee and the Holders of the Notes, and of the terms upon which the Notes are,
and are to be, authenticated and delivered. The Notes include the Initial Notes
and the Unrestricted Notes (including the Exchange Notes), issued in exchange
for the Initial Notes pursuant to the Registration Rights Agreement. The
Initial Notes and the Unrestricted Notes, including the Exchange Notes, are
treated as a single class of securities under the Indenture.
All capitalized terms used in this Note which are defined in the
Indenture and not otherwise defined herein shall have the meanings assigned to
them in the Indenture.
The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(15 U.S.C. Sections 77aaa-77bbbb) (the "TIA"), as in effect on the date of the
Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this
Note or of the Indenture shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of, premium, if any,
and interest on this Note at the times, place, and rate, and in the coin or
currency, herein prescribed.
2. REDEMPTION. The Notes will be redeemable, at the option of the
Company, in whole or in part, on or after May 15, 2003 upon not less than 30 nor
more than 60 days' written notice at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon, if any, to the applicable redemption date, if redeemed during
the twelve-month period beginning on May 15 of each of the years indicated
below:
A-2-4
<PAGE>
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003 . . . . . . . . 106.750%
2004 . . . . . . . . 104.500%
2005 . . . . . . . . 102.250%
2006 and thereafter 100.000%
</TABLE>
In addition, at any time on or prior to May 15, 2001, the Company may,
other than in any circumstances resulting in a Change of Control, redeem, at its
option, up to a maximum of 35% of the originally-issued aggregate principal
amount at maturity of Notes at a redemption price (determined as of the
applicable redemption date) equal to 113.5% of the Accredited Value of the Notes
so redeemed, with the net cash proceeds of (a) one or more Public Equity
Offerings and/or (b) the sale, subsequent to the Issue Date, of Capital Stock
(other than Disqualified Stock) in one or more transactions to Strategic Equity
Investors, resulting in gross cash proceeds to the Company of at least $25
million in the aggregate; PROVIDED that not less than 65% of the
originally-issued aggregate principal amount at maturity of Notes is outstanding
immediately following such redemption. Any such redemption must be effected
upon not less than 30 nor more than 60 days' notice given within 30 days after
the consummation of a Public Equity Offering or sale to one or more Strategic
Equity Investors the net proceeds from which, together with any net proceeds
from any prior Public Equity Offerings or sales to Strategic Equity Investors,
are to be used to effect an optional redemption in accordance with this
paragraph.
3. OFFERS TO PURCHASE. Sections 10.10 and 10.15 of the Indenture
provide that upon the occurrence of a Change of Control and following certain
Asset Sales, and subject to certain conditions and limitations contained
therein, the Company shall make an offer to purchase all or a portion of the
Notes at the purchase prices and in accordance with the procedures set forth in
the Indenture.
4. DEFAULTS AND REMEDIES. If an Event of Default occurs and is
continuing, the Default Amount of all outstanding Notes may be declared due and
payable in the manner and with the effect provided in this Indenture.
5. DEFEASANCE. The Indenture contains provisions (which provisions
apply to this Note) for defeasance at any time of (a) the entire indebtedness of
the Company on this Note and (b) certain restrictive covenants and related
Defaults and Events of Default, in each case upon compliance by the Company with
certain conditions set forth therein.
6. AMENDMENTS AND WAIVERS. The Indenture permits, with certain
exceptions as provided therein, the amendment thereof and the modification of
the rights and obligations of the Company and
A-2-5
<PAGE>
the rights of the Holders under the Indenture at any time by the Company and
the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount at maturity of the Notes at the time Outstanding.
The Indenture also contains provisions permitting the Holders of specified
percentages in aggregate principal amount at maturity of the Notes at the
time Outstanding, on behalf of the Holders of all the Notes, to waive
compliance by the Company with certain provisions of the Indenture and
certain past Defaults under the Indenture and this Note and their
consequences. Any such consent or waiver by or on behalf of the Holder of
this Note shall be conclusive and binding upon such Holder and upon all
future Holders of this Note and of any Note issued upon the registration of
transfer herefor or in exchange hereof or in lieu hereof whether or not
notation of such consent or waiver is made upon this Note.
7. DENOMINATIONS, TRANSFER AND EXCHANGE. The Notes are issuable
only in registered form without coupons in denominations of $1,000 and any
integral multiple thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Notes are exchangeable for a like aggregate
principal amount of Notes of a different authorized denomination, as requested
by the Holder surrendering the same.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Note is registrable on the Note
Register, upon surrender of this Note for registration of transfer at the office
or agency of the Company maintained for such purpose in the Borough of Manhattan
in The City of New York, State of New York, or at such other office or agency of
the Company as may be maintained for such purpose, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Registrar or co-Registrar duly executed by, the Holder hereof or
his attorney duly authorized in writing, and thereupon one or more new Notes, of
authorized denominations and for the same aggregate principal amount at
maturity, will be issued to the designated transferee or transferees.
No service charge shall be made for any registration of transfer
or exchange or redemption of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
8. PERSONS DEEMED OWNERS. Prior to and at the time of due
presentment of this Note for registration of transfer, the Company, the Trustee
and any agent of the Company or the Trustee may treat the Person in whose name
this Note is registered as the owner hereof for all purposes, whether or not
this Note shall be overdue, and neither the Company, the Trustee nor any agent
shall be affected by notice to the contrary.
9. GOVERNING LAW. THE INDENTURE, THIS NOTE AND EACH SUBSIDIARY
GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
A-2-6
<PAGE>
The Company will furnish to any Holder of a Note upon written
request and without charge a copy of the Indenture unless the same is publicly
available from the SEC. Requests may be made to: Rhythms NetConnections Inc.,
7337 South Revere Parkway, Englewood, Colorado 80112-3931; Attention: Secretary.
A-2-7
<PAGE>
ASSIGNMENT FORM
If you the holder want to assign this Note, fill in the form below and have your
signature guaranteed:
I or we assign and transfer this Note to
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Print or type assignee's name and address (including zip code) and social
security or tax ID number)
and irrevocably appoint
-------------------------------------------------------
- -------------------------------------------------------------------------------
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for such agent.
A-2-8
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant
to Section 10.10 or 10.15 of the Indenture, check the appropriate box:
Section 10.10 [ ] Section 10.15 [ ]
If you wish to have a portion of this Note purchased by the
Company pursuant to Section 10.10 or 10.15 of the Indenture, state the Accreted
Value (or percentage of principal amount at maturity):
$________ or ____%
Date: Your signature:
----------------- -------------------------------
(Sign exactly as your name
appears on the other side of
this Note)
By:
---------------------------
NOTICE: To be executed
by an executive officer
Signature Guarantee:
-------------------------
A-2-9
<PAGE>
EXHIBIT B
FORM OF SUPPLEMENTAL INDENTURE TO BE DELIVERED
BY SUBSIDIARY GUARANTORS
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") dated as of
_________ ___, _____ between ________________ (the "Subsidiary Guarantor"), a
subsidiary of Rhythms NetConnections Inc. (or its successor), a company
incorporated under the laws of the State of Delaware (the "Company"), and State
Street Bank and Trust Company of California, N.A.,as trustee under the indenture
referred to below (the "Trustee").
WITNESSETH
WHEREAS, the Company has heretofore executed and delivered to the
Trustee an indenture (the "indenture"), dated as of May 5, 1998, providing for
the issuance of an aggregate principal amount at maturity of $290,000,000 of
13 1/2% Senior Discount Notes due 2008 (the "Notes");
WHEREAS, Section 10.22 of the Indenture provides that, under certain
circumstances, the Company is required to cause the Subsidiary Guarantor to
execute and deliver to the Trustee a Subsidiary Guarantee on the terms and
conditions set forth herein; and
WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture;
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the
Subsidiary Guarantor and the Trustee mutually covenant and agree for the equal
and ratable benefit of the Holders of the Notes as follows:
1. CAPITALIZED TERMS. Capitalized terms used herein without
definition shall have the meanings assigned to them in the Indenture.
2. INDENTURE PROVISION PURSUANT TO WHICH GUARANTEE IS GIVEN. This
Supplemental Indenture is being executed and delivered pursuant to Section 10.22
of the Indenture.
3. AGREEMENTS TO GUARANTEE. The Subsidiary Guarantor hereby agrees
as follows:
(a) The Subsidiary Guarantor, jointly and severally with all other
Subsidiary Guarantors, if any, unconditionally guarantees to each Holder of a
Note authenticated and delivered by the Trustee and to the Trustee and its
successors and assigns, regardless of the validity and enforceability of the
Indenture, the Notes and the obligations of the Company under the Indenture and
the Notes, that:
(i) the principal of, premium, if any, on and interest on
the Notes shall be promptly paid in full when due, whether at maturity,
by acceleration, redemption or otherwise, and
B-1
<PAGE>
interest on the overdue principal of, premium, if any, and interest on
the Notes, to the extent lawful, and all other obligations of the
Company to the Holders or the Trustee thereunder shall be promptly paid
in full, all in accordance with the terms thereof; and
(ii) in case of any extension of time for payment or renewal
of any Notes or any of such other obligations, that the same shall be
promptly paid in full when due in accordance with the terms of the
extension or renewal, whether at stated maturity, by acceleration or
otherwise.
(b) Notwithstanding the foregoing, in the event that this Subsidiary
Guarantee would constitute or result in a violation of any applicable fraudulent
conveyance or similar law of any relevant jurisdiction, the liability of the
Subsidiary Guarantor under this Supplemental Indenture and its Subsidiary
Guarantee shall be limited to such amount as will not, after giving effect
thereto, and to all other liabilities of the Subsidiary Guarantor, result in
such amount constituting a fraudulent transfer or conveyance.
4. EXECUTION AND DELIVERY OF SUBSIDIARY GUARANTEES.
(a) To evidence its Subsidiary Guarantee set forth in this
Supplemental Indenture, the Subsidiary Guarantor hereby agrees that a notation
of such Subsidiary Guarantee substantially in the form of ANNEX A hereto shall
be endorsed by an officer of such Subsidiary Guarantor on each Note
authenticated and delivered by the Trustee after the date hereof.
(b) Notwithstanding the foregoing, the Subsidiary Guarantor hereby
agrees that its Subsidiary Guarantee set forth herein shall remain in full force
and effect notwithstanding any failure to endorse on each Note a notation of
such Subsidiary Guarantee.
(c) If an officer whose signature is on this Supplemental Indenture
or on the Subsidiary Guarantee no longer holds that office at the time the
Trustee authenticates the Note on which a Subsidiary Guarantee is endorsed, the
Subsidiary Guarantee shall be valid nevertheless.
(d) The delivery of the Note by the Trustee, after the
authentication thereof under the Indenture, shall constitute due delivery of the
Subsidiary Guarantee set forth in this Supplemental Indenture on behalf of the
Subsidiary Guarantor.
(e) The Subsidiary Guarantor hereby agrees that its obligations
hereof shall be unconditional, regardless of the validity, regularity or
enforceability of the Notes or the Indenture, the absence of any action to
enforce the same, any waiver or consent by any Holder of the Notes with respect
to any provisions hereof or thereof, the recovery of any judgment against the
Company, any action to enforce the same or any other circumstance which might
otherwise constitute a legal or equitable discharge or defense of a guarantor.
B-2
<PAGE>
(f) The Subsidiary Guarantor hereby waives diligence, presentment,
demand of payment, filing of claims with a court in the event of insolvency or
bankruptcy of the Company, any right to require a proceeding first against the
Company protest, notice and all demands whatsoever and covenants that its
Subsidiary Guarantee made pursuant to this Supplemental Indenture will not be
discharged except by complete performance of the obligations contained in the
Notes and the Indenture or pursuant to Section 5(b) of this Supplemental
Indenture.
(g) If the Trustee or any Holder has instituted any proceeding to
enforce any right or remedy under this Supplemental Indenture and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Holder, then, and in every such
case, subject to any determination in such proceeding, the Subsidiary Guarantor,
the Trustee and the Holders shall be restored severally and respectively to
their former positions hereof and thereafter all rights and remedies of the
Subsidiary Guarantor, the Trustee and the Holders shall continue as though no
such proceeding had been instituted.
(h) The Subsidiary Guarantor hereby waives and will not in any
manner whatsoever claim or take the benefit or advantage of any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Subsidiary Guarantor as a result of any payment by such Subsidiary
Guarantor under its Subsidiary Guarantee. The Subsidiary Guarantor further
agrees that, as between the Subsidiary Guarantors, on the one hand, and the
Holders and the Trustee, on the other hand:
(i) the maturity of the obligations guaranteed hereby may be
accelerated as provided in Article Five of the Indenture for the
purposes of the Subsidiary Guarantee made pursuant to this Supplemental
Indenture, notwithstanding any stay, injunction or other prohibition
preventing such acceleration in respect of the obligations guaranteed
hereby; and
(ii) in the event of any declaration of acceleration of such
obligations as provided in Article Five of the Indenture, such
obligations (whether or not due and payable) shall forthwith become due
and payable by the Subsidiary Guarantor for the purpose of the
Subsidiary Guarantee made pursuant to this Supplemental Indenture.
(i) The Subsidiary Guarantor shall have the right to seek
contribution from any other nonpaying Subsidiary Guarantor, if any, so long as
the exercise of such right does not impair the rights of the Holders under the
Subsidiary Guarantee made pursuant to this Supplemental Indenture.
(j) The Subsidiary Guarantor covenants (to the extent that it may
lawfully do so) that it will not at any time insist upon, or plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay, extension
or usury law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of the Indenture or this Subsidiary
Guarantee; and the Subsidiary Guarantor (to the extent that it may lawfully do
so) hereby expressly waives all benefit or advantage of any such law, and
covenants that it will not hinder, delay or impede the execution of
B-3
<PAGE>
any power herein granted to the Trustee, but will suffer and permit the
execution of every such power as though no such law had been enacted.
5. SUBSIDIARY GUARANTOR MAY CONSOLIDATE, ETC. ON CERTAIN TERMS.
(a) Except as set forth in Articles Eight and Ten of the Indenture,
nothing contained in the Indenture, this Supplemental Indenture or in the Notes
shall prevent any consolidation or merger of the Subsidiary Guarantor with or
into the Company or any other Subsidiary Guarantor or shall prevent any
transfer, sale or conveyance of the property of the Subsidiary Guarantor as an
entirety or substantially as an entirety, to the Company or any other Subsidiary
Guarantor.
(b) Except as set forth in Articles Eight and Ten of the Indenture,
upon the sale, exchange or transfer, to any Person not an Affiliate of the
Company, of all of the Capital Stock of the Subsidiary Guarantor held by the
Company and its Subsidiaries, or of all or substantially all of the assets of
the Subsidiary Guarantor, whether by way of merger, consolidation or otherwise,
which sale, exchange or transfer is made in compliance with all applicable
provisions of the Indenture, then such Subsidiary Guarantor (in the event of a
sale, exchange or transfer of all the Capital Stock of such Subsidiary
Guarantor) or the corporation acquiring the property (in the event of a sale,
exchange or transfer of all or substantially all of the assets of such
Subsidiary Guarantor) will be released and relieved of any obligation under its
Subsidiary Guarantee; PROVIDED that the Net Cash Proceeds of such sale, exchange
or transfer are applied in accordance with Section 10.15 of the Indenture.
Except with respect to transactions set forth in the preceding sentence, the
Company and the Subsidiary Guarantor covenant and agree that upon any such
merger, consolidation or sale, the performance of all covenants and conditions
of this Supplemental Indenture to be performed by such Subsidiary Guarantor
shall be expressly assumed by supplemental indenture satisfactory in form to the
Trustee, by the corporation formed by such consolidation, or into which the
Subsidiary Guarantor shall have merged, or by the corporation which shall have
acquired such property. Upon receipt of an Officers' Certificate of the Company
or the Subsidiary Guarantor, as the case may be, to the effect that the Company
or such Subsidiary Guarantor has complied with the first sentence of this
Section 5(b), the Trustee shall execute any documents reasonably requested by
the Company or the Subsidiary Guarantor, at the cost of the Company or such
Subsidiary Guarantor, as the case may be, in order to evidence the release of
such Subsidiary Guarantor from its obligations under its Guarantee endorsed on
the Notes and under the Indenture and this Supplemental Indenture.
6. RELEASES UPON RELEASE OF GUARANTEE OF GUARANTEED
INDEBTEDNESS. Concurrently with the release or discharge of all of the
Subsidiary Guarantor's Guarantees of the payment of Indebtedness of the
Company (other than a release or discharge by or as a result of payment under
such Guarantee of Indebtedness), the Subsidiary Guarantor shall be
automatically and unconditionally released and relieved of its obligations
under this Supplemental Indenture and its Subsidiary Guarantee made pursuant
to Section 4 of this Supplemental Indenture. Upon delivery by the Company to
the Trustee of an Officer's Certificate to the effect that such release or
discharge has occurred, the Trustee shall execute any documents reasonably
required in order to evidence the release of the Subsidiary Guarantor from
its obligations under this Supplemental Indenture and its Subsidiary
Guarantee made
B-4
<PAGE>
pursuant hereto; PROVIDED such documents shall not affect or impair the
rights of the Trustee and Paying Agent under Section 6.07 of the Indenture.
7. RELEASES UPON DESIGNATION AS AN UNRESTRICTED SUBSIDIARY. Upon
the Designation of the Subsidiary Guarantor as an Unrestricted Subsidiary in
compliance with Section 10.20 of the Indentures the Subsidiary Guarantor shall
be automatically and unconditionally released and relieved of its obligations
under this Supplemental Indenture and its Subsidiary Guarantee made pursuant to
Section 4 of this Supplemental Indenture. Upon delivery by the Company to the
Trustee of an Officer's Certificate to the effect that such Designation has
occurred in compliance with Section 10.20 of the Indenture, the Trustee shall
execute any documents reasonably required in order to evidence the release of
the Subsidiary Guarantor from its obligations under this Supplemental Indenture
and its Subsidiary Guarantee made pursuant hereto; PROVIDED such documents shall
not affect or impair the rights of the Trustee and Paying Agent under Section
6.07 of the Indenture.
8. NEW YORK LAW TO GOVERN. THIS SUPPLEMENTAL INDENTURE SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
9. COUNTERPARTS. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
10. EFFECT OF HEADINGS. The Section headings herein are for
convenience only and shall not effect the construction hereof.
11. RANKING. [Ranking terms to be provided as required by Section
10.22 of the Indenture.]
[Signatures on following page]
B-5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture
to be duly executed and attested, all as of the date first above written.
Dated: , [Subsidiary Guarantor]
-------- -- ----
By:
-------------------------
Name:
Title:
Dated: , State Street Bank and Trust Company of
-------- -- ---- California, N.A., as Trustee
By:
-------------------------
Name:
Title:
B-6
<PAGE>
ANNEX A TO SUPPLEMENTAL INDENTURE
FORM OF NOTATION OF SUBSIDIARY GUARANTEE ON NOTE
Each Subsidiary Guarantor (as defined in the Indenture) has jointly and
severally unconditionally guaranteed (a) the due and punctual payment of the
principal of, premium, if any, and interest on the Notes, whether at stated
maturity or an Interest Payment Date, by acceleration, call for redemption or
otherwise, (b) the due and punctual payment of interest on the overdue principal
and premium of, if any, and interest, to the extent lawful, on the Notes and (c)
that in case of any extension of time of payment or renewal of any Notes or any
of such other obligations, the same will be promptly paid in full when due in
accordance with the terms of the extension of renewal, whether at Stated
Maturity, by acceleration or otherwise. Notwithstanding the foregoing, in the
event that the Subsidiary Guarantee would constitute or result in a violation of
any applicable fraudulent conveyance or similar law of any relevant
jurisdiction, the liability of the Subsidiary Guarantor under its Subsidiary
Guarantee shall be limited to such amount as will not, after giving effect
thereto, and to all other liabilities of the Subsidiary Guarantor, result in
such amount constituting a fraudulent transfer or conveyance. The Subsidiary
Guarantee shall not be valid or obligatory for any purpose until the certificate
of authentication on the Note upon which the Subsidiary Guarantee is noted shall
have been executed by the Trustee under the Indenture by the manual or facsimile
signature of one of its authorized officers. [Ranking terms to be provided as
required by Section 10.22 of the Indenture.]
Dated , [Subsidiary Guarantor]
---------------- -- ----
By:
----------------------------
Name:
Title:
B-7
<PAGE>
EXHIBIT C
FORM OF LEGEND FOR BOOK-ENTRY SECURITIES
Any Global Note authenticated and delivered hereunder shall bear
a legend (which would be in addition to any other legends required in the case
of a Restricted Note) in substantially the following form:
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR
A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS NOTE IS NOT
EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER
THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES
DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A
TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE
DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR
ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE
LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION
("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO.
OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE
BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF,
CEDE & CO., HAS AN INTEREST HEREIN.
C-1
<PAGE>
EXHIBIT D
Form of Certificate To Be
Delivered in Connection with
Transfers to Institutional (non-QIB) Accredited Investors
____________, ___
State Street Bank and Trust Company
of California, N.A.
633 West 5th Street, 12th Floor
Los Angeles, California 90071
Attention: Corporate Trust Department
Re: Rhythms NetConnections Inc. (the "Company")
Indenture (the "indenture") relating to
13 1/2% Senior Discount Notes due 2008
--------------------------------------
Ladies and Gentlemen:
In connection with our proposed purchase of 13 1/2% Senior
Discount Notes due 2008 (the "Notes") of the Company we confirm that:
1. We have received such information as we deem necessary
in order to make our investment decision.
2. We understand that any subsequent transfer of the Notes
is subject to certain restrictions and conditions set forth in the
Indenture and the undersigned agrees to be bound by, and not to resell,
pledge or otherwise transfer the Notes except in compliance with, such
restrictions and conditions and the Securities Act of 1933, as amended
(the "Securities Act").
3. We understand that the offer and sale of the Notes have
not been registered under the Securities Act, and that the Notes may not
be offered or sold within the United States or to, or for the account or
benefit of, U.S. persons except as permitted in the following sentence.
We agree, on our own behalf and on behalf of any accounts for which we
are acting as hereinafter stated, that if we should sell any Notes, we
will do so only (A) to the Company,
D-1
<PAGE>
(B) inside the United States in accordance with Rule 144A under the
Securities Act to a "qualified institutional buyer" (as defined
therein), (C) inside the United States to an institutional "accredited
investor" (as defined below) that, prior to such transfer, furnishes
(or has furnished on its behalf by a U.S. broker-dealer) to the Trustee
a signed letter substantially in the form hereof, (D) outside the United
States in accordance with Regulation S under the Securities Act (E)
pursuant to the exemption from registration provided by Rule 144 under
the Securities Act (if available), or (F) pursuant to an effective
registration statement under the Securities Act, and we further agree to
provide to any person purchasing Notes from us a notice advising such
purchaser that resales of the Notes are restricted as stated herein.
4. We understand that, on any proposed resale of Notes, we
will be required to furnish to the Trustee and the Company such
certification, legal opinion and other information as the Trustee and
the Company may reasonably require to confirm that the proposed sale
complies with the foregoing restrictions. We further understand that
the Notes purchased by us will bear a legend to the foregoing effect.
5. We are an institutional "accredited investor" (as
defined in Rule 501(a)(l), (2), (3) or (7) of Regulation D under the
Securities Act) and have such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of
our investment in the Notes, and we and any accounts for which we are
acting are each able to bear the economic risk of our or their
investment as the case may be.
6. We are acquiring the Notes purchased by us for our
account or for one or more accounts (each of which is an institutional
"accredited investor") as to each of which we exercise sole investment
discretion.
You and the Company and your and their respective counsel are
entitled to rely upon this letter and are irrevocably authorized to produce this
letter or a copy hereof to any interested party in any administrative or legal
proceeding or official inquiry with respect to the matters covered hereby.
Very truly yours,
[Name of Proposed Transferee]
By:
------------------------------
[Authorized Signature]
Signature Guarantee:
-------------------------
D-2
<PAGE>
EXHIBIT E
Form of Certificate To Be Delivered
in Connection with Transfers
Pursuant to Regulation S
------------------------
_____________, _______
State Street Bank and Trust Company
of California, N.A.
633 West 5th Street, 12th Floor
Los Angeles, California 90071
Attention: Corporate Trust Department
Re: Rhythms NetConnections Inc. (the "Company")
13 1/2% Senior Discount Notes due 2008
Ladies and Gentlemen:
In connection with our proposed sale of 13 1/2% Senior Discount
Notes due 2008 (the "Notes") of the Company, we confirm that such sale has been
effected pursuant to and in accordance with Regulation S under the U.S.
Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we
represent that:
(1) the offer of the Notes was not made to a person in the
United States;
(2) either (a) at the time the buy offer was originated, the
transferee was outside the United States or we and any person acting on
our behalf reasonably believed that the transferee was outside the
United States, or (b) the transaction was executed in, on or through the
facilities of a designated off-shore securities market and neither we
nor any person acting on our behalf knows that the transaction has been
pre-arranged with a buyer in the United States;
(3) no directed selling efforts have been made in the United
States in contravention of the requirements of Rule 903(a) or Rule
904(a) of Regulation S, as applicable;
(4) the transaction is not part of a plan or scheme to evade
the registration requirements of the Securities Act;
(5) we have advised the transferee of the transfer
restrictions applicable to the Notes;
E-1
<PAGE>
(6) if the circumstances set forth in Rule 904(b) under the
Securities Act are applicable, we have complied with the additional
conditions therein, including (if applicable) sending a confirmation or
other notice stating that the Notes may be offered and sold during the
distribution compliance period specified in Rule 903(b)(3), as
applicable, in accordance with the provisions of Regulation S; pursuant
to registration of the Securities under the Securities Act; or pursuant
to an available exemption from the registration requirements under the
Securities Act;
(7) if the sale is made during a distribution compliance
period and the provisions of Rule 903(b)(3) are applicable thereto, we
confirm that such sale has been made in accordance with such provisions;
and
(8) if the provisions of Rule 144 under the Securities Act
are applicable, we have complied with the terms and conditions thereof.
You and the Company and your and their respective counsel are
entitled to rely upon this letter and are irrevocably authorized to produce this
letter or a copy hereof to any interested party in any administrative or legal
proceedings or official inquiry with respect to the matters covered hereby.
Terms used in this certificate have the meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:
-----------------------------
Authorized Signature
Signature Guarantee:
-----------------------------
E-2
<PAGE>
SCHEDULE A
RHYTHMS NETCONNECTIONS INC.
Outstanding/Committed Indebtedness
May 5, 1998
<TABLE>
<CAPTION>
Committed Amt.
Description Amt. Drawn Remaining
----------- --------- -------- ---------
<S> <C> <C> <C>
Silicon Valley Bank 1,000,000 1,000,000 -
Sun Financial Group 2,000,000 2,000,000 -
</TABLE>
<PAGE>
NOTES REGISTRATION RIGHTS AGREEMENT
Dated as of May 5, 1998
among
Rhythms NetConnections, Inc.,
Issuer
and
Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith
Incorporated, and
Donaldson, Lufkin & Jenrette
Securities Corporation,
Initial Purchasers
<PAGE>
TABLE OF CONTENTS
PAGE
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1933 Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1934 Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Depositary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Exchange Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Exchange Offer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Exchange Offer Registration . . . . . . . . . . . . . . . . . . . . . . 2
Exchange Offer Registration Statement . . . . . . . . . . . . . . . . . 2
Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Initial Purchasers. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Majority Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Original Issue Date . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Person. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Prospectus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Purchase Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Registration Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 2
Registration Statement. . . . . . . . . . . . . . . . . . . . . . . . . 3
SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Shelf Registration. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Shelf Registration Statement. . . . . . . . . . . . . . . . . . . . . . 3
Transfer Restricted Notes . . . . . . . . . . . . . . . . . . . . . . . 3
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2. REGISTRATION UNDER THE 1933 ACT . . . . . . . . . . . . . . . . . . . . 4
(a) EXCHANGE OFFER REGISTRATION . . . . . . . . . . . . . . . . . . . 4
(b) SHELF REGISTRATION. . . . . . . . . . . . . . . . . . . . . . . . 5
(c) EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(d) EFFECTIVE REGISTRATION STATEMENT. . . . . . . . . . . . . . . . . 8
(e) ACCRUAL AND PAYMENT OF ADDITIONAL INTEREST. . . . . . . . . . . . 9
(f) SPECIFIC ENFORCEMENT. . . . . . . . . . . . . . . . . . . . . . . 9
3. REGISTRATION PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . 9
4. UNDERWRITTEN REGISTRATIONS . . . . . . . . . . . . . . . . . . . . . . 16
5. INDEMNIFICATION AND CONTRIBUTION . . . . . . . . . . . . . . . . . . . 16
6. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
(a) RULE 144 AND RULE 144A. . . . . . . . . . . . . . . . . . . . . . 19
(b) NO INCONSISTENT AGREEMENTS. . . . . . . . . . . . . . . . . . . . 19
(c) AMENDMENTS AND WAIVERS. . . . . . . . . . . . . . . . . . . . . . 19
(d) NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
(e) SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . . . 20
(f) THIRD PARTY BENEFICIARY . . . . . . . . . . . . . . . . . . . . . 20
(g) COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(h) HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(i) GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(j) SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
<PAGE>
NOTES REGISTRATION RIGHTS AGREEMENT
THIS NOTES REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into as of May 5, 1998, by and among RHYTHMS NETCONNECTIONS, INC., a
Delaware corporation (the "Company"), and MERRILL LYNCH & CO., MERRILL LYNCH,
PIERCE, FENNER & SMITH INCORPORATED ("Merrill Lynch") and DONALDSON, LUFKIN &
JENRETTE SECURITIES CORPORATION (together with Merrill Lynch, the "Initial
Purchasers").
This Agreement is made pursuant to the Purchase Agreement dated April 28,
1998 among the Company and the Initial Purchasers (the "Purchase Agreement"),
with respect to the issue and sale by the Company and the purchase by the
Initial Purchasers of the respective number of the Company's Units (the
"Units"), each Unit consisting of $1,000 principal amount at maturity of the
Company's 131/2% Senior Discount Notes due 2008 (the "Notes") and four warrants
(the "Warrants"), each initially entitling the holder thereof to purchase 1.7
shares of common stock, par value $0.001 per share (the "Common Stock"), of the
Company. In order to induce the Initial Purchasers to enter into the Purchase
Agreement, the Company has agreed to provide to the Initial Purchasers and to
other holders of Notes the registration rights set forth in this Agreement. The
execution and delivery of this Agreement is a condition to the closing under the
Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following capitalized defined terms shall have
the following meanings:
"1933 ACT" shall mean the Securities Act of 1933, as amended from time to
time, and the rules and regulations of the SEC promulgated thereunder.
"1934 ACT" shall mean the Securities Exchange Act of 1934, as amended from
time to time, and the rules and regulations of the SEC promulgated thereunder.
"DEPOSITARY" shall mean The Depository Trust Company, or any other
depositary appointed by the Company; PROVIDED, HOWEVER, that any such depositary
must have an address in the Borough of Manhattan, in the City of New York.
"EXCHANGE NOTES" shall mean 131/2% Senior Discount Notes due 2008, Series B
of the Company, issued under the Indenture containing terms identical to the
respective Notes (except that (i) interest on the Exchange Notes shall accrue
from the last date on which interest was paid on the Notes, (ii) the transfer
restrictions thereon shall be eliminated and (iii) certain provisions relating
to payment of additional interest shall be eliminated) to be offered to Holders
of Notes in exchange for Notes pursuant to the Exchange Offer.
<PAGE>
"EXCHANGE OFFER" shall mean the exchange offer by the Company of Exchange
Notes for Transfer Restricted Notes pursuant to Section 2(a) hereof.
"EXCHANGE OFFER REGISTRATION" shall mean a registration under the 1933 Act
effected pursuant to Section 2(a) hereof.
"EXCHANGE OFFER REGISTRATION STATEMENT" shall mean an exchange offer
registration statement on Form S-4 (or, if applicable, on another appropriate
form), and all amendments and supplements to such registration statement, in
each case including the Prospectus contained therein, all exhibits thereto and
all material incorporated by reference therein.
"HOLDERS" shall mean the Initial Purchasers, for so long as they own any
Transfer Restricted Notes, and each of their respective successors, assigns and
direct and indirect transferees who become registered owners of Transfer
Restricted Notes under the Indenture.
"INDENTURE" shall mean the Indenture relating to the Notes dated as of May
5, 1998, between the Company and State Street Bank and Trust Company of
California, N.A., as trustee (the "Trustee"), and as the same may be amended
from time to time in accordance with the terms thereof.
"INITIAL PURCHASERS" shall have the meaning set forth in the preamble of
this Agreement.
"MAJORITY HOLDERS" shall mean the Holders of a majority of the aggregate
principal amount at maturity of Transfer Restricted Notes outstanding; PROVIDED
that whenever the consent or approval of Holders of a specified percentage of
Transfer Restricted Notes is required hereunder, Transfer Restricted Notes held
by the Company or any of its affiliates (as such term is defined in Rule 405
under the 1933 Act) shall be disregarded in determining whether such consent or
approval was given by the Holders of such required percentage or amount.
"ORIGINAL ISSUE DATE" shall mean the date of original issuance of the
Notes.
"PERSON" shall mean an individual, partnership, limited liability company,
corporation, trust or unincorporated organization, or a government or agency or
political subdivision thereof.
"PROSPECTUS" shall mean the prospectus included in a Registration
Statement, including any preliminary prospectus, and any such prospectus as
amended or supplemented by any prospectus supplement, including a prospectus
supplement with respect to the terms of the offering of any portion of the
Transfer Restricted Notes covered by a Shelf Registration Statement, and by all
other amendments and supplements to a prospectus, including post-effective
amendments, and in each case including all material incorporated by reference
therein.
"PURCHASE AGREEMENT" shall have the meaning set forth in the preamble of
this Agreement.
"REGISTRATION EXPENSES" shall mean any and all expenses incident to
performance of or compliance by the Company with this Agreement, including
without limitation: (i) all SEC, stock exchange or National Association of
Securities Dealers, Inc. ("NASD") registration and filing fees, (ii) all fees
and expenses incurred in connection with compliance with state or other
securities or
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blue sky laws and compliance with the rules of the NASD (including reasonable
fees and disbursements of United States and local counsel for any underwriters
and Holders in connection with state or other securities or blue sky
qualification of any of the Exchange Notes or Transfer Restricted Notes), (iii)
all expenses of any Persons in preparing, printing and distributing any
Registration Statement, any Prospectus, any amendments or supplements thereto,
any underwriting agreements, securities sales agreements, certificates
representing the Exchange Notes and other documents relating to the performance
of and compliance with this Agreement, (iv) all rating agency fees, (v) all fees
and disbursements relating to the qualification of the Indenture under
applicable securities laws, (vi) the reasonable fees and disbursements of
counsel for the Company and of the independent public accountants of the
Company, including the expenses of any special audits or "cold comfort" letters
required by or incident to such performance and compliance, (vii) the fees and
expenses of a "qualified independent underwriter" as defined by Conduct Rule
2720 of the NASD, if required by the NASD rules, in connection with the offering
of the Transfer Restricted Notes, and (viii) the reasonable fees and expenses of
the Trustee, including its counsel, and any escrow agent or custodian.
Notwithstanding the foregoing, "Registration Expenses" shall exclude, and the
Holders of the Transfer Restricted Notes being registered shall pay, any amounts
required by Section 2(c) to be paid by the Holders.
"REGISTRATION STATEMENT" shall mean any registration statement of the
Company which covers any of the Exchange Notes or Transfer Restricted Notes
pursuant to the provisions of this Agreement, and all amendments and supplements
to any such Registration Statement, including post-effective amendments, in each
case including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
"SEC" shall mean the Securities and Exchange Commission.
"SHELF REGISTRATION" shall mean a registration effected pursuant to Section
2(b) hereof.
"SHELF REGISTRATION STATEMENT" shall mean a "shelf" registration statement
of the Company pursuant to the provisions of Section 2(b) of this Agreement
which covers all of the Transfer Restricted Notes on an appropriate form under
Rule 415 under the 1933 Act, or any similar rule that may be adopted by the SEC,
and all amendments and supplements to such registration statement, including
post-effective amendments, in each case including the Prospectus contained
therein, all exhibits thereto and all material incorporated by reference
therein.
"TRANSFER RESTRICTED NOTES" shall mean the Notes; PROVIDED, HOWEVER, that
any Note shall cease to be a Transfer Restricted Note when (i) such Note has
been exchanged by a person other than a broker-dealer for an Exchange Note in
the Exchange Offer, (ii) following the exchange by a broker-dealer in the
Exchange Offer of a Note for an Exchange Note, such Exchange Note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of the prospectus contained in the Exchange Offer Registration
Statement, (iii) such Note has been effectively registered under the 1933 Act
and disposed of in accordance with the Shelf Registration Statement, (iv) such
Note is distributed to the public pursuant to Rule 144(k) under the 1933 Act (or
any similar provision then in force, but not Rule 144A under the 1933 Act), (v)
such Note shall have been otherwise transferred by the Holder thereof and a new
Note not bearing a legend restricting further transfer shall have been delivered
by the Company and subsequent disposition of
3
<PAGE>
such Note shall not require registration or qualification under the 1933 Act or
any similar state law then in force or (vi) such Note ceases to be outstanding.
"TRUSTEE" shall mean the Trustee under the Indenture.
2. REGISTRATION UNDER THE 1933 ACT.
(a) EXCHANGE OFFER REGISTRATION. To the extent not prohibited by any
applicable law or applicable interpretation of the staff of the SEC, the Company
shall (A) cause to be filed an Exchange Offer Registration Statement with the
SEC within 90 days after the Original Issue Date covering the offer by the
Company to the Holders of Exchange Notes for all of their Transfer Restricted
Notes, (B) use its best efforts to cause such Exchange Offer Registration
Statement to be declared effective under the 1933 Act as promptly as possible
but in any event within 150 days after the Original Issue Date and (C) use its
best efforts to consummate the Exchange Offer within 30 days after the date on
which such Exchange Offer Registration Statement is declared effective under the
1933 Act. Upon the effectiveness of the Exchange Offer Registration Statement,
the Company shall promptly commence the Exchange Offer, it being the objective
of such Exchange Offer to enable each Holder (other than Participating
Broker-Dealers (as defined in Section 3(f))) eligible and electing to exchange
Transfer Restricted Notes for Exchange Notes (assuming that such Holder is not
an affiliate of the Company within the meaning of Rule 405 under the 1933 Act,
acquires the Exchange Notes in the ordinary course of such Holder's business and
has no arrangements or understandings with any person to participate in the
Exchange Offer for the purpose of distributing the Exchange Notes) to trade such
Exchange Notes from and after their receipt without any limitations or
restrictions under the 1933 Act and without material restrictions under the
securities laws of a substantial proportion of the several states of the United
States.
In connection with the Exchange Offer, the Company shall:
(i) mail to each Holder a copy of the Prospectus forming part of
the Exchange Offer Registration Statement, together with an appropriate
letter of transmittal and related documents;
(ii) keep the Exchange Offer open for not less than 20 business days
after the date notice thereof is mailed to the Holders (or longer if
required by applicable law);
(iii) use the services of the Depositary for the Exchange Offer with
respect to Notes evidenced by global certificates;
(iv) permit Holders to withdraw tendered Transfer Restricted Notes
at any time prior to the close of business, New York City time, on the last
business day on which the Exchange Offer shall remain open, by sending to
the institution specified in the notice, a telegram, telex, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Transfer Restricted Notes delivered for exchange, and a statement
that such Holder is withdrawing its election to have such Notes exchanged;
and
(v) otherwise comply with all applicable laws relating to the
Exchange Offer.
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<PAGE>
As soon as practicable after the close of the Exchange Offer, the Company
shall:
(i) accept for exchange Transfer Restricted Notes duly tendered and
not validly withdrawn pursuant to the Exchange Offer in accordance with the
terms of the Exchange Offer Registration Statement and the letter of
transmittal which is an exhibit thereto;
(ii) deliver, or cause to be delivered, to the Trustee for
cancellation all Transfer Restricted Notes so accepted for exchange by the
Company; and
(iii) cause the Trustee promptly to authenticate and deliver Exchange
Notes to each Holder of Transfer Restricted Notes equal in principal amount
at maturity to the principal amount at maturity of the Transfer Restricted
Notes of such Holder so accepted for exchange.
Original issue discount will accrete, if on or prior to May 15, 2003, and
interest will accrue, if after May 15,2003, on each Exchange Note exchanged for
a Note, in either case from the last date on which original issue discount
accreted or interest was paid, as the case may be, on the Notes surrendered in
exchange therefor. If no interest has been paid on the Notes, such interest will
be payable from May 15, 2003. The Exchange Offer shall not be subject to any
conditions, other than (i) that the Exchange Offer, or the making of any
exchange by a Holder, does not violate applicable law or any applicable
interpretation of the staff of the SEC and (ii) the proper tendering of Transfer
Restricted Notes in accordance with the Exchange Offer. Each Holder of Transfer
Restricted Notes (other than Participating Broker-Dealers) who wishes to
exchange such Transfer Restricted Notes for Exchange Notes in the Exchange Offer
shall have represented that (i) it is not an affiliate (as defined in Rule 405
under the 1933 Act) of the Company, or, if it is such an affiliate, it will
comply with the registration and prospectus delivery requirements of the 1933
Act to the extent applicable, (ii) any Exchange Notes to be received by it will
be acquired in the ordinary course of its business, (iii) at the time of the
commencement of the Exchange Offer it has no arrangement with any person to
participate in the distribution (within the meaning of the 1933 Act) of the
Exchange Notes and (iv) it shall have made such other representations as may be
reasonably necessary under applicable SEC rules, regulations or interpretations
to render the use of Form S-4 or another appropriate form under the 1933 Act
available. To the extent permitted by law and ascertainable by the Company, the
Company shall inform the Initial Purchasers of the names and addresses of the
Holders to whom the Exchange Offer is made, and the Initial Purchasers shall
have the right to contact such Holders and otherwise facilitate the tender of
Transfer Restricted Notes in the Exchange Offer.
(b) SHELF REGISTRATION. If (i) because of any change in law or applicable
interpretations thereof by the staff of the SEC, the Company is not permitted to
effect the Exchange Offer as contemplated by Section 2(a) hereof, (ii) for any
other reason the Exchange Offer is not consummated within 180 days following the
Original Issue Date, (iii) any Holder notifies the Company prior to one year
after the Original Issue Date that (x) due to a change in law or policy it is
not entitled to participate in the Exchange Offer, (y) due to a change in law or
policy it may not resell the Exchange Notes acquired by it in the Exchange Offer
to the public without delivering a prospectus, and the prospectus contained in
the Exchange Offer Registration Statement is not appropriate or available for
such resales by such Holder, and such prospectus is not promptly amended or
modified in order to be suitable for use in connection with such resales for
such Holder
5
<PAGE>
and all similarly situated Holders or (z) it is a broker-dealer and owns Notes
acquired directly from the Company or an affiliate of the Company or (iv) a
majority of the Holders may not resell the Exchange Notes acquired by them in
the Exchange Offer to the public without restriction under the Securities Act
and without restriction under applicable blue sky or state securities laws, then
the Company shall, at its cost:
(A) use its best efforts to, prior to the later of (I) the date
that is 90 days after the Original Issue Date and (II) the date that is 30
days after the filing obligation arises, file with the SEC a Shelf
Registration Statement relating to the offer and sale of the Transfer
Restricted Notes by the Holders from time to time in accordance with the
methods of distribution elected by the Majority Holders of such Transfer
Restricted Notes and set forth in such Shelf Registration Statement, and
use their best efforts to cause such Shelf Registration Statement to be
declared effective under the Securities Act as promptly as possible, but in
any event within 60 days after the filing obligation arises; PROVIDED that,
if the filing obligation arises pursuant to clause (ii) above, then the
Company shall file the Shelf Registration Statement on or prior to 210 days
after the Original Issue Date; and PROVIDED FURTHER that, with respect to
Exchange Notes received by a broker-dealer in exchange for any securities
that were acquired by such broker-dealer as a result of market making or
other trading activities, the Company may, if permitted by current
interpretations by the Commission's staff, file a post-effective amendment
to the Exchange Offer Registration Statement containing the information
required by Regulation S-K Items 507 and/or 508, as applicable, in
satisfaction of its obligations under this paragraph (A) solely
with respect to broker-dealers who acquired their Notes as a result of
market making or other trading activities, and any such Exchange Offer
Registration Statement, as so amended, shall be referred to herein as, and
governed by the provisions herein applicable to, a Shelf Registration
Statement. If the Company is required to file a Shelf Registration
Statement pursuant to clause (iii) above or pursuant to clause (iv) above,
then the Company shall file and use its best efforts to have declared
effective by the SEC both an Exchange Offer Registration Statement pursuant
to Section 2(a) with respect to all Transfer Restricted Notes and a Shelf
Registration Statement (which may be a combined Registration Statement with
the Exchange Offer Registration Statement) with respect to offers and sales
of Transfer Restricted Notes held by such Holder or such Initial Purchaser
entitled to the rights under Section 2(b)(iii), as applicable, after
completion of the Exchange Offer;
(B) use its best efforts to keep the Shelf Registration Statement
continuously effective in order to permit the Prospectus forming part
thereof to be usable by Holders for a period of two years after its
effective date or such shorter period which will terminate when all of the
Transfer Restricted Notes covered by the Shelf Registration Statement
either have been sold pursuant to the Shelf Registration Statement or have
ceased to be Transfer Restricted Notes; and
(C) notwithstanding any other provisions hereof, ensure that (i) any Shelf
Registration Statement and any amendment thereto and any Prospectus forming
a part thereof and any supplement thereto complies in all material respects
with the 1933 Act and the rules and regulations thereunder, (ii) any Shelf
Registration Statement and any amendment thereto does not, when it becomes
effective, contain an untrue statement of a material fact or omit
6
<PAGE>
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) any Prospectus forming
part of any Shelf Registration Statement, and any supplement to such
Prospectus (as amended or supplemented from time to time), does not include
an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
The Company further agrees, if necessary, to supplement or amend the Shelf
Registration Statement if reasonably requested by the Majority Holders with
respect to information relating to the Holders and otherwise as required by
Section 3(b) below, to use all reasonable efforts to cause any such amendment to
become effective and such Shelf Registration to become usable as soon as
practicable thereafter and to furnish to the Holders of Transfer Restricted
Notes copies of any such supplement or amendment promptly after its being used
or filed with the SEC.
(c) EXPENSES. The Company shall pay all Registration Expenses in
connection with the registration pursuant to Section 2(a) and 2(b) and, in the
case of any Shelf Registration Statement, will reimburse the Holders entitled to
the rights under Section 2(b) for the reasonable fees and disbursements of one
counsel designated in writing by the Majority Holders to act as counsel for the
Holders of the Transfer Restricted Notes in connection therewith. Each Holder
shall pay all expenses of its counsel other than as set forth in the preceding
sentence, underwriting discounts and commissions (and any other fees or costs of
the underwriter) and transfer taxes, if any, relating to the sale or disposition
of such Holder's Transfer Restricted Notes pursuant to the Shelf Registration
Statement.
(d) EFFECTIVE REGISTRATION STATEMENT.
(i) The Company will be deemed not to have used its best efforts to
cause a Registration Statement to become, or to remain, effective during
the requisite periods set forth herein if the Company voluntarily takes any
action that could reasonably be expected to result in any such Registration
Statement not being declared effective or in the Holders of Transfer
Restricted Notes covered thereby not being able to exchange or offer and
sell such Transfer Restricted Notes during that period unless (A) such
action is required by applicable law or (B) such action is taken by the
Company in good faith and for valid business reasons (but not including
avoidance of the Company's obligations hereunder), including a material
corporate transaction, so long as the Company promptly complies with the
requirements of Section 3(k) hereof, if applicable.
(ii) An Exchange Offer Registration Statement pursuant to Section
2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b)
hereof will not be deemed to have become effective unless it has been
declared effective by the SEC; PROVIDED, HOWEVER, that if, after it has
been declared effective, the offering of Transfer Restricted Notes pursuant
to a Registration Statement is interfered with by any stop order,
injunction or other order or requirement of the SEC or any other
governmental agency or court, such Registration Statement will be deemed
not to have been effective during the period of such interference, until
the offering of Transfer Restricted Notes pursuant to such Registration
Statement may legally resume.
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<PAGE>
(iii) During any 365-day period, the Company may suspend the
availability of a Shelf Registration Statement and the use of the related
Prospectus, as provided in Section 3(e)(vi) and the last paragraph of
Section 3 hereof, for a period of up to 60 consecutive days (except for the
consecutive 60-day period immediately prior to maturity of the Notes), if
any event shall occur as a result of which it shall be necessary, in the
good faith determination of the board of directors of the Company, to amend
the Shelf Registration Statement or amend or supplement any prospectus or
prospectus supplement thereunder in order that each such document not
include any untrue statement of fact or omit to state a material fact
necessary to make the statements therein not misleading in light of the
circumstances under which they were made.
(e) ACCRUAL AND PAYMENT OF ADDITIONAL INTEREST. In the event that (i) the
Exchange Offer Registration Statement is not filed with the SEC on or prior to
the 90th calendar day following the Original Issue Date, (ii) the Exchange Offer
Registration Statement is not declared effective on or prior to the 150th
calendar day following the Original Issue Date, (iii) the Exchange Offer is not
consummated on or prior to the 30th calendar day after the date on which the
Exchange Offer Registration Statement is declared effective, (iv) if required, a
Shelf Registration Statement with respect to the Notes is not declared effective
on or prior to the 60th calendar day following the date on which the obligation
to file such registration statement arises or (v) the Exchange Offer
Registration Statement or the Shelf Registration Statement is declared effective
but thereafter ceases to be effective or usable except in accordance with
Section 2(d)(iii) hereof (each event referred to in clauses (i) through (v)
above, a "Registration Default"), the Notes shall, with respect to each
Registration Default, accrue interest, as liquidated damages ("Additional
Interest"), at a rate of one-half of one percent per annum of the Accreted Value
(as defined in the Indenture) of the Notes commencing upon the occurrence of
such Registration Default, which rate will increase by one-half of one percent
at the end of each 90-day period in which such Registration Default is not
cured, PROVIDED that the maximum aggregate Additional Interest that accrues on
the Accreted Value of the Restricted Notes as a result of all Registration
Defaults will in no event exceed one and one-half percent (1.5%) per annum.
Additional Interest shall be computed based on the actual number of days elapsed
in each 90-day period in which Additional Interest accrues on the Notes.
The Company shall notify the Trustee within three Business Days after the
occurrence of each Registration Default. Additional Interest payable with
respect to any Note shall be due and payable on each May 15 and November 15
(each an "Additional Interest Payment Date") if Additional Interest has accrued
on such Note during the semi-annual period immediately preceding such Additional
Interest Payment Date, to the Person in whose name such Note (or one or more
Predecessor Notes) is registered at the close of business on the May 1 or
November 1, whether or not a Business Day, next preceding such Additional
Interest Payment Date. Each obligation to pay Additional Interest shall be
deemed to accrue from and including the day following the occurrence of the
applicable Registration Default.
Upon (v) the filing of the Exchange Offer Registration Statement after the
90-day period described in clause (i) above, (w) the effectiveness of the
Exchange Offer Registration Statement after the 150-day period described in
clause (ii) above, (x) the consummation of the Exchange Offer after the 30-day
period described in clause (iii) above, (y) the effectiveness of a Shelf
Registration Statement after the 60-day period described in clause (iv) above,
or (z) the cure of any Registration
8
<PAGE>
Default described in clause (v) above, such Additional Interest shall cease to
accrue on the Notes from the date of such filing, effectiveness, consummation or
cure, as the case may be, if the Company is otherwise in compliance with this
paragraph; PROVIDED, HOWEVER, that if, after any such Additional Interest ceases
to accrue, a different event specified in clause (i), (ii), (iii), (iv) or (v)
above occurs, such Additional Interest shall begin to accrue again pursuant to
the foregoing provisions.
(f) SPECIFIC ENFORCEMENT. Without limiting the remedies available to the
Initial Purchasers and the Holders, the Company acknowledges (i) that any
failure by it to comply with its obligations under Sections 2(a) and 2(b) hereof
may result in material irreparable injury to the Initial Purchasers or the
Holders for which there is no adequate remedy at law, (ii) that it will not be
possible to measure damages for such injuries precisely and (iii) that, in the
event of any such failure, the Initial Purchasers or any Holder may obtain such
relief as may be required to specifically enforce the Company's obligations
under Sections 2(a) and 2(b).
3. REGISTRATION PROCEDURES.
In connection with the obligations of the Company with respect to the
Registration Statements pursuant to Sections 2(a) and 2(b) hereof, the Company
shall:
(a) prepare and file with the SEC a Registration Statement, within the
time period specified in Section 2, on the appropriate form under the 1933 Act,
which form (i) shall be selected by the Company, (ii) shall, in the case of a
Shelf Registration, be available for the sale of the Transfer Restricted Notes
by the selling Holders thereof entitled to the rights under Section 2(b) and
(iii) shall comply as to form in all material respects with the requirements of
the applicable form and include or incorporate by reference all financial
statements required by the SEC to be filed therewith, and use its best efforts
to cause such Registration Statement to become effective and remain effective in
accordance with Section 2 hereof;
(b) prepare and file with the SEC such amendments and post-effective
amendments to each Registration Statement as may be necessary under applicable
law to keep such Registration Statement effective for the applicable period;
cause each Prospectus to be supplemented by any required prospectus supplement,
and as so supplemented to be filed pursuant to Rule 424 under the 1933 Act; and
comply with the provisions of the 1933 Act with respect to the disposition of
all securities covered by each Registration Statement during the applicable
period in accordance with the intended method or methods of distribution by the
selling Holders thereof;
(c) in the case of a Shelf Registration, (i) notify each Holder of
Transfer Restricted Notes, at least ten days prior to filing, that a Shelf
Registration Statement with respect to the Transfer Restricted Notes is being
filed and advising such Holders that the distribution of Transfer Restricted
Notes will be made in accordance with the method elected by the Majority
Holders; and (ii) furnish to each Holder of Transfer Restricted Notes, to
counsel for the Initial Purchasers, to counsel for the Holders and to each
underwriter of an underwritten offering of Transfer Restricted Notes, if any,
without charge, as many copies of each Prospectus, including each preliminary
Prospectus, and any amendment or supplement thereto and such other documents as
such Holder or underwriter may reasonably request, including financial
statements and schedules and, if the Holder so requests, all
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exhibits (including those incorporated by reference) in order to facilitate the
public sale or other disposition of the Transfer Restricted Notes; and (iii)
subject to Section 2(d)(iii) and the last paragraph of this Section 3, hereby
consent to the use of the Prospectus, including each preliminary Prospectus, or
any amendment or supplement thereto by each of the selling Holders of Transfer
Restricted Notes in connection with the offering and sale of the Transfer
Restricted Notes covered by the Prospectus or any amendment or supplement
thereto;
(d) use its reasonable best efforts to register or qualify the Transfer
Restricted Notes under all applicable state securities or "blue sky" laws of
such jurisdictions as any Holder of Transfer Restricted Notes covered by a
Registration Statement and each underwriter of an underwritten offering of
Transfer Restricted Notes shall reasonably request by the time the Registration
Statement is declared effective by the SEC, to cooperate with the Holders in
connection with any filings required to be made with the NASD and do any and all
other acts and things which may be reasonably necessary or reasonably advisable
to enable such Holder to consummate the disposition in each such jurisdiction of
such Transfer Restricted Notes owned by such Holder; PROVIDED, HOWEVER, that the
Company shall not be required to (i) qualify as a foreign corporation or as a
dealer in securities in any jurisdiction where it would not otherwise be
required to qualify but for this Section 3(d) or (ii) take any action which
would subject it to general service of process or taxation in any such
jurisdiction if it is not then so subject;
(e) in the case of a Shelf Registration, notify each Holder of Transfer
Restricted Notes entitled to the rights under Section 2(b) and counsel for such
Holders promptly and, if requested by such Holder or counsel, confirm such
advice in writing promptly (i) when a Registration Statement has become
effective and when any post-effective amendments and supplements thereto become
effective, (ii) of any request by the SEC or any state securities authority for
post-effective amendments and supplements to a Registration Statement and
Prospectus or for additional information after the Registration Statement has
become effective, (iii) of the issuance by the SEC or any state securities
authority of any stop order suspending the effectiveness of a Registration
Statement or the initiation of any proceedings for that purpose, (iv) if, during
the period a Registration Statement is effective, the representations and
warranties of the Company contained in any underwriting agreement, securities
sales agreement or other similar agreement, if any, relating to such offering
cease to be true and correct in all material respects, (v) of the receipt by the
Company of any notification with respect to the suspension of the qualification
of the Transfer Restricted Notes for sale in any jurisdiction or the initiation
or threatening of any proceeding for such purpose, (vi) of the happening of any
event or the discovery of any facts during the period a Shelf Registration
Statement is effective (including as contemplated in Section 2(d)(iii) hereof)
which makes any statement made in such Registration Statement or the related
Prospectus untrue in any material respect or which requires the making of any
changes in such Registration Statement or Prospectus in order to make the
statements therein not misleading and (vii) of any determination by the Company
that a post-effective amendment to a Registration Statement would be
appropriate;
(f) (A) in the case of the Exchange Offer, (i) include in the Exchange
Offer Registration Statement a "Plan of Distribution", section covering the
use of the Prospectus included in the Exchange Offer Registration Statement
by broker-dealers who have exchanged their Transfer Restricted Notes for
Exchange Notes for the resale of such Exchange Notes, (ii) furnish to each
broker-dealer who desires to participate in the Exchange
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Offer, without charge, as many copies of each Prospectus included in the
Exchange Offer Registration Statement, including any preliminary
prospectus, and any amendment or supplement thereto, as such broker-dealer
may reasonably request within 180 days following the date of effectiveness
of the Exchange Offer Registration Statement, (iii) include in the Exchange
Offer Registration Statement a statement that any broker-dealer who holds
Transfer Restricted Notes acquired for its own account as a result of
market-making activities or other trading activities (a "Participating
Broker-Dealer"), and who receives Exchange Notes for Transfer Restricted
Notes pursuant to the Exchange Offer, may be a statutory underwriter and
must deliver a prospectus meeting the requirements of the 1933 Act in
connection with any resale of such Exchange Notes, (iv) subject to the last
paragraph of Section 3, hereby consent to the use of the Prospectus forming
part of the Exchange Offer Registration Statement or any amendment or
supplement thereto, by any broker-dealer in connection with the sale or
transfer of the Exchange Notes covered by the Prospectus or any amendment
or supplement thereto, and (v) include in the transmittal letter or similar
documentation to be executed by an exchange offeree in order to participate
in the Exchange Offer the following provision:
"If the undersigned is not a broker-dealer, the undersigned represents
that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes. If the undersigned is a broker-dealer
that will receive Exchange Notes for its own account in exchange for
Transfer Restricted Notes, it represents that the Transfer Restricted
Notes to be exchanged for Exchange Notes were acquired by it as a
result of market-making activities or other trading activities and
acknowledges that it will deliver a prospectus meeting the
requirements of the 1933 Act in connection with any resale of such
Exchange Notes pursuant to the Exchange Offer; however, by so
acknowledging and by delivering a prospectus, the undersigned will not
be deemed to admit that it is an "underwriter" within the meaning of
the 1933 Act;"
(B) to the extent any Participating Broker-Dealer participates in
the Exchange Offer, the Company shall use its best efforts to cause to be
delivered at the request of an entity representing the Participating
Broker-Dealers (which entity shall be one of the Initial Purchasers, unless
it elects not to act as such representative) only one, if any, "cold
comfort" letter with respect to the Prospectus in the form existing on the
last date for which exchanges are accepted pursuant to the Exchange Offer
and with respect to each subsequent amendment or supplement, if any,
effected during the period specified in clause (C) below;
(C) to the extent any Participating Broker-Dealer participates in
the Exchange Offer, the Company shall use its best efforts to maintain the
effectiveness of the Exchange Offer Registration Statement for a period of
180 days following the closing of the Exchange Offer; and
(D) the Company shall not be required to amend or supplement the
Prospectus contained in the Exchange Offer Registration Statement as would
otherwise be contemplated by Section 3(b) hereof, or take any other action
as a result of this Section 3(f), for a period exceeding 180 days after the
last date for which exchanges are accepted pursuant to the Exchange Offer
(as such period may be extended by the Company) and Participating
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Broker-Dealers shall not be authorized by the Company to, and shall not,
deliver such Prospectus after such period in connection with resales
contemplated by this Section 3.
(g) (A) in the case of an Exchange Offer, furnish counsel for the
Initial Purchasers and (B) in the case of a Shelf Registration, furnish counsel
for the Holders of Transfer Restricted Notes copies of any request by the SEC or
any state securities authority for amendments or supplements to a Registration
Statement and Prospectus or for additional information;
(h) make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of a Registration Statement as soon as practicable
and provide immediate notice to each Holder of the withdrawal of any such order;
(i) in the case of a Shelf Registration, furnish to each Holder entitled
to the rights under Section 2(b), without charge, at least one conformed copy of
each Registration Statement and any post-effective amendment thereto (without
documents incorporated therein by reference or exhibits thereto, unless
requested);
(j) in the case of a Shelf Registration, cooperate with the selling
Holders entitled to the rights under Section 2(b) to facilitate the timely
preparation and delivery of any certificates representing Transfer Restricted
Notes to be sold and not bearing any restrictive legends; and cause such
Transfer Restricted Notes to be in such denominations (consistent with the
provisions of the Indenture) in a form eligible for deposit with the Depositary
and registered in such names as the selling Holders or the underwriters, if any,
may reasonably request in writing at least one business day prior to the closing
of any sale of Transfer Restricted Notes;
(k) in the case of a Shelf Registration, upon the occurrence of any event
or the discovery of any facts, each as contemplated by Section 3(e)(vi) hereof,
use their best efforts to prepare a supplement or post-effective amendment to a
Registration Statement or the related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Transfer Restricted Notes, such Prospectus
will not contain at the time of such delivery any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
Company agrees to notify each Holder to suspend use of the Prospectus as
promptly as practicable after the occurrence of such an event, and each Holder
hereby agrees to suspend use of the Prospectus until the Company has amended or
supplemented the Prospectus to correct such misstatement or omission. At such
time as such public disclosure is otherwise made or the Company determines that
such disclosure is not necessary, in each case to correct any misstatement of a
material fact or to include any omitted material fact, the Company agrees
promptly to notify each Holder of such determination and to furnish each Holder
such numbers of copies of the Prospectus, as amended or supplemented, as such
Holder may reasonably request;
(l) obtain CUSIP numbers for all Exchange Notes, or Transfer Restricted
Notes, as the case may be, not later than the effective date of a Registration
Statement, and provide the Trustee with any necessary printed certificates for
the Exchange Notes in a form eligible for deposit with the Depositary;
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<PAGE>
(m) (i) cause the Indenture to be qualified under the Trust Indenture Act
of 1939, as amended (the "TIA"), in connection with the registration of the
Exchange Notes, or Transfer Restricted Notes, as the case may be, (ii) cooperate
with the Trustee and the Holders to effect such changes to the Indenture as may
be required for the Indenture to be so qualified in accordance with the terms of
the TIA and (iii) execute, and use its best efforts to cause the Trustee to
execute, all documents as may be required to effect such changes, and all other
forms and documents required to be filed with the SEC to enable the Indenture to
be so qualified in a timely manner;
(n) in the case of a Shelf Registration, enter into agreements (including
underwriting agreements) and take all other customary and appropriate actions
(including those reasonably requested by the Holders of a majority in principal
amount at maturity of the Transfer Restricted Notes being sold under Section
2(b)) in order to expedite or facilitate the disposition of such Transfer
Restricted Notes and in such connection, whether or not an underwriting
agreement is entered into and whether or not the registration is an underwritten
registration:
(i) make such representations and warranties to the Holders of such
Transfer Restricted Notes and the underwriters, if any, in form, substance
and scope as are customarily made by issuers to underwriters in similar
underwritten offerings as may be reasonably requested by them;
(ii) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the managing underwriters, if any, and the
Holders of a majority in principal amount at maturity of the Transfer
Restricted Notes being sold) addressed to each selling Holder and the
underwriters, if any, covering the matters customarily covered in opinions
requested in sales of securities or underwritten offerings and such other
matters as may be reasonably requested by such Holders and underwriters;
(iii) obtain "cold comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to the
underwriters, if any, and to the selling Holders of Transfer Restricted
Notes, such letters to be in customary form and covering matters of the
type customarily covered in "cold comfort" letters to underwriters in
connection with similar underwritten offerings;
(iv) enter into a securities sales agreement with the Holders and an
agent of the Holders providing for, among other things, the appointment of
such agent for the selling Holders for the purpose of soliciting purchases
of Transfer Restricted Notes, which agreement shall be in form, substance
and scope customary for similar offerings;
(v) if an underwriting agreement is entered into in the case of an
underwritten offering, cause the same to set forth indemnification
provisions and procedures substantially equivalent to the indemnification
provisions and procedures set forth in Section 5 hereof with respect to the
underwriters and all other parties to be indemnified pursuant to Section 5
hereof; and
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<PAGE>
(vi) deliver such documents and certificates as may be reasonably
requested and as are customarily delivered in similar offerings.
The above shall be done at (i) the effectiveness of such Registration
Statement (and, if appropriate, each post-effective amendment thereto) and (ii)
each closing under any underwriting or similar agreement as and to the extent
required thereunder. In the case of any underwritten offering, the Company shall
provide written notice to the Holders of all Transfer Restricted Notes not then
exchanged for Exchange Notes of such underwritten offering at least 30 days
prior to the filing of a prospectus supplement for such underwritten offering.
Such notice shall (x) offer each such Holder the right to participate in such
underwritten offering, (y) specify a date, which shall be no earlier than 10
days following the date of such notice, by which such Holder must inform the
Company of its intent to participate in such underwritten offering and (z)
include the instructions such Holder must follow in order to participate in such
underwritten offering;
(o) in the case of a Shelf Registration, make available for inspection by
representatives of the Holders entitled to rights under Section 2(b) and any
underwriters participating in any disposition pursuant to a Shelf Registration
Statement and any U.S. counsel or accountant retained by such Holders or
underwriters, all financial and other records, pertinent corporate documents and
properties of the Company reasonably requested by any such Persons, and cause
the respective officers, directors, employees, and any other agents of the
Company to supply all information reasonably requested by any such
representative, underwriter, special counsel or accountant in connection with a
Registration Statement; PROVIDED that any such records, documents, properties
and such information that is designated in writing by the Company, in good
faith, as confidential at the time of delivery of such records, documents,
properties or information shall be kept confidential by any such representative,
underwriter, special counsel or accountant and shall be used only in connection
with such Registration Statement, unless disclosure thereof is made in
connection with a court proceeding or required by law, or such information has
become available (not in violation of this agreement) to the public generally or
through a third party without an accompanying obligation of confidentiality, and
the Company shall be entitled to request that such representative, underwriter,
special counsel or accountant sign a confidentiality agreement to the foregoing
effect;
(p) (i) in the case of an Exchange Offer, a reasonable time prior to the
filing of any Exchange Offer Registration Statement, any Prospectus forming a
part thereof, any amendment to an Exchange Offer Registration Statement or
amendment or supplement to a Prospectus, provide copies of such document to the
Initial Purchasers, and make such changes in any such document prior to the
filing thereof as the Initial Purchasers or their counsel may reasonably
request; (ii) in the case of a Shelf Registration, a reasonable time prior to
filing any Shelf Registration Statement, any Prospectus forming a part thereof,
any amendment to such Shelf Registration Statement or amendment or supplement to
such Prospectus, provide copies of such document to the Holders entitled to
rights under Section 2(b), to the Initial Purchasers, to counsel on behalf of
such Holders and to the underwriter or underwriters of an underwritten offering
of Transfer Restricted Notes, if any, and make such changes in any such document
prior to the filing thereof as counsel to the Initial Purchasers or any
underwriter may reasonably request; and (iii) cause the representatives of the
Company to be available for discussion of such document as shall be reasonably
requested by the Holders of Transfer Restricted Notes, the Initial Purchasers on
behalf of such Holders or any underwriter, and shall not at any time make any
filing of any such document of which such Holders,
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<PAGE>
the Initial Purchasers on behalf of such Holders, their counsel or any
underwriter shall not have previously been advised and furnished a copy or to
which such Holders, the Initial Purchasers on behalf of such Holders, their
counsel or any underwriter shall reasonably object within a reasonable time
period;
(q) otherwise use its best efforts to comply with all applicable rules and
regulations of the SEC and make available to their security holders, as soon as
reasonably practicable (but not until the end of the first full fiscal quarter
following effectiveness), an earnings statement covering at least 12 months
which shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158
thereunder; and
(r) cooperate and assist in any filings required to be made with the NASD
and in the performance of any due diligence investigation by any underwriter and
its counsel.
In the case of a Shelf Registration Statement, the Company may (as a
condition to such Holder's participation in the Shelf Registration) require each
Holder of Transfer Restricted Notes to furnish to the Company such information
regarding such Holder and the proposed distribution by such Holder of such
Transfer Restricted Notes as the Company may from time to time reasonably
request in writing.
In the case of (1) a Shelf Registration Statement or (2) Participating
Broker-Dealers utilizing the Prospectus contained in the Exchange Offer
Registration Statement as provided in Section 3(f) hereof, that are seeking to
sell Exchange Notes and are required to deliver Prospectuses, each Holder agrees
that, upon receipt of any notice from the Company of the happening of any event
or the discovery of any facts, each of the kind described in Section
3(e)(ii)-(vii) hereof, such Holder will forthwith discontinue disposition of
Transfer Restricted Notes pursuant to a Registration Statement until such
Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 3(k) hereof or until it is advised in writing by the
Company that the use of the applicable Prospectus may be resumed, and, if so
directed by the Company, such Holder will deliver to the Company (at their
expense) all copies in its possession, other than permanent file copies then in
such Holder's possession, of the Prospectus covering such Transfer Restricted
Notes or Exchange Notes, as the case may be, current at the time of receipt of
such notice. Each Holder agrees to keep confidential the cause of any such
notice of suspension or other information provided to them by the Company with
respect thereto or any other event which would materially adversely affect the
Company. If the Company shall give any such notice to suspend the disposition of
Transfer Restricted Notes or Exchange Notes, as the case may be, pursuant to a
Registration Statement as a result of the happening of any event or the
discovery of any facts, each of the kind described in Section 3(e)(vi) hereof,
the Company shall be deemed to have used its best efforts to keep the Shelf
Registration Statement effective during such period of suspension; PROVIDED that
(i) such period of suspension shall not exceed the time periods provided in
Section 2(d)(iii) hereof and (ii) the Company shall use its reasonable best
efforts to file and have declared effective (if an amendment) as soon as
practicable an amendment or supplement to the Shelf Registration Statement and
shall extend the period during which the Registration Statement shall be
maintained effective pursuant to this Agreement by the number of days during the
period from and including the date of the giving of such notice to and including
the date when the Holders shall have received copies of the supplemented or
amended Prospectus necessary to resume such dispositions.
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<PAGE>
4. UNDERWRITTEN REGISTRATIONS.
If any of the Transfer Restricted Notes covered by any Shelf Registration
are to be sold in an underwritten offering, the investment banker or investment
bankers and manager or managers that will manage the offering will be selected
by the Majority Holders of such Transfer Restricted Notes included in such
offering, PROVIDED such banker or manager is acceptable to the Company, acting
reasonably.
No Holder of Transfer Restricted Notes may participate in any underwritten
registration hereunder unless such Holder (a) agrees to sell such Holder's
Transfer Restricted Notes on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
underwriting arrangements.
5. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each Initial
Purchaser, each Holder, including Participating Broker-Dealers, each underwriter
who participates in an offering of Transfer Restricted Notes, their respective
affiliates, and their respective directors, officers, employees, agents and each
Person, if any, who controls any of such parties within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement
(or any amendment thereto) pursuant to which Exchange Notes or Transfer
Restricted Notes were registered under the 1933 Act, including all
documents incorporated therein by reference, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
contained in any Prospectus (or any amendment or supplement thereto) or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever, in each case, based upon any such untrue statement or omission,
or any such alleged untrue statement or omission; PROVIDED that (subject to
Section 5(d) below) any such settlement is effected with the written
consent of the Company; and
(iii) against any and all expenses whatsoever, as incurred (including
the reasonable fees and disbursements of one counsel chosen by any
indemnified party), reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceeding by any
court or governmental agency or body, commenced or threatened, or any
16
<PAGE>
claim whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under subparagraph (i) or (ii) of this Section 5(a);
PROVIDED, HOWEVER, that this indemnity agreement does not apply to any loss,
liability, claim, damage or expense to the extent (i) arising out of an untrue
statement or omission or alleged untrue statement or omission (A) made in or
omitted from a Preliminary Prospectus or registration statement and corrected or
included in a subsequent Prospectus or registration statement or any amendment
or supplement thereto made in reliance upon and in conformity with written
information furnished to the Company by the Initial Purchasers, any Holder,
including Participating Broker-Dealers, or any underwriter expressly for use in
the Registration Statement (or any amendment thereto) or the Prospectus (or any
amendment or supplement thereto) or (B) resulting from the use of the Prospectus
during a period when the use of the Prospectus has been suspended in accordance
with Section 2(d)(iii), Section 3(e)(vi) and the last paragraph of Section 3
hereof, PROVIDED, in each case, that Holders received prior notice of such
suspension.
(b) In the case of an Exchange Offer Registration or a Shelf Registration,
each Holder agrees, severally and not jointly, to indemnify and hold harmless
the Company, each Initial Purchaser, each underwriter who participates in an
offering of Transfer Restricted Notes and the other selling Holders and each of
their respective directors and officers (including each of officer of the
Company who signed the Registration Statement) and each Person, if any, who
controls the Company, any Initial Purchaser, any underwriter or any other
selling Holder within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act, against any and all loss, liability, claim, damage and expense
described in the indemnity contained in Section 5(a) hereof, as incurred, but
only with respect to untrue statements or omissions, or alleged untrue
statements or omissions, made in the Registration Statement (or any amendment
thereto) or the Prospectus (or any amendment or supplement thereto) in reliance
upon and in conformity with written information furnished to the Company by such
Holder expressly for use in the Registration Statement (or any amendment
thereto), or the Prospectus (or any amendment or supplement thereto); PROVIDED,
HOWEVER, that no such Holder shall be liable for any claims hereunder in excess
of the amount of net proceeds received by such Holder from the sale of Transfer
Restricted Notes pursuant to such Registration Statement.
(c) In case any action shall be commenced involving any Person in respect
of which may be sought pursuant to either paragraph (a) or (b) above, such
Person (the "indemnified party") shall give notice as promptly as reasonably
practicable to each Person against whom such indemnity may be sought (the
"indemnifying party"), but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it is
not materially prejudiced as a result thereof and in any event shall not relieve
it from any liability which it may have otherwise than on account of this
indemnity agreement. An indemnifying party may participate at its own expense in
the defense of such action; PROVIDED, HOWEVER, that counsel to the indemnifying
party shall not (except with the consent of the indemnified party) also be
counsel to the indemnified party. In no event shall the indemnifying party or
parties be liable for the fees and expenses of more than one counsel (in
addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or
17
<PAGE>
consent to the entry of any judgment with respect to any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever in respect of which indemnification or
contribution could be sought under this Section 5 (whether or not the
indemnified parties are actual or potential parties thereof), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 5(a)(ii) hereof effected
without its written consent if (i) such settlement is entered into more than 45
days after receipt by such indemnifying party of the aforesaid request, (ii)
such indemnifying party shall have received notice of the terms of such
settlement at least 30 days prior to such settlement being entered into and
(iii) such indemnifying party shall not have reimbursed such indemnified party
in accordance with such request prior to the date of such settlement.
(e) If the indemnification provided for in any of the indemnity provisions
set forth in this Section 5 is for any reason unavailable to or insufficient to
hold harmless an indemnified party in respect of any losses, liabilities,
claims, damages or expenses referred to therein, then each indemnifying party
shall contribute to the aggregate amount of such losses, liabilities, claims,
damages and expenses incurred by such indemnified party, as incurred, in such
proportion as is appropriate to reflect the relative fault of such indemnifying
party or parties on the one hand, and such indemnified party or parties on the
other hand, in connection with the statements or omissions which resulted in
such losses, liabilities, claims, damages or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying
party or parties on the one hand, and such indemnified party or parties on the
other hand shall be determined by reference to, among other things, whether any
such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by
such indemnifying party or parties or such indemnified party or parties and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, the Initial
Purchasers and the Holders of the Transfer Restricted Notes agree that it would
not be just and equitable if contribution pursuant to this Section 5 were
determined by pro rata allocation (even if the Initial Purchasers were treated
as one entity, and the Holders were treated as one entity, for such purpose) or
by another method of allocation which does not take account of the equitable
considerations referred to above in Section 5. The aggregate amount of losses,
liabilities, claims, damages and expenses incurred by an indemnified party and
referred to above in this Section 5 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in investigating,
preparing or defending against any litigation, or any investigation or
proceeding by an governmental agency or body, commenced or threatened, or any
claim whatsoever based upon any such untrue or alleged untrue statement or
omission or alleged omission. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1993 Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 5, each Person, if any, who
controls an Initial Purchaser or Holder within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act shall have the same rights
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<PAGE>
to contribution as such Initial Purchaser or Holder, and each director of the
Company, each officer of the Company who signed the Registration Statement, and
each Person, if any, who controls the Company within the meaning of Section 15
of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as the Company.
6. MISCELLANEOUS.
(a) RULE 144 AND RULE 144A. For so long as the Company is subject to the
reporting requirements of Section 13 or 15(d) of the 1934 Act, the Company
covenants that it will file the reports required to be filed by it under Section
13(a) or 15(d) of the 1934 Act and the rules and regulations adopted by the SEC
thereunder, and that if it ceases to be so required to file such reports, it
will upon the request of any Holder of Transfer Restricted Notes (i) make
publicly available such information as is necessary to permit sales pursuant to
Rule 144 under the 1933 Act, (ii) deliver such information to a prospective
purchaser as is necessary to permit sales pursuant to Rule 144A under the 1933
Act and it will take such further action as any Holder of Transfer Restricted
Notes may reasonably request, and (iii) take such further action that is
reasonable in the circumstances, in each case, to the extent required from time
to time to enable such Holder to sell its Transfer Restricted Notes without
registration under the 1933 Act within the limitation of the exemptions provided
by (x) Rule 144 under the 1933 Act, as such Rule may be amended from time to
time, (y) Rule 144A under the 1933 Act, as such Rule may be amended from time to
time, or (z) any similar rules or regulations hereafter adopted by the SEC. Upon
the written request of any Holder of Transfer Restricted Notes, the Company will
deliver to such Holder a written statement as to whether it has complied with
such requirements.
(b) NO INCONSISTENT AGREEMENTS. The Company has not entered into, nor will
it on or after the date of this Agreement enter into, any agreement that is
inconsistent with the rights granted to the Holders of Transfer Restricted Notes
in this Agreement or that otherwise conflicts with the provisions hereof. The
rights granted to the Holders hereunder do not in any way conflict with, and are
not inconsistent with, the rights granted to the holders of the Company's other
issued and outstanding securities under any agreements or instruments relating
to such securities. Except as set forth in this Agreement, no Person has any
rights to include any securities of the Company in any Registration Statement
required to be filed pursuant to this Agreement.
(c) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given unless the Company has obtained the written consent of Holders of at least
a majority in aggregate principal amount at maturity of the outstanding Transfer
Restricted Notes affected by such amendment, modification, supplement, waiver or
departure; PROVIDED, HOWEVER, that no amendment, modification, supplement or
waiver or consent to any departure from the provisions of Section 5 hereof shall
be effective as against any Holder of Transfer Restricted Notes unless consented
to in writing by such Holder.
(d) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telecopier, or any courier guaranteeing overnight delivery (i)
if to a Holder (other than an Initial Purchaser), at the most current address
set forth on the records of the Registrar under the Indenture, (ii) if to an
Initial
19
<PAGE>
Purchaser, at the most current address given by such Initial Purchaser to the
Company by means of a notice given in accordance with the provisions of this
Section 6(d), which address initially is the address set forth in the Purchase
Agreement; and (iii) if to the Company, initially at the address set forth in
the Purchase Agreement and thereafter at such other address, notice of which is
given in accordance with the provisions of this Section 6(d).
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when receipt
is acknowledged, if telecopied; and on the next business day if timely delivered
to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands, or other communications shall be
concurrently delivered by the Person giving the same to the Trustee, at the
address specified in the Indenture.
(e) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the successors, assigns and transferees of each of the
parties, including, without limitation and without the need for an express
assignment, subsequent Holders; PROVIDED that nothing herein shall be deemed to
permit any assignment, transfer or other disposition of Transfer Restricted
Notes in violation of the terms hereof or of the Purchase Agreement or the
Indenture. If any transferee of any Holder shall acquire Transfer Restricted
Notes, in any manner, whether by operation of law or otherwise, such Transfer
Restricted Notes shall be held subject to all of the terms of this Agreement,
and by taking and holding such Transfer Restricted Notes, such Person shall be
conclusively deemed to have agreed to be bound by and to perform all of the
terms and provisions of this Agreement, including the restrictions on resale set
forth in this Agreement and, if applicable, the Purchase Agreement, and such
Person shall be entitled to receive the benefits hereof.
(f) THIRD PARTY BENEFICIARY. The Holders shall be third party
beneficiaries to the agreements made hereunder between the Company on the one
hand, and the Initial Purchasers, on the other hand, and shall have the right to
enforce such agreements directly to the extent it deems such enforcement
necessary or advisable to protect its rights or the rights of Holders hereunder.
(g) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(j) SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
[signature page follows]
20
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
RHYTHMS NETCONNECTIONS, INC.
By:/s/ Scott C. Chandler
--------------------------------
Scott C. Chandler
Chief Financial Officer
Confirmed and accepted as of
the date first above written:
MERRILL LYNCH & CO.,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: MERRIL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: /s/ Marcy Becker
----------------------------------------
Authorized Signatory
<PAGE>
-----------------------------------------------------------
-----------------------------------------------------------
WARRANT AGREEMENT
Dated as of May 5, 1998
By and Between
RHYTHMS NETCONNECTIONS INC.
and
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.,
Warrant Agent
-------------------------------------
Warrants to Purchase Common Stock
(Par Value $0.001 Per Share)
-----------------------------------------------------------
-----------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
ARTICLE I. ISSUANCE, FORM, EXECUTION, DELIVERY AND
REGISTRATION OF WARRANT CERTIFICATES . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.01. ISSUANCE OF WARRANTS . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.02. FORM OF WARRANT CERTIFICATES . . . . . . . . . . . . . . . . . 2
SECTION 1.03. EXECUTION OF WARRANT CERTIFICATES . . . . . . . . . . . . . . 2
SECTION 1.04. AUTHENTICATION AND DELIVERY . . . . . . . . . . . . . . . . . 3
SECTION 1.05. TEMPORARY WARRANT CERTIFICATES . . . . . . . . . . . . . . . . 3
SECTION 1.06. SEPARATION OF WARRANTS AND NOTES . . . . . . . . . . . . . . . 4
SECTION 1.07. REGISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 1.08. REGISTRATION OF TRANSFERS OR EXCHANGES . . . . . . . . . . . . 5
SECTION 1.09. LOST, STOLEN, DESTROYED, DEFACED OR MUTILATED WARRANT
CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . .10
SECTION 1.10. OFFICES FOR EXERCISE, ETC. . . . . . . . . . . . . . . . . . .10
ARTICLE II. DURATION AND EXERCISE OF WARRANTS; EXERCISE PRICE
AND REPURCHASE OF WARRANTS . . . . . . . . . . . . . . . . . . . . . . . . .11
SECTION 2.01. DURATION OF WARRANTS . . . . . . . . . . . . . . . . . . . . .11
SECTION 2.02. EXERCISE, EXERCISE PRICE, SETTLEMENT AND DELIVERY . . . . . .12
SECTION 2.03. CANCELLATION OF WARRANT CERTIFICATES . . . . . . . . . . . . .14
SECTION 2.04. NOTICE OF EXERCISE DATE . . . . . . . . . . . . . . . . . . .14
SECTION 2.05. REPURCHASE . . . . . . . . . . . . . . . . . . . . . . . . . .14
ARTICLE III. OTHER PROVISIONS RELATING TO
RIGHTS OF HOLDERS OF WARRANTS. . . . . . . . . . . . . . . . . . . . . . . .17
SECTION 3.01. ENFORCEMENT OF RIGHTS . . . . . . . . . . . . . . . . . . . .17
SECTION 3.02. OBTAINING STOCK EXCHANGE LISTINGS . . . . . . . . . . . . . .18
ARTICLE IV. CERTAIN COVENANTS OF THE COMPANY . . . . . . . . . . . . . . . .18
SECTION 4.01. PAYMENT OF TAXES . . . . . . . . . . . . . . . . . . . . . . .18
SECTION 4.02. RULES 144 AND 144A . . . . . . . . . . . . . . . . . . . . . .18
SECTION 4.03. FORM OF INITIAL PUBLIC EQUITY OFFERING . . . . . . . . . . . .18
SECTION 4.04. SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. . . . . .19
SECTION 4.05. RESOLUTION OF PREEMPTIVE RIGHTS, IF ANY. . . . . . . . . . . .19
ARTICLE V. ADJUSTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . .19
SECTION 5.01. ADJUSTMENT OF EXERCISE RATE; NOTICES . . . . . . . . . . . . .19
SECTION 5.02. FRACTIONAL WARRANT SHARES . . . . . . . . . . . . . . . . . .26
SECTION 5.03. CERTAIN DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . .27
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ARTICLE VI. CONCERNING THE WARRANT AGENT . . . . . . . . . . . . . . . . . .27
SECTION 6.01. WARRANT AGENT . . . . . . . . . . . . . . . . . . . . . . . .27
SECTION 6.02. CONDITIONS OF WARRANT AGENT'S OBLIGATIONS . . . . . . . . . .27
SECTION 6.03. RESIGNATION AND APPOINTMENT OF SUCCESSOR . . . . . . . . . . .31
ARTICLE VII. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . .32
SECTION 7.01. AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . .32
SECTION 7.02. NOTICES AND DEMANDS TO THE COMPANY AND WARRANT AGENT . . . . .33
SECTION 7.03. ADDRESSES FOR NOTICES TO PARTIES AND FOR TRANSMISSION
OF DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . .33
SECTION 7.04. NOTICES TO HOLDERS . . . . . . . . . . . . . . . . . . . . . .34
SECTION 7.05. APPLICABLE LAW . . . . . . . . . . . . . . . . . . . . . . . .34
SECTION 7.06. PERSONS HAVING RIGHTS UNDER AGREEMENT . . . . . . . . . . . .34
SECTION 7.07. HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . .35
SECTION 7.08. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . .35
SECTION 7.09. INSPECTION OF AGREEMENT . . . . . . . . . . . . . . . . . . .35
SECTION 7.10. AVAILABILITY OF EQUITABLE REMEDIES . . . . . . . . . . . . . .35
SECTION 7.11. OBTAINING OF GOVERNMENTAL APPROVALS . . . . . . . . . . . . .35
SECTION 7.12. REPORTS TO HOLDERS . . . . . . . . . . . . . . . . . . . . . .35
EXHIBIT A - Form of Warrant Certificate
EXHIBIT B - Form of Legend for Global Warrant
EXHIBIT C - Certificate to Be Delivered upon Exchange or Registration of
Transfer of Warrants
EXHIBIT D - Form of Certificate to Be Delivered in Connection with
Regulation S Transfers
APPENDIX A - List of Financial Experts
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<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT ("AGREEMENT"), dated as of May 5, 1998 by and between
RHYTHMS NETCONNECTIONS INC., a Delaware corporation (the "Company"), and STATE
STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., as warrant agent (with any
successor Warrant Agent, the "WARRANT AGENT").
WHEREAS, the Company has entered into a purchase agreement (the
"PURCHASE AGREEMENT") dated April 28, 1998 with Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("MERRILL LYNCH") and Donaldson,
Lufkin & Jenrette Securities Corporation (together with Merrill Lynch, the
"INITIAL PURCHASERS"), severally, in which the Company has agreed to sell to
the Initial Purchasers 290,000 units (the "Units"), each consisting of (i)
$1,000 principal amount at maturity of 13 1/2% Senior Discount Notes due 2008
(the "NOTES") of the Company to be issued under an indenture dated as of May
5, 1998 (the "INDENTURE"), between the Company and State Street Bank and
Trust Company of California, N.A., trustee (in such capacity, the "TRUSTEE"),
and (ii) four warrants (the "WARRANTS"), each initially entitling the holder
thereof to purchase 1.7 shares of Common Stock (as defined herein) of the
Company, as set forth opposite such Initial Purchaser's name on Schedule A to
the Purchase Agreement. The certificates evidencing the Warrants are herein
referred to collectively as the "WARRANT CERTIFICATES"; and
WHEREAS, the Notes and the Warrants comprising the Units shall not be
separately transferable until the Separability Date (as defined herein); and
WHEREAS, the holders of the Warrants are entitled to the benefits of a
Warrant Registration Rights Agreement dated as of May 5, 1998 between the
Company and the Initial Purchasers (the "WARRANT REGISTRATION RIGHTS
AGREEMENT"); and
WHEREAS, the Company desires the Warrant Agent as warrant agent to assist
the Company in connection with the issuance, exchange, cancellation, replacement
and exercise of the Warrants, and in this Agreement wishes to set forth, among
other things, the terms and conditions on which the Warrants may be issued,
exchanged, canceled, replaced and exercised;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I. ISSUANCE, FORM, EXECUTION, DELIVERY AND
REGISTRATION OF WARRANT CERTIFICATES
SECTION 1.01. ISSUANCE OF WARRANTS. Warrants comprising part of the Units
shall be originally issued in connection with the issuance of the Units, and
such Warrants shall not be separately transferable from the Notes until on or
after the Separability Date as provided in Section 1.06 hereof.
<PAGE>
Each Warrant Certificate shall evidence the number of Warrants specified
therein. Each Warrant evidenced by a Warrant Certificate shall, when it becomes
exercisable as provided herein and therein, represent the right, subject to the
provisions contained herein and therein, to purchase from the Company (and the
Company shall issue and sell to the holder of such Warrant) 1.7 fully paid,
registered and non-assessable Warrant Shares at an exercise price of $0.01 per
share. The number of shares of the Company's common stock, par value $0.001 per
share, and any other class or series of common equity equivalent shares of the
Company hereafter created (the "COMMON STOCK") issuable upon exercise of a
Warrant is subject to adjustment as provided herein and in the Warrant. The
shares of Common Stock issuable upon exercise of a Warrant are hereinafter
referred to as the "WARRANT SHARES" and, unless the context otherwise requires,
such term shall also include any other securities or property issuable and
deliverable upon exercise of a Warrant as provided in Article V, subject to
adjustment as provided herein and in the Warrant.
SECTION 1.02. FORM OF WARRANT CERTIFICATES. The Warrant Certificates will
initially be issued either in global form (the "GLOBAL WARRANTS") or in
registered form as definitive Warrant Certificates (the "DEFINITIVE WARRANTS"),
in either case substantially in the form of EXHIBIT A attached hereto. Any
Global Warrants to be delivered pursuant to this Agreement shall bear the legend
set forth in EXHIBIT B attached hereto. The Global Warrants shall represent such
of the outstanding Warrants as shall be specified therein, and each Global
Warrant shall provide that it shall represent the aggregate amount of
outstanding Warrants from time to time endorsed thereon and that the aggregate
amount of outstanding Warrants represented thereby may from time to time be
reduced or increased, as appropriate. Any endorsement of a Global Warrant to
reflect the amount of any increase or decrease in the amount of outstanding
Warrants represented thereby shall be made by the Warrant Agent and the
Depositary (as defined below) in accordance with instructions given by the
holder thereof. The Depository Trust Company shall act as the "DEPOSITARY" with
respect to the Global Warrants until a successor shall be appointed by the
Company and the Warrant Agent. Upon written request, a holder of Warrants may
receive from the Warrant Agent or the Depositary Definitive Warrants as set
forth in Section 1.08 hereof.
SECTION 1.03. EXECUTION OF WARRANT CERTIFICATES. The Warrant Certificates
shall be executed on behalf of the Company by the chairman of its board of
directors, its president, its chief financial officer or any vice president and
attested by its secretary or assistant secretary. Such signatures may be the
manual or facsimile signatures of the present or any future such officers. The
seal of the Company may be in the form of a facsimile thereof and may be
impressed, affixed, imprinted or otherwise reproduced on the Warrant
Certificates. Typographical and other minor errors or defects in any such
reproduction of any such signature shall not affect the validity or
enforceability of any Warrant Certificate that has been duly countersigned and
delivered by the Warrant Agent.
In case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer before the Warrant Certificate so
signed shall be authenticated and delivered by the Warrant Agent or disposed of
by the Company, such Warrant Certificate nevertheless may be authenticated and
delivered or disposed of as though the person who signed
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<PAGE>
such Warrant Certificate had not ceased to be such officer of the Company. Any
Warrant Certificate may be signed on behalf of the Company by such persons as,
at the actual date of the execution of such Warrant Certificate, shall be the
proper officers of the Company, although at the date of the execution and
delivery of this Agreement any such person was not such an officer.
SECTION 1.04. AUTHENTICATION AND DELIVERY. Subject to the immediately
following paragraph, Warrant Certificates shall be authenticated by manual
signature and dated the date of authentication by the Warrant Agent and shall
not be valid for any purpose unless so authenticated and dated. The Warrant
Certificates shall be numbered and shall be registered in the Warrant Register
(as defined in Section 1.07 hereof).
Upon the receipt by the Warrant Agent of a written order of the Company,
which order shall be signed by the chairman of its board of directors, its
president, its chief financial officer or any vice president and attested by its
secretary or assistant secretary, and shall specify the amount of Warrants to be
authenticated, whether the Warrants are to be Global Warrants or Definitive
Warrants, the date of such Warrants and such other information as the Warrant
Agent may reasonably request, without any further action by the Company, the
Warrant Agent is authorized, upon receipt from the Company at any time and from
time to time of the Warrant Certificates, duly executed as provided in Section
1.03 hereof, to authenticate the Warrant Certificates and upon the holder's
request deliver them. Such authentication shall be by a duly authorized
signatory of the Warrant Agent (although it shall not be necessary for the same
signatory to sign all Warrant Certificates).
In case any authorized signatory of the Warrant Agent who shall have
authenticated any of the Warrant Certificates shall cease to be such authorized
signatory before the Warrant Certificate shall be disposed of by the Company or
the Warrant Agent, such Warrant Certificate nevertheless may be delivered or
disposed of as though the person who authenticated such Warrant Certificate had
not ceased to be such authorized signatory of the Warrant Agent; and any Warrant
Certificate may be authenticated on behalf of the Warrant Agent by such persons
as, at the actual time of authentication of such Warrant Certificates, shall be
the duly authorized signatories of the Warrant Agent, although at the time of
the execution and delivery of this Agreement any such person is not such an
authorized signatory.
The Warrant Agent's authentication on all Warrant Certificates shall be in
substantially the form set forth in EXHIBIT A hereto.
SECTION 1.05. TEMPORARY WARRANT CERTIFICATES. Any Warrants sold in offshore
transactions in reliance on Regulation S will initially be represented by one or
more permanent legended global Warrants in definitive, fully registered form
(each a LEGENDED REGULATION S GLOBAL WARRANT"). The Company may execute, and the
Warrant Agent shall authenticate and deliver, Legended Regulation S Global
Warrant Certificates, which are printed, lithographed, typewritten or otherwise
produced, substantially of the tenor of the definitive Warrant Certificates in
lieu of which they are issued and with such appropriate insertions, omissions,
substitutions and
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<PAGE>
other variations as the officers executing such Warrant Certificates may
determine, as evidenced by their execution of such Warrant Certificates.
The Legended Regulation S Global Warrants will be exchangeable for one or
more unlegended permanent global Warrants on or after one year following the
Issue Date (as defined herein) upon certification that the beneficial interests
in such global Warrants are owned by non-U.S. persons at any office or agency
maintained by the Company for that purpose pursuant to Section 1.10 hereof.
Subject to the provisions of Section 4.01 hereof, such exchange shall be without
charge to the holder. Upon surrender for cancellation of any one or more
Legended Regulation S Global Warrant Certificates, the Company shall execute,
and the Warrant Agent shall authenticate and deliver in exchange therefor, one
or more unlegended permanent global Warrant Certificates representing in the
aggregate a like number of Warrants. Until so exchanged, the holder of a
Legended Regulation S Global Warrant Certificate shall in all respects be
entitled to the same benefits under this Agreement as a holder of an unlegended
permanent global Warrant Certificate PROVIDED that prior to one year after the
Issue Date, beneficial interests in the Legended Regulation S Global Warrant may
be only held through Euroclear or Cedel Bank. Cedel Bank and Euroclear will hold
interests in the Global Warrant on behalf of their participants through DTC.
SECTION 1.06. SEPARATION OF WARRANTS AND NOTES. The Notes and the Warrants
will not be separately transferable until the Separability Date. "SEPARABILITY
DATE" means the earliest to occur of: (i) November 1, 1998; (ii) the date on
which a registration statement with respect to a registered exchange offer for
the Notes is declared effective under the Securities Act of 1933, as amended
(the "SECURITIES ACT"); (iii) the occurrence of a Change of Control (as defined
in the Indenture); and (iv) such earlier date as determined by Merrill Lynch &
Co. in its sole discretion. The separation of the Warrants and the Notes is
herein referred to as a "SEPARATION."
SECTION 1.07. REGISTRATION. The Company will keep, at the office or agency
maintained by the Company for such purpose, a register or registers in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration of, and registration of transfer and exchange of,
Warrants as provided in this Article. Each person designated by the Company from
time to time as a person authorized to register the transfer and exchange of the
Warrants is hereinafter called, individually and collectively, the "REGISTRAR".
The Company hereby initially appoints the Warrant Agent as Registrar. Upon
written notice to the Warrant Agent and any acting Registrar, the Company may
appoint a successor Registrar for such purposes.
The Company will at all times designate one person (who may be the Company
and who need not be a Registrar) to act as repository of a master list of names
and addresses of the holders of Warrants (the "WARRANT REGISTER"). The Warrant
Agent will act as such repository unless and until some other person is, by
written notice from the Company to the Warrant Agent and the Registrar,
designated by the Company to act as such. The Company shall cause each Registrar
to furnish to such repository, on a current basis, such information as to all
registrations of transfer and exchanges effected by such Registrar, as may be
necessary to enable such repository to maintain the Warrant Register on as
current a basis as is practicable.
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<PAGE>
SECTION 1.08. REGISTRATION OF TRANSFERS OR EXCHANGES.
(a) TRANSFER OR EXCHANGE OF DEFINITIVE WARRANTS. When Definitive
Warrants are presented to the Warrant Agent with a request from the holder:
(i) to register the transfer of the Definitive Warrants; or
(ii) to exchange such Definitive Warrants for an equal number of
Definitive Warrants of other authorized denominations,
the Warrant Agent shall register the transfer or make the exchange as requested
if the requirements under this Warrant Agreement as set forth in this Section
1.08 hereof for such transactions are met; PROVIDED, HOWEVER, that the
Definitive Warrants presented or surrendered by a holder for registration of
transfer or exchange:
(x) shall be duly endorsed or accompanied by a written instruction of
transfer or exchange in form satisfactory to the Company and the
Warrant Agent, duly executed by such holder or by his attorney, duly
authorized in writing; and
(y) in the case of Warrants the offer and sale of which have not been
registered under the Securities Act and are presented for transfer
or exchange prior to (X) the date which is two years (or such
shorter period as may be prescribed by Rule 144(k) (or any successor
provision thereto)) after the later of the date of original issuance
of the Warrants and the last date on which the Company or any
Affiliate (as defined in the Indenture) of the Company was the owner
of such Warrants, or any predecessor thereto, and (Y) such later
date, if any, as may be required by any subsequent change in
applicable law, as set forth in a certification from such holder in
substantially the form of EXHIBIT C hereto (the "RESALE RESTRICTION
TERMINATION DATE"), such Warrants shall be accompanied by the
following additional information and documents, as applicable:
(A) if such Warrants are being delivered to the Warrant Agent by
a holder for registration in the name of such holder,
without transfer, a certification from such holder to that
effect (in substantially the form of EXHIBIT C hereto); or
(B) if such Warrants are being transferred to a qualified
institutional buyer as such term is defined in Rule 144A
under the Securities Act (a "QIB") in accordance with Rule
144A under the Securities Act, a certification from the
transferor to that effect (in substantially the form of
EXHIBIT C hereto); or
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<PAGE>
(C) if such Warrants are being transferred in reliance on
Regulation S under the Securities Act, delivery by the
transferor of a certification to that effect (in
substantially the form of EXHIBIT C hereto), and a
Certificate for Regulation S Transfers (in substantially the
form of EXHIBIT D hereto); or
(D) if such Warrants are being transferred in reliance on Rule
144 under the Securities Act, delivery by the transferor of
(i) a certification from the transferor to that effect (in
substantially the form of EXHIBIT C hereto), and (ii) an
opinion of counsel reasonably satisfactory to the Company to
the effect that such transfer is in compliance with the
Securities Act; or
(E) if such Warrants are being transferred in reliance on
another exemption from the registration requirements of the
Securities Act, a certification from the transferor to that
effect (in substantially the form of EXHIBIT C hereto) and
an opinion of counsel reasonably satisfactory to the Company
to the effect that such transfer is in compliance with the
Securities Act; PROVIDED that the Company may, based upon
the views of its own counsel, instruct the Warrant Agent not
to register such transfer in any case where the proposed
transferee is not a QIB or non-U. S. person.
(b) RESTRICTIONS ON TRANSFER OF A DEFINITIVE WARRANT FOR A BENEFICIAL
INTEREST IN A GLOBAL WARRANT. A Definitive Warrant may not be transferred by a
holder for a beneficial interest in a Global Warrant except upon satisfaction of
the requirements set forth below. Upon receipt by the Warrant Agent of a
Definitive Warrant, duly endorsed or accompanied by appropriate instruments of
transfer, in form satisfactory to the Warrant Agent, together with:
(i) certification from such holder (in substantially the form of EXHIBIT
C hereto) that such Definitive Warrant is being transferred to a QIB
in accordance with Rule l44A under the Securities Act; and
(ii) written instructions directing the Warrant Agent to make, or to
direct the Depositary to make, an endorsement on the Global Warrant
to reflect an increase in the aggregate amount of the Warrants
represented by the Global Warrant,
then the Warrant Agent shall cancel such Definitive Warrant and cause, or direct
the Depositary to cause, in accordance with the standing instructions and
procedures existing between the Depositary and the Warrant Agent, the number of
Warrant Shares represented by the Global Warrant to be increased accordingly. If
no Global Warrant is then outstanding, the Company shall issue, and the Warrant
Agent shall upon written instructions from the Company authenticate, a new
Global Warrant in the appropriate amount.
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<PAGE>
(c) TRANSFER OR EXCHANGE OF GLOBAL WARRANTS. The transfer or exchange of
Global Warrants or beneficial interests therein shall be effected through the
Depositary, in accordance with this Section 1.08, the Private Placement Legend
(as defined below), this Agreement (including those restrictions on transfer set
forth herein) and the procedures of the Depositary therefor.
(d) TRANSFER OR EXCHANGE OF A BENEFICIAL INTEREST IN A GLOBAL WARRANT
FOR A DEFINITIVE WARRANT.
(i) Any person having a beneficial interest in a Global Warrant may
transfer or exchange such beneficial interest for a Definitive
Warrant upon receipt by the Warrant Agent of written instructions
(or such other form of instructions as is customary for the
Depositary) from the Depositary or its nominee on behalf of any
person having a beneficial interest in a Global Warrant, including a
written order containing registration instructions and, in the case
of any such transfer or exchange prior to the Resale Restriction
Termination Date, the following additional information and
documents:
(A) if such beneficial interest is being transferred to the
person designated by the Depositary as being the beneficial
owner, a certification from such person to that effect (in
substantially the form of EXHIBIT C hereto); or
(B) if such beneficial interest is being transferred to a QIB in
accordance with Rule 144A under the Securities Act, a
certification from the transferor to that effect (in
substantially the form of EXHIBIT C hereto); or
(C) if such beneficial interest is being transferred in reliance
on Regulation S under the Securities Act, delivery by the
transferor of (i) a certification to that effect (in
substantially in the form of EXHIBIT C hereto), and (ii) a
Certificate for Regulation S Transfers in substantially the
form of EXHIBIT D hereto; or
(D) if such beneficial interest is being transferred in reliance
on Rule 144 under the Securities Act, delivery by the
transferor of (i) a certification to that effect (in
substantially the form of EXHIBIT C hereto) and (ii) an
opinion of counsel reasonably satisfactory to the Company to
the effect that such transfer is in compliance with the
Securities Act; or
(E) if such beneficial interest is being transferred in reliance
on another exemption from the registration requirements of
the Securities Act, a certification from the transferor to
that effect (in substantially the form of EXHIBIT C hereto)
and an opinion of counsel reasonably satisfactory to the
Company to the effect that such transfer is in compliance
with the Securities Act; provided that the Company may
instruct the Warrant Agent not to register such transfer in
any case where the proposed transferee is not a QIB or
non-U.S. person;
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then the Warrant Agent will cause, in accordance with the standing
instructions and procedures existing between the Depositary and the
Warrant Agent, the aggregate amount of the Global Warrant to be
reduced and, following such reduction, the Company will execute and,
upon receipt of an authentication order in the form of an officers'
certificate (a certificate signed by the chairman or a co-chairman
of the board, the president, the chief financial officer, any
executive vice president or any senior vice president of the Company
signing alone, or by any vice president signing together with the
secretary, any assistant secretary, the treasurer, or any assistant
treasurer of the Company) (an "OFFICERS' CERTIFICATE"), the Warrant
Agent will authenticate and deliver to the transferee a Definitive
Warrant.
(ii) Definitive Warrants issued in exchange for a beneficial interest in
a Global Warrant pursuant to this Section 1.08(d) shall be
registered in such names and in such authorized denominations as the
Depositary, pursuant to instructions from its direct or indirect
participants or otherwise, shall instruct the Warrant Agent in
writing. The Warrant Agent shall deliver such Definitive Warrants to
the persons in whose names such Warrants are so registered and
adjust the Global Warrant pursuant to paragraph (h) of this Section
1.08.
(e) RESTRICTIONS ON TRANSFER OR EXCHANGE OF GLOBAL WARRANTS.
Notwithstanding any other provisions of this Agreement (other than the
provisions set forth in subsection (f) of this Section 1.08), a Global Warrant
may not be transferred or exchanged as a whole except by the Depositary to a
nominee of the Depositary; by a nominee of the Depositary to the Depositary or
another nominee of the Depositary; or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.
(f) AUTHENTICATION OF DEFINITIVE WARRANTS IN ABSENCE OF DEPOSITARY. If
at any time:
(i) the Depositary for the Global Warrants notifies the Company that the
Depositary is unwilling or unable to continue as Depositary for the
Global Warrant and a successor Depositary for the Global Warrant is
not appointed by the Company within 90 days after delivery of such
notice; or
(ii) the Company, at its sole discretion, notifies the Warrant Agent in
writing that it elects to cause the issuance of Definitive Warrants
for all Global Warrants under this Agreement,
then the Company will execute, and the Warrant Agent will, upon receipt of an
Officers' Certificate requesting the authentication and delivery of Definitive
Warrants, authenticate and deliver Definitive
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Warrants, in an aggregate number equal to the aggregate number of warrants
represented by the Global Warrant, in exchange for such Global Warrant.
(g) PRIVATE PLACEMENT LEGEND. Upon the transfer or exchange of Warrant
Certificates not bearing the legend set forth in the first paragraph of EXHIBIT
A attached hereto (the "PRIVATE PLACEMENT LEGEND"), the Warrant Agent shall
deliver Warrant Certificates that do not bear the Private Placement Legend. Upon
the transfer, exchange or replacement of Warrant Certificates bearing the
Private Placement Legend, the Warrant Agent shall deliver Warrant Certificates
that bear the Private Placement Legend unless, and the Warrant Agent is hereby
authorized to deliver Warrant Certificates without the Private Placement Legend
if, (i) there is delivered to the Warrant Agent an opinion of counsel reasonably
satisfactory to the Company and the Warrant Agent to the effect that neither
such legend nor the related restrictions on transfer are required in order to
maintain compliance with the provisions of the Securities Act or (ii) the
Warrants to be transferred or exchanged represented by such Warrant Certificates
are being transferred or exchanged pursuant to an effective registration
statement under the Securities Act.
(h) CANCELLATION OR ADJUSTMENT OF A GLOBAL WARRANT. At such time as all
beneficial interests in a Global Warrant have either been exchanged for
Definitive Warrants, redeemed, repurchased or canceled, such Global Warrant
shall be returned to the Company or, upon written order to the Warrant Agent in
the form of an Officers' Certificate from the Company, retained and canceled by
the Warrant Agent. At any time prior to such cancellation, if any beneficial
interest in a Global Warrant is exchanged for Definitive Warrants, redeemed,
repurchased or canceled, the number of Warrants represented by such Global
Warrant shall be reduced and an endorsement shall be made on such Global Warrant
by the Warrant Agent to reflect such reduction.
(i) OBLIGATIONS WITH RESPECT TO TRANSFERS OR EXCHANGES OF DEFINITIVE
WARRANTS.
(i) To permit registrations of transfers or exchanges, the Company shall
execute, at the Warrant Agent's request, and the Warrant Agent shall
authenticate, Definitive Warrants and Global Warrants.
(ii) All Definitive Warrants and Global Warrants issued upon any
registration, transfer or exchange of Definitive Warrants or Global
Warrants, as the case may be, shall be the valid obligations of the
Company, entitled to the same benefits under this Warrant Agreement
as the Definitive Warrants or Global Warrants surrendered upon the
registration of transfer or exchange.
(iii) Prior to due presentment for registration of transfer of any
Warrant, the Warrant Agent and the Company may deem and treat the
person in whose name any Warrant is registered as the absolute owner
of such Warrant, and neither the Warrant Agent nor the Company shall
be affected by notice to the contrary.
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<PAGE>
SECTION 1.09. LOST, STOLEN, DESTROYED, DEFACED OR MUTILATED WARRANT
CERTIFICATES. Upon receipt by the Company and the Warrant Agent (or any agent of
the Company or the Warrant Agent, if requested by the Company) of evidence
satisfactory to them of the loss, theft, destruction, defacement, or mutilation
of any Warrant Certificate and of indemnity satisfactory to them and, in the
case of mutilation or defacement, upon surrender thereof to the Warrant Agent
for cancellation, then, in the absence of notice to the Company or the Warrant
Agent that such Warrant Certificate has been acquired by a BONA FIDE purchaser
or holder in due course, the Company shall execute, and an authorized signatory
of the Warrant Agent shall manually authenticate and deliver, in exchange for or
in lieu of the lost, stolen, destroyed, defaced or mutilated Warrant
Certificate, a new Warrant Certificate representing a like number of Warrants,
bearing a number or other distinguishing symbol not contemporaneously
outstanding. Upon the issuance of any new Warrant Certificate under this Section
in a name other than the prior registered holder of the lost, stolen, destroyed,
defaced or mutilated Warrant Certificate, the Company may require the payment
from the holder of such Warrant Certificate of a sum sufficient to cover any
tax, stamp tax or other governmental charge that may be imposed in relation
thereto and any other expenses (including the fees and expenses of the Warrant
Agent and the Registrar) in connection therewith. Every substitute Warrant
Certificate executed and delivered pursuant to this Section in lieu of any lost,
stolen or destroyed Warrant Certificate shall constitute an additional
contractual obligation of the Company, whether or not the lost, stolen or
destroyed Warrant Certificate shall be at any time enforceable by anyone, and
shall be entitled to the benefits of (but shall be subject to all the
limitations of rights set forth in) this Agreement equally and proportionately
with any and all other Warrant Certificates duly executed and delivered
hereunder. The provisions of this Section 1.09 are exclusive with respect to the
replacement of lost, stolen, destroyed, defaced or mutilated Warrant
Certificates and shall preclude (to the extent lawful) any and all other rights
or remedies notwithstanding any law or statute existing or hereafter enacted to
the contrary with respect to the replacement of lost, stolen, destroyed, defaced
or mutilated Warrant Certificates.
The Warrant Agent is hereby authorized to authenticate in accordance with
the provisions of this Agreement and deliver the new Warrant Certificates
required pursuant to the provisions of this Section.
SECTION 1.10. OFFICES FOR EXERCISE, ETC. So long as any of the Warrants
remain outstanding, the Company will designate and maintain in the Borough of
Manhattan, The City of New York: (a) an office or agency where the Warrant
Certificates may be presented for exercise (each a "WARRANT EXERCISE OFFICE"),
(b) an office or agency where the Warrant Certificates may be presented for
registration of transfer and for exchange (including the exchange of temporary
Warrant Certificates for definitive Warrant Certificates pursuant to Section
1.05 hereof), and (c) an office or agency where notices and demands to or upon
the Company in respect of the Warrants or of this Agreement may be served. The
Company may from time to time change or rescind such designation, as it may deem
desirable or expedient; PROVIDED, HOWEVER, that an office or agency shall at all
times be maintained in the Borough of Manhattan, The City of New York, as
provided in the first sentence of this Section. In addition to such office or
offices or agency or agencies, the Company may from time to time designate and
maintain one or more additional offices or agencies within or outside The
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City of New York, where Warrant Certificates may be presented for exercise or
for registration of transfer or for exchange, and the Company may from time to
time change or rescind such designation, as it may deem desirable or expedient.
The Company will give to the Warrant Agent written notice of the location of any
such office or agency and of any change of location thereof. The Company hereby
designates the office of State Street Bank and Trust Company, N.A., an affiliate
of the Warrant Agent, 61 Broadway, 15th Floor, New York, NY 10006, as the
initial agency maintained for each such purpose. In case the Company shall fail
to maintain any such office or agency or shall fail to give such notice of the
location or of any change in the location thereof, presentations and demands may
be made and notice may be served at the corporate trust office of the Warrant
Agent identified in Section 7.03 hereof (the "WARRANT AGENT OFFICE") and the
Company appoints the Warrant Agent as its agent to receive all such
presentations, surrenders, notices and demands.
ARTICLE II. DURATION AND EXERCISE OF WARRANTS; EXERCISE PRICE
AND REPURCHASE OF WARRANTS
SECTION 2.01. DURATION OF WARRANTS. Subject to the terms and conditions
established herein, the Warrants shall expire at 5:00 p.m., New York City time,
on May 15, 2008. The applicable date of expiration of a particular Warrant is
referred to herein as the "EXPIRATION DATE" of such Warrant. Each Warrant may be
exercised on any Business Day (as defined below) on or after the Exercisability
Date (as defined in Section 2.02) and on or prior to the close of business on
the Expiration Date; PROVIDED, HOWEVER, that no Warrant may be exercised during
the 180-day period commencing on the date of the closing of an initial public
offering of the Company's common stock (the "BLACKOUT PERIOD"), except (i) in
the event of receipt by the holder of such Warrant of the written consent for
such exercise by the Company and the managing underwriters in such initial
public offering or (ii) in the event that such closing of the Company's initial
public offering occurs on or after the date that is 180 days prior to the
Expiration Date (the events referred to in these clauses (i) and (ii), the
"BLACKOUT PERIOD EXCEPTIONS"); AND PROVIDED FURTHER that either a registration
statement relating to the Warrant Shares underlying such Warrant is, at the time
of exercise, effective and available or the exercise of such Warrant is exempt
from the registration requirements of the Securities Act, and such Warrant
Shares are qualified for sale or exempt from qualification under the applicable
securities laws of the state or other jurisdiction in which the holder of such
Warrant resides. The Company shall give written notice to the Warrant Agent of
the occurrence and duration of any Blackout Period and of the applicability of
any Blackout Period Exception.
Any Warrant not exercised before the close of business on the Expiration
Date shall become void, and all rights of the holder under the Warrant
Certificate evidencing such Warrant and under this Agreement shall cease.
"BUSINESS DAY" shall mean any day on which (i) banks in the City of New
York, (ii) banks in the city in which the principal corporate trust office of
the Warrant Agent is located, (iii) the principal U.S. securities exchange or
market, if any, on which any Common Stock is listed or
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admitted to trading and (iv) the principal U.S. securities exchange or market,
if any, on which the Warrants are listed or admitted to trading, are open for
business.
SECTION 2.02. EXERCISE, EXERCISE PRICE, SETTLEMENT AND DELIVERY. (a)
Subject to the provisions of this Agreement, and except as set forth in Section
2.01 hereof, a holder of a Warrant shall have the right to purchase from the
Company on or after the Exercisability Date and on or prior to the close of
business on the Expiration Date 1.7 fully paid, registered and non-assessable
Warrant Shares (and any other securities or property purchasable or deliverable
upon exercise of such Warrant as provided in Article V), subject to adjustment
in accordance with Article V hereof, at the purchase price of $0.01 for each
share purchased (the "EXERCISE PRICE"). The number and amount of Warrant Shares
issuable upon exercise of a Warrant (the "EXERCISE RATE") shall be subject to
adjustment from time to time as set forth in Article V hereof.
"EXERCISABILITY DATE" means, with respect to each Warrant, the date that is
one year after the Issue Date.
(b) Warrants may be exercised on or after the date they are exercisable
hereunder by (i) surrendering at any Warrant Exercise Office the Warrant
Certificate evidencing such Warrants with the form of election to purchase
Warrant Shares set forth on the reverse side of the Warrant Certificate (the
"ELECTION TO EXERCISE") duly completed and signed by the registered holder or
holders thereof or by the duly appointed legal representative thereof or by a
duly authorized attorney, and in the case of a transfer, such signature shall be
guaranteed by an eligible guarantor institution, and (ii) paying in full the
Exercise Price for each such Warrant exercised. Each Warrant may be exercised
only in whole.
(c) Simultaneously with the exercise of each Warrant, payment in full of
the aggregate Exercise Price may be made, at the option of the holder, (i) in
cash or by certified or official bank check, (ii) by a Cashless Exercise (as
defined below) or (iii) by any combination of (i) and (ii), to the office or
agency where the Warrant Certificate is being surrendered. For purposes of this
Agreement, a "CASHLESS EXERCISE" shall mean an exercise of a Warrant in
accordance with the immediately following two sentences. To effect a Cashless
Exercise, the holder may exercise a Warrant or Warrants without payment of the
Exercise Price in cash by surrendering such Warrant or Warrants (represented by
one or more Warrant Certificates) and, in exchange therefor, receiving such
number of shares of Common Stock equal to the product of (1) that number of
shares of Common Stock for which such Warrant or Warrants are exercisable and
which would be issuable in the event of an exercise with payment in cash of the
Exercise Price and (2) the Cashless Exercise Ratio (as defined below). The
"CASHLESS EXERCISE RATIO," which shall be set forth in a certification of the
Company delivered to the Warrant Agent, shall equal a fraction, the numerator of
which is the excess of the Current Market Value (calculated as set forth in this
Agreement) per share of Common Stock on the date of exercise over the Exercise
Price per share of Common Stock as of the date of exercise, and the denominator
of which is the Current Market Value per share of Common Stock on the date of
exercise. Upon surrender of a Warrant Certificate representing more than one
Warrant in connection with a holder's option to elect a Cashless Exercise, such
holder must
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specify the number of Warrants for which such Warrant Certificate is to be
exercised (without giving effect to such Cashless Exercise). All provisions of
this Agreement shall be applicable with respect to a Cashless Exercise of a
Warrant Certificate for less than the full number of Warrants represented
thereby. No payment or adjustment shall be made on account of any distributions
of dividends on the Common Stock issuable upon exercise of a Warrant. If the
Company has not effected the registration under the Securities Act of the offer
and sale of the Warrant Shares by the Company to the holders of the Warrants on
or prior to the Exercise Date (as defined below) thereof, then the Company may
elect to require that the holders of the Warrants effect the exercise thereof
solely pursuant to the Cashless Exercise option and may also amend the Warrants
to eliminate the requirement for payment of the Exercise Price with respect to
such Cashless Exercise option. The Warrant Agent shall have no obligation under
this section to calculate the Cashless Exercise Ratio and may assume without
inquiry that the most recent Cashless Exercise Ratio set forth in a prior
certification from the Company remains in effect.
(d) Upon surrender of a Warrant Certificate and payment and collection
of the Exercise Price at any Warrant Exercise Office (other than any Warrant
Exercise Office that also is an office of the Warrant Agent), such Warrant
Certificate and payment shall be promptly delivered to the Warrant Agent. The
"EXERCISE DATE" for a Warrant shall be the date when all of the items referred
to in the first sentence of paragraphs (b) and (c) of this Section 2.02 are
received by the Warrant Agent at or prior to 11:00 a.m., New York City time, on
a Business Day, and the exercise of the Warrant will be effective as of such
Exercise Date. If any items referred to in the first sentence of paragraphs (b)
and (c) are received after 11:00 a.m., New York City time, on a Business Day,
the exercise of the Warrants to which such item relates will be effective on the
next succeeding Business Day. Notwithstanding the foregoing, in the case of an
exercise of Warrants on the Expiration Date, if all of the items referred to in
the first sentence of paragraphs (b) and (c) are received by the Warrant Agent
at or prior to 5:00 p.m., New York City time, on the Expiration Date, the
exercise of the Warrants to which such items relate will be effective on the
Expiration Date.
(e) Upon the exercise of a Warrant in accordance with the terms hereof,
the receipt of a Warrant Certificate and payment of the Exercise Price (or
election of the Cashless Exercise option), the Warrant Agent shall: (i) except
to the extent exercise of the Warrant has been effected through a Cashless
Exercise, cause an amount equal to the aggregate Exercise Price to be paid to
the Company by crediting such amount in immediately available funds to the
account designated by the Company in writing to the Warrant Agent for that
purpose; (ii) advise the Company immediately by telephone of the amount so
deposited to the Company's account and promptly confirm such telephonic advice
in writing; and (iii) as soon as practicable, advise the Company in writing of
the number of Warrants exercised in accordance with the terms and conditions of
this Agreement and the Warrant Certificates, the instructions of each exercising
holder of the Warrant Certificates with respect to delivery of the Warrant
Shares to which such holder is entitled upon such exercise, and such other
information as the Company shall reasonably request.
(f) Subject to Section 5.02 hereof, as soon as practicable after the
exercise of any Warrant or Warrants in accordance with the terms hereof, the
Company shall issue or cause to be
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issued to or upon the written order of the registered holder of the Warrant
Certificate evidencing such exercised Warrant or Warrants, a certificate or
certificates evidencing the Warrant Shares to which such holder is entitled, in
fully registered form, registered in such name or names as may be directed by
such holder pursuant to the Election to Exercise, as set forth on the reverse of
the Warrant Certificate. Such certificate or certificates evidencing the Warrant
Shares shall be deemed to have been issued and any persons who are designated to
be named therein shall be deemed to have become the holders of record of such
Warrant Shares as of the close of business on the Exercise Date; the Warrant
Shares may initially be issued in global form (the "GLOBAL SHARES"). Such Global
Shares shall represent such of the outstanding Warrant Shares as shall be
specified therein. Each Global Share shall provide that it represents the
aggregate amount of outstanding Warrant Shares from time to time endorsed
thereon and that the aggregate amount of outstanding Warrant Shares represented
thereby may from time to time be reduced or increased, as appropriate. Any
endorsement of a Global Share to reflect any increase or decrease in the amount
of outstanding Warrant Shares represented thereby shall be made by the registrar
for the Warrant Shares and the Depositary (referred to below) in accordance with
instructions given by the holder thereof. The Depository Trust Company shall (if
possible) act as the Depositary with respect to the Global Shares until a
successor shall be appointed by the Company and the registrar for the Warrant
Shares. After exercise of any Warrant or Warrant Shares, the Company shall also
issue or cause to be issued to or upon the written order of the registered
holder of such Warrant Certificate, a new Warrant Certificate, countersigned by
the Warrant Agent pursuant to written instruction, evidencing the number of
Warrants, if any, remaining unexercised unless such Warrants shall have expired.
SECTION 2.03. CANCELLATION OF WARRANT CERTIFICATES. If the Company shall
purchase or otherwise acquire Warrants, then the Warrant Certificates evidencing
such Warrants may thereupon be delivered to the Warrant Agent, and if so
delivered, shall at the Company's written instruction be canceled by it and
retired. The Warrant Agent shall cancel all Warrant Certificates properly
surrendered for exchange, substitution, transfer or exercise. Upon the Company's
written request, the Warrant Agent shall deliver such canceled Warrant
Certificates to the Company.
SECTION 2.04. NOTICE OF EXERCISE DATE. The Company shall, promptly after
the Exercise Date, send or cause to be sent to each holder of Warrants and to
each beneficial owner of the Warrants to the extent that the Warrants are held
of record by a depositary or other agent (with a copy to the Warrant Agent), by
first-class mail, at the addresses appearing on the Warrant Register, a notice
prepared by the Company advising such holder of the occurrence of the Exercise
Date, which notice shall describe the date of expiration of the right to
exercise the Warrants prominently set forth in the face of such notice.
SECTION 2.05. REPURCHASE. (a) NOTICE OF REPURCHASE EVENT. Promptly
following the occurrence of a Repurchase Event (as defined below), the Company
shall give notice (a "REPURCHASE NOTICE") to the Holders of the Warrants and the
Warrant Agent that such event has occurred.
"REPURCHASE EVENT" means, and shall be deemed to occur on, any date when
the Company (i) consolidates with or merges into or with another person (but
only where the holders of Common
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Stock receive consideration in exchange for all or part of such Common Stock),
if the Common Stock (or other securities) thereafter issuable upon exercise of
the Warrants is not registered under the Exchange Act or (ii) sells all or
substantially all of its assets to another person, if the Common Stock (or other
securities) thereafter issuable upon exercise of the Warrants is not registered
under the Exchange Act; PROVIDED that, in each case, a "Repurchase Event" shall
not be deemed to have occurred if the consideration for such transaction
consists solely of cash.
(b) REPURCHASE OFFERS GENERALLY. Following the occurrence of a
Repurchase Event, the Company shall offer to repurchase for cash all outstanding
Warrants pursuant to the provisions of this Section 2.05 (a "REPURCHASE OFFER").
The Company shall give notice of a Repurchase Offer in accordance with Section
2.05(f) hereof. Each date on which the Company gives any such notice is referred
to as the "NOTICE DATE." The Repurchase Offer shall commence on the Notice Date
for such Repurchase Offer and shall expire at 5:00 p.m., New York City time, on
a date determined by the Company (the "FINAL SURRENDER TIME") that is at least
30 but not more than 60 days after the Notice Date.
(c) REPURCHASE OFFERS.
(i) In any Repurchase Offer, the Company shall offer to purchase for
cash at the Repurchase Price (as defined in Section 2.05(d)) all
Warrants outstanding on the Notice Date for such Repurchase Offer
that are properly tendered to the Warrant Agent on or prior to the
Final Surrender Time for such Repurchase Offer.
(ii) Each Holder may, but shall not be obligated to, accept such
Repurchase Offer by tendering to the Warrant Agent, on or prior to
the Final Surrender Time for such Repurchase Offer, the Warrant
Certificates evidencing the Warrants such Holder desires to have
repurchased in such offer, together with a completed Certificate for
Surrender in substantially the form attached to the Warrant
Certificate. A Holder may withdraw all or a portion of the Warrants
tendered to the Warrant Agent at any time prior to the Final
Surrender Time for such Repurchase Offer. If less than all the
Warrants represented by a Warrant Certificate shall be tendered,
such Warrant Certificate shall be surrendered and a new Warrant
Certificate of the same tenor and for the number of Warrants which
were not tendered shall be executed by the Company and delivered to
the Warrant Agent and the Warrant Agent shall countersign the new
Warrant Certificate, registered in such name or names as may be
directed in writing by the Holder, and shall make available for
delivery the new Warrant Certificate to the Person or Persons
entitled to receive the same; provided that the Holder of such
Warrants shall be responsible for the payment of any transfer taxes
required as the result of any change in ownership of such Warrants
and any such transfer shall comply with applicable law.
(d) REPURCHASE PRICE.
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(i) The purchase price (the "REPURCHASE PRICE") for each Warrant
properly tendered to the Warrant Agent pursuant to a Repurchase
Offer shall be equal to the value (the "RELEVANT VALUE") on the date
five Business Days prior to the Notice Date (the "VALUATION DATE")
of the Warrant Shares issuable, and other securities or property of
the Company which would have been delivered, upon exercise of
Warrants had the Warrants been exercised (regardless of whether the
Warrants are then exercisable), less the Exercise Price in effect on
the Notice Date for such Repurchase Offer.
(ii) The Relevant Value of the Warrant Shares and other securities or
property issuable upon exercise of all the Warrants on any Valuation
Date shall be deemed to be equal to the value set forth in the Value
Report (as defined below) as determined by an Independent Financial
Expert, which shall be selected by the Board in accordance with
Section 2.05(e) hereof, and retained on customary terms and
conditions, using one or more valuation methods that the Independent
Financial Expert, in its best professional judgment, determines to
be most appropriate but without giving effect to any discount for
lack of liquidity, the fact that the Company has no class of equity
securities registered under the Exchange Act, the fact that there
may be no public market for the Common Stock or the fact that the
Warrant Shares and other securities or property issuable upon
exercise of the Warrants represent a minority interest in the
Company. The Company shall use its best efforts (including by
selecting another Independent Financial Expert) to cause the
Independent Financial Expert to deliver to the Company, with a copy
to the Warrant Agent, within 45 days of the appointment of the
Independent Financial Expert in accordance with Section 2.05(e)
hereof, a value report (the "VALUE REPORT") stating the Relevant
Value of the Common Shares and other securities or property of the
Company, if any, being valued as of the Valuation Date and
containing a brief statement as to the nature and scope of the
methodologies upon which the determination of Relevant Value was
made. The Warrant Agent shall have no duty with respect to the Value
Report of any Independent Financial Expert, except to keep it on
file and available for inspection by the Holders. The determination
as to Relevant Value in accordance with the provisions of this
Section 2.05(d) shall be conclusive on all Persons.
(e) SELECTION OF INDEPENDENT FINANCIAL EXPERT. The Board of Directors of
the Company shall select an Independent Financial Expert not more than five
Business Days following a Repurchase Event. Within two Business Days following
such selection, the Company shall deliver to the Warrant Agent a notice setting
forth the name of such Independent Financial Expert.
(f) NOTICE OF REPURCHASE OFFER. Each notice of a Repurchase Offer (an
"OFFER NOTICE") given by the Company pursuant to Section 2.05(b) shall be given
by the Company directly to all Holders of the Warrants, with a copy to the
Warrant Agent, shall be given within five Business Days after the Company
receives the Value Report with respect to such offer and shall specify (A) the
Final Surrender Time for such Repurchase Offer, (B) the manner in which Warrants
may be surrendered to the Warrant Agent for repurchase by the Company, (C) the
Repurchase Price at which
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the Warrants will be repurchased by the Company, (D) the name of the Independent
Financial Expert whose valuation of the Common Shares and other securities or
property was utilized in connection with determining such Repurchase Price and
(E) that payment of the Repurchase Price will be made by the Warrant Agent. Each
such notice shall be accompanied by a Certificate for Surrender for Repurchase
Offer in substantially the form attached to the Warrant Certificate and a copy
of the Value Report, if any.
(g) PAYMENT FOR WARRANTS. Upon surrender for repurchase of any
Warrants in conformity with the provisions of this Section 2.05, the Warrant
Agent shall thereupon promptly notify the Company of such surrender. On or
before the Final Surrender Time for any Repurchase Offer, the Company shall
deposit with the Warrant Agent funds sufficient to make payment for the Warrants
tendered to the Warrant Agent and not withdrawn. After receipt of such deposit
from the Company, the Warrant Agent shall make payment, by delivering a check in
such amount as is appropriate, to such Person or Persons as it may be directed
in writing by the Holder surrendering such Warrants, net of any transfer taxes
required to be paid in the event that the check is to be delivered to a Person
other than the Holder.
(h) COMPLIANCE WITH LAWS. Notwithstanding anything contained in
this Section 2.05, if the Company is required to comply with laws, rules,
regulations and securities exchange or clearing procedures, in connection with
making any Repurchase Offer, such laws, rules, regulations and procedures shall
govern the making of such Repurchase Offer.
(i) DEFAULT. Notwithstanding any other provision of this Warrant
Agreement, if a Repurchase Event occurs and the Company (or its successor) shall
fail to make a Repurchase Offer pursuant to this Section 2.05, or if the Company
(or its successor) shall fail to purchase the Warrants pursuant to the
Repurchase Offer in accordance with the provisions of this Section 2.05 (each
such event, a "DEFAULT"), then the holders of the Warrants may pursue any
available remedy to collect the Repurchase Price or to enforce the performance
of any provision of this Warrant Agreement. A delay or omission by any Holder of
a Warrant in exercising, or a failure to exercise, any right or remedy arising
out of a Default shall not impair the right or remedy or constitute a waiver of
or acquiescence in the Default. All remedies are cumulative to the extent
permitted by law.
ARTICLE III. OTHER PROVISIONS RELATING TO
RIGHTS OF HOLDERS OF WARRANTS
SECTION 3.01. ENFORCEMENT OF RIGHTS. (a) Notwithstanding any of the
provisions of this Agreement, any holder of any Warrant Certificate, without the
consent of the Warrant Agent, the holder of any Warrant Shares or the holder of
any other Warrant Certificate, may, in and for his own behalf, enforce, and may
institute and maintain any suit, action or proceeding against the Company
suitable to enforce, his right to exercise the Warrant or Warrants evidenced by
his Warrant Certificate in the manner provided in such Warrant Certificate and
in this Agreement.
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(b) Neither the Warrants nor any Warrant Certificate shall entitle the
holders thereof to any of the rights of shareholders of the Company, including,
without limitation, the right to vote or to receive any dividends or other
payments or to consent or to receive notice as shareholders in respect of the
meetings of shareholders or for the election of directors of the Company or any
other matter, or any rights whatsoever as shareholders of the Company, except as
expressly provided in Section 5.03 hereof.
SECTION 3.02. OBTAINING STOCK EXCHANGE LISTINGS. The Company will from
time to time take all action which may be necessary so that the Warrant Shares,
immediately upon their issuance upon the exercise of Warrants, will be listed on
the principal securities exchanges and markets within the United States
(including the Nasdaq National Market), if any, on which other shares of Common
Stock are then listed, if any.
ARTICLE IV. CERTAIN COVENANTS OF THE COMPANY
SECTION 4.01. PAYMENT OF TAXES. The Company will pay all documentary
stamp taxes attributable to the initial issuance of Warrants and of the Warrant
Shares upon the exercise of Warrants; PROVIDED, HOWEVER, that the Company shall
not be required to pay any tax or other governmental charge which may be payable
in respect of any transfer or exchange of any Warrant Certificates or any
certificates for Warrant Shares in a name other than the registered holder of a
Warrant Certificate surrendered upon the exercise of a Warrant. In any such
case, no transfer or exchange shall be made unless or until the person or
persons requesting issuance thereof shall have paid to the Company the amount of
such tax or other governmental charge or shall have established to the
satisfaction of the Company that such tax or other governmental charge has been
paid or an exemption is available therefrom.
SECTION 4.02. RULES 144 AND 144A. The Company covenants that it will file
the reports required to be filed by it under the Securities Act and the Exchange
Act and the rules, regulations and policies adopted by the Securities and
Exchange Commission thereunder in a timely manner in accordance with the
requirements of the Securities Act and the Exchange Act and, if at any time the
Company is not required to file such reports, it will mail to each owner or
beneficial owner of Warrants, such information as is referred to in Rule
144A(d)(4) under the Securities Act.
SECTION 4.03. FORM OF INITIAL PUBLIC EQUITY OFFERING. The Company agrees
that it will not make an Initial Public Equity Offering of any class or series
of its Capital Stock (as defined below) (other than the class of Capital Stock
into which the Warrants are then exercisable) without (a) adopting any
amendments to the terms of the Company's articles of incorporation that may be
necessary to provide that the Warrant Shares are convertible into such class or
series of Capital Stock subject to the Initial Public Equity Offering (the
"SUBJECT CLASS") on a share-for-share basis or other equitable basis and that
the rights, conditions and privileges of the Subject Class shall not be adverse
to the holders of the Warrant Shares and (b) offering to holders of the Warrants
the right to convert their Warrants into warrants to purchase shares of the
Subject Class on a share-for-share
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basis or other equitable basis. Such conversion rights shall be on terms and
conditions determined by the Company's Board of Directors in it sole discretion
to be fair and reasonable.
"CAPITAL STOCK" means, with respect to any Person, any and all shares,
interests, partnership interests, participations, rights in or other equivalents
(however designated and whether voting or non-voting) of, such person's capital
stock, and any rights (other than debt securities convertible into capital
stock), warrants or options exchangeable for or convertible into such capital
stock whether outstanding on the Issue Date or issued after the Issue Date.
"INITIAL PUBLIC EQUITY OFFERING" means a primary public offering (whether
or not underwritten, but excluding any offering pursuant to Form S-8 or F-8
under the Securities Act or any other publicly registered offering pursuant to
the Securities Act pertaining to an issuance of shares of Common Stock or
securities exercisable therefor under any benefit plan, employee compensation
plan, or employee or director stock purchase plan or pertaining to debt
securities) of Capital Stock pursuant to an effective registration statement
under the Securities Act.
SECTION 4.04. SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. The
Company agrees to comply with all applicable laws, including the Securities Act
and any applicable state securities laws, in connection with the offer and sale
of Common Stock (and other securities and property deliverable) upon exercise of
the Warrants.
SECTION 4.05. RESOLUTION OF PREEMPTIVE RIGHTS IF ANY. The Warrant Shares
shall not be subject to any preemptive or similar rights.
ARTICLE V. ADJUSTMENTS
SECTION 5.01. ADJUSTMENT OF EXERCISE RATE; NOTICES. The Exercise Rate is
subject to adjustment from time to time as provided in this Section.
(a) ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If, after the Issue Date,
the Company:
(i) pays a dividend or makes a distribution on shares of its Common
Stock payable in shares of its Common Stock or any other Capital
Stock of the Company (other than any such dividend to the extent
covered by Section 5.03);
(ii) subdivides or splits any of its outstanding shares of Common Stock
into a greater number of shares;
(iii) combines any of its outstanding shares of Common Stock into a
smaller number of shares; or
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(iv) issues by reclassification of any of its Common Stock any shares of
any of its Capital Stock;
then the Exercise Rate in effect immediately prior to such action for each
Warrant then outstanding shall be adjusted so that the holder of a Warrant
thereafter exercised may receive the number of shares of Capital Stock of the
Company which such holder would have owned immediately following such action if
such holder had exercised the Warrant immediately prior to such action or
immediately prior to the record date applicable thereto, if any (regardless of
whether the Warrants then outstanding are then exercisable and without giving
effect to the Cashless Exercise option). If there are no outstanding shares of
Common Stock that are of the same class as the Warrant Shares at the time of any
such action and such action has therefore been taken only in respect of shares
of another class of Common Stock, such adjustment shall relate to the Warrant
Shares as Warrant Shares (and not in the form of shares of Common Stock) if it
would not frustrate the intent and purposes of this Section 5.01.
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification. In the event that
such dividend or distribution is not so paid or made or such subdivision,
combination or reclassification is not effected, the Exercise Rate shall again
be adjusted to be the Exercise Rate which would then be in effect if such record
date or effective date had not been so fixed.
If, after an adjustment, a holder of a Warrant, upon exercise of such
Warrant, may receive shares of two or more classes of Capital Stock of the
Company, then the Exercise Rate shall thereafter be subject to adjustment upon
the occurrence of an action taken with respect to any such class of Capital
Stock as is contemplated by this Article V with respect to the Common Stock, on
terms comparable to those applicable to Common Stock in this Article V.
(b) ADJUSTMENT FOR SALE OF COMMON STOCK BELOW CURRENT MARKET VALUE.
If, after the Issue Date, the Company grants or sells to any Person any Common
Stock or any securities convertible into or exchangeable or exercisable for any
Common Stock (other than (1) pursuant to the exercise of the Warrants, (2)
pursuant to any security convertible into, or exchangeable or exercisable for,
shares of Common Stock outstanding as of the Issue Date (to the extent in
accordance with the terms of such securities as in effect on such date), (3)
upon the conversion, exchange or exercise of any convertible, exchangeable or
exercisable security as to which upon the issuance thereof an adjustment
pursuant to this Article V has been made or which did not require any adjustment
pursuant to this Article V, (4) with respect to any transaction or adjustment
described in subsections (a) or (d) of this section 5.01 or (5) pursuant to the
issuance of warrants to purchase up to 290,000 shares of Common Stock at an
exercise price no less than $4.45 per share to any Person from which the Company
obtains lease financing subsequent to the date hereof) at a price below the then
Current Market Value (calculated as set forth in paragraph (1) of this Section
5.01), the Exercise Rate for each Warrant then outstanding shall be adjusted in
accordance with the formula:
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E(1)=Ex (O+N)
-----------
(O+(NxP/M))
where:
E(1) = the adjusted Exercise Rate for each Warrant then outstanding;
E = the then current Exercise Rate for each Warrant then outstanding;
O = the number of shares of Common Stock outstanding immediately prior
to the sale of Common Stock or issuance of securities convertible,
exchangeable or exercisable for Common Stock;
N = the number of shares of Common Stock so sold or the maximum stated
number of shares of Common Stock issuable upon the conversion,
exchange or exercise of any such convertible, exchangeable or
exercisable securities, as the case may be;
P = the proceeds per share of Common Stock received by the Company,
which (i) in the case of shares of Common Stock is the amount
received by the Company in consideration for the sale and issuance
of such shares; and (ii) in the case of securities convertible into
or exchangeable or exercisable for shares of Common Stock is the
amount received by the Company in consideration for the sale and
issuance of such convertible or exchangeable or exercisable
securities, plus the minimum aggregate amount of additional
consideration, other than the surrender of such convertible or
exchangeable securities, payable to the Company upon exercise,
conversion or exchange thereof; and
M = the Current Market Value as of the Time of Determination (as
defined herein) or at the time of sale, as the case may be,
calculated as set forth in paragraph (1) of this Section 5.01.
The adjustment shall become effective immediately after the record date for
the determination of shareholders entitled to receive the rights, warrants or
options to which this paragraph (b) applies or upon consummation of the sale of
Common Stock, as the case may be. To the extent that shares of Common Stock are
not delivered after the expiration of such rights or warrants, the Exercise Rate
for each Warrant then outstanding shall be readjusted to the Exercise Rate which
would otherwise be in effect had the adjustment made upon the issuance of such
rights or warrants been made on the basis of delivery of only the number of
shares of Common Stock actually delivered. In the event that such rights or
warrants are not so issued, the Exercise Rate for each Warrant then outstanding
shall again be adjusted to be the Exercise Rate which would then be in effect if
such date fixed for determination of shareholders entitled to receive such
rights or warrants had not been so fixed.
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No adjustment shall be made under this paragraph (b) if the application of
the formula stated above in this paragraph (b) would result in a value of E1
that is lower than the value of E.
No adjustment in the Exercise Rate shall be made under this paragraph (b)
upon the conversion, exchange or exercise of options to acquire shares of Common
Stock by officers, directors or employees of the Company; provided that the
exercise price of such options, at the time of issuance thereof, is at least
equal to the then Current Market Value of the Common Stock underlying such
options.
"ISSUE DATE" means the date of the Indenture.
(c) NOTICE OF ADJUSTMENT. Whenever the Exercise Rate is adjusted, the
Company shall promptly mail to holders of Warrants then outstanding at the
addresses appearing on the Warrant Register a notice of the adjustment. The
Company shall file with the Warrant Agent and any other Registrar such notice
and a certificate from the Company's independent public accountants briefly
stating the facts requiring the adjustment and the manner of computing it. The
certificate shall be conclusive evidence that the adjustment is correct. Neither
the Warrant Agent nor any such Registrar shall be under any duty or
responsibility with respect to any such certificate except to exhibit the same
during normal business hours to any holder desiring inspection thereof. Unless
and until the Warrant Agent shall receive such certificate, it may assume
without inquiry that there has not been any adjustment of the Exercise Rate and
that the last Exercise Rate of which it has knowledge remains in effect.
(d) REORGANIZATION OF COMPANY; SPECIAL DISTRIBUTIONS.
(i) If the Company, in a single transaction or through a series of
related transactions, consolidates with or merges with or into any
other person or sells, assigns, transfers, leases, conveys or
otherwise disposes of all or substantially all of its properties and
assets to another person or group of affiliated persons or is a
party to a merger or binding share exchange which reclassifies or
changes its outstanding Common Stock (a "FUNDAMENTAL TRANSACTION"),
as a condition to consummating any such transaction the person
formed by or surviving any such consolidation or merger if other
than the Company or the person to whom such transfer has been made
(the "SURVIVING PERSON") shall enter into a supplemental warrant
agreement. The supplemental warrant agreement shall provide (A)
that the holder of a Warrant then outstanding may exercise it for
the kind and amount of capital stock or other securities or property
which such holder would have received immediately after the
Fundamental Transaction if such holder had exercised the Warrant
immediately before the effective date of the Fundamental Transaction
(whether or not the Warrants were then exercisable and without
giving effect to the Cashless Exercise option); it being understood
that the Warrants will remain exercisable only in accordance with
their terms so that conditions to exercise will remain applicable,
such as payment of Exercise Price, assuming (to the extent
applicable) that such holder (i) was not a
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constituent person or an affiliate of a constituent person to such
transaction, (ii) made no election with respect thereto, and (iii)
was treated alike with the plurality of non-electing holders, and
(B) that the Surviving Person shall succeed to and be substituted to
every right and obligation of the Company in respect of this
Agreement and the Warrants. The supplemental warrant agreement shall
provide for adjustments which shall be as nearly equivalent as may
be practicable to the adjustments provided for in this Article V.
The Surviving Person shall mail to holders of Warrants at the
addresses appearing on the Warrant Register a notice briefly
describing the supplemental warrant agreement. If the issuer of
securities deliverable upon exercise of Warrants is an affiliate of
the Surviving Person, that issuer shall join in the supplemental
warrant agreement.
(ii) Notwithstanding the foregoing, if the Company enters into a
Fundamental Transaction with another Person (other than a subsidiary
of the Company) and consideration is payable to holders of shares of
Capital Stock (or other securities or property) issuable or,
deliverable upon exercise of the Warrants in connection with such
Fundamental Transaction which consists solely of cash, or in the
event of the dissolution, liquidation or winding-up of the Company,
then the holders of Warrants shall be entitled to receive
distributions on the date of such event on an equal basis with
holders of such shares (or other securities) issuable upon exercise
of the Warrants as if the Warrants had been exercised immediately
prior to such event, less the aggregate Exercise Price therefor. If
the Company has made a Repurchase Offer that has not expired at the
time of such transaction, the holders of the Warrants will be
entitled to receive the higher of (i) the amount payable to the
holders of the Warrants described above and (ii) the Repurchase
Price payable to the holders of the Warrants pursuant to such
Repurchase Offer. Upon receipt of such payment, if any, the rights
of a holder of such Warrant shall terminate and cease and such
holder's Warrants shall expire.
(iii) If this paragraph (d) applies, it shall supersede the application of
paragraph (a) of this Section 5.01.
(iv) In case of any Fundamental Transaction, the surviving or acquiring
person and, in the event of any dissolution, liquidation or
winding-up of the Company, the Company shall deposit promptly with
the Warrant Agent the funds, if any, necessary to pay to the holders
of the Warrants. After such funds and the surrendered Warrant
Certificate are received, the Warrant Agent shall make payment by
delivering a check in such amount as is appropriate (or, in the case
of consideration other than cash, such other consideration as is
appropriate) to such person or persons as it may be directed in
writing by the holders surrendering such Warrants.
(e) COMPANY DETERMINATION FINAL. Any determination that the Company or
the board of directors of the Company must make pursuant to this Article V shall
be conclusive.
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(f) WARRANT AGENT'S ADJUSTMENT DISCLAIMER. The Warrant Agent shall
have no duty to determine when an adjustment under this Article V should be
made, how it should be made or what it should be. The Warrant Agent shall have
no duty to determine whether a supplemental warrant agreement under paragraph
(d) need be entered into or whether any provisions of any supplemental warrant
agreement are correct. The Warrant Agent shall not be accountable for and makes
no representation as to the validity or value of any securities or assets issued
upon exercise of Warrants. The Warrant Agent shall not be responsible for the
Company's failure to comply with this Article V.
(g) ADJUSTMENT FOR TAX PURPOSES. The Company may make such increases
in the Exercise Rate, in addition to those otherwise required by this Section,
as it considers to be advisable in order that any event treated for Federal
income tax purposes as a dividend of stock or stock rights shall not be taxable
to the recipients.
(h) UNDERLYING WARRANT SHARES. The Company shall at all times reserve
and keep available, out of its authorized but unissued Common Stock or Common
Stock held in the treasury of the Company, for the purpose of effecting the
exercise of Warrants, the full number of Warrant Shares then deliverable upon
the exercise of all Warrants then outstanding and payment of the exercise price,
and the shares so deliverable shall be duly and validly issued, fully paid and
nonassessable, free of preemptive rights and free from all taxes, liens, charges
and security interests.
(i) SPECIFICITY OF ADJUSTMENT. Regardless of any adjustment in the
number or kind of shares purchasable upon the exercise of the Warrants, Warrant
Certificates theretofore or thereafter issued may continue to express the same
number and kind of Warrant Shares per Warrant as are stated on the Warrant
Certificates initially issuable pursuant to this Agreement.
(j) VOLUNTARY ADJUSTMENT. The Company from time to time may increase
the Exercise Rate by any number and for any period of time (provided that such
period is not less than 20 Business Days). Whenever the Exercise Rate is so
increased, the Company shall mail to holders at the addresses appearing on the
Warrant Register and file with the Warrant Agent a notice of the increase. The
Company shall give the notice at least 15 days before the date the increased
Exercise Rate takes effect. The notice shall state the increased Exercise Rate
and the period it will be in effect. A voluntary increase in the Exercise Rate
shall not change or adjust the Exercise Rate otherwise in effect as determined
by this Section 5.01.
(k) MULTIPLE ADJUSTMENTS. After an adjustment to the Exercise Rate for
outstanding Warrants under this Article V, any subsequent event requiring an
adjustment under this Article V shall cause an adjustment to the Exercise Rate
for outstanding Warrants as so adjusted.
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(1) DEFINITIONS.
"CURRENT MARKET VALUE" per share of Common Stock of the Company or
any other security at any date shall mean:
(i) if the security is not registered under the Exchange Act, (a) the
value of the security, determined in good faith by the board of
directors of the Company and certified in a board resolution, based
on the most recently completed arm's-length transaction between the
Company and a person other than an Affiliate of the Company and the
closing of which occurs on such date or shall have occurred within
the six-month period preceding such date, or (b) if no such
transaction shall have occurred on such date or within such
six-month period, the fair market value of the security as
determined by an Independent Financial Expert (as defined herein)
(provided that, in the case of the calculation of Current Market
Value for determining the cash value of fractional shares, any such
determination within six months that is, in the good faith judgment
of the Board, a reasonable determination of value, may be utilized),
(ii) (a) if the security is registered under the Exchange Act, the
average of the daily closing sales prices of the securities for the
20 consecutive trading days immediately preceding such date, or (b)
if the security has been registered under the Exchange Act for less
than 20 consecutive trading days before such date, then the average
of the daily closing sales prices for all of the trading days before
such date for which closing sales prices are available, in the case
of each of (ii)(a) and (ii)(b), as certified to the Warrant Agent by
the president, any vice president or the chief financial officer of
the Company. The closing sales price for each such trading day shall
be: (A) in the case of a security listed or admitted to trading on
any U.S. national securities exchange or quotation system, the
closing sales price, regular way, on such day, or if no sale takes
place on such day, the average of the closing bid and asked prices
on such day, (B) in the case of a security not then listed or
admitted to trading on any U.S. national securities exchange or
quotation system, the last reported sale price on such day, or if no
sale takes place on such day, the average of the closing bid and
asked prices on such day, as reported by a reputable quotation
source designated by the Company, (C) in the case of a security not
then listed or admitted to trading on any U.S. national securities
exchange or quotation system and as to which no such reported sale
price or bid and asked prices are available, the average of the
reported high bid and low asked prices on such day, as reported by a
reputable quotation service, or a newspaper of general circulation
in the Borough of Manhattan, The City and State of New York
customarily published on each Business Day, designated by the
Company, or, if there shall be no bid and asked prices on such day,
the average of the high bid and low asked prices, as so reported, on
the most recent day (not more than 30 days prior to the date in
question) for which prices have been so reported and (D) if there
are not bid and asked prices reported during the 30 days
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prior to the date in question, the Current Market Value shall be
determined as if the securities were not registered under the
Exchange Act, and
(iii) notwithstanding the above subsections (i) and (ii), in the case of
stock options granted to any employee, officer or director of the
Company pursuant to a stock option plan of the Company, the fair
value of such options determined in good faith by the board of
directors of the Company.
"INDEPENDENT FINANCIAL EXPERT" means any Person listed on Appendix A hereto
(i) that does not (and whose directors, executive officers and 5% stockholders
do not) have a direct or indirect financial interest in the Company or any of
its subsidiaries or Affiliates and (ii) that has not been for at least five
years and, at the time that it is called upon to give independent financial
advice to the Company, is not (and none of its directors, executive officers or
5% stockholders is) a promoter, director or officer of the Company or any of its
subsidiaries or Affiliates.
"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof or any other entity, including any predecessor of any such entity.
"TIME OF DETERMINATION" means, (i) in the case of any distribution of
securities or other property to existing shareholders to which paragraph (b)
applies, the time and date of the determination of shareholders entitled to
receive such securities or property or (ii) in the case of any other issuance
and sale to which paragraph (b) applies, the time and date of such issuance or
sale.
(m) WHEN DE MINIMIS ADJUSTMENT MAY BE DEFERRED. No adjustment in the
Exercise Rate need be made unless the adjustment would require an increase of at
least 1 % in the Exercise Rate. Any adjustments that are not made shall be
carried forward and taken into account in any subsequent adjustments. All
calculations under this Article V shall be made to the nearest l/l000th of a
share.
SECTION 5.02. FRACTIONAL WARRANT SHARES. The Company shall not be required
to issue fractional Warrant Shares upon exercise of the Warrants or distribute
Warrant Certificates that evidence fractional Warrant Shares. In the event a
holder is required by Section 2.02(c) to make a Cashless Exercise, the number of
Warrant Shares issuable shall be rounded up to the nearest whole number. In
addition, in no event shall any holder of Warrants be required to make any
payment of a fractional cent. In lieu of fractional Warrant Shares, there shall
be paid to the registered holders of Warrant Certificates at the time Warrants
evidenced thereby are exercised as herein provided an amount in cash equal to
the same fraction of the Current Market Value per Warrant Share on the Business
Day preceding the date the Warrant Certificates evidencing such Warrants are
surrendered for exercise. Such payments shall be made by check or by transfer to
an account maintained by such registered holder with a bank in The City of New
York. If any holder surrenders for exercise more than one Warrant Certificate,
the number of Warrant Shares deliverable to such holder may, at the
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option of the Company, be computed on the basis of the aggregate amount of all
the Warrants exercised by such holder.
SECTION 5.03. CERTAIN DISTRIBUTIONS. If at any time after the
Exercisability Date, the Company grants, issues or sells at a price lower than
Current Market Value options, convertible securities, or rights to purchase
Capital Stock, warrants or other securities PRO RATA to the record holders of
Common Stock (the "DISTRIBUTION RIGHTS") or, without duplication, makes any
dividend or otherwise makes any distribution, including (subject to applicable
law) pursuant to any plan of liquidation ("DISTRIBUTION") on shares of any
Common Stock (whether in cash, property, evidences of indebtedness or
otherwise), then the Company shall grant, issue, sell or make to each registered
holder of Warrants then outstanding the aggregate Distribution Rights or
Distribution, as the case may be, which such holder would have acquired if such
holder had held the maximum number of shares of Common Stock acquirable upon
complete exercise of each holder's Warrants (regardless of whether the Warrants
are then exercisable and without giving effect to the Cashless Exercise option)
immediately before the record date for the grant, issuance or sale of such
Distribution Rights or Distribution, as the case may be, or, if there is no such
record date, the date as of which the record holders of Common Stock are to be
determined for the grant, issue or sale of such Distribution Rights or
Distribution, as the case may be.
ARTICLE VI. CONCERNING THE WARRANT AGENT
SECTION 6.01. WARRANT AGENT. The Company hereby appoints State Street
Bank and Trust Company of California, N.A. as Warrant Agent of the Company in
respect of the Warrants and the Warrant Certificates upon the terms and subject
to the conditions set forth herein and in the Warrant Certificates; and State
Street Bank and Trust Company of California, N.A. hereby accepts such
appointment. The Warrant Agent shall have the powers and authority specifically
granted to and conferred upon it in the Warrant Certificates and hereby and such
further powers and authority to act on behalf of the Company as the Company may
hereafter grant to or confer upon it and it shall accept in writing. All of the
terms and provisions with respect to such powers and authority contained in the
Warrant Certificates are subject to and governed by the terms and provisions
hereof. The Warrant Agent may act through agents and shall not be responsible
for the misconduct or negligence of any such agent appointed with due care.
SECTION 6.02. CONDITIONS OF WARRANT AGENT'S OBLIGATIONS. The Warrant
Agent accepts its obligations herein set forth upon the terms and conditions
hereof and in the Warrant Certificates, including the following, to all of which
the Company agrees and to all of which the rights hereunder of the holders from
time to time of the Warrant Certificates shall be subject:
(a) The Warrant Agent shall be entitled to compensation to be agreed
upon with the Company in writing for all services rendered by it and the Company
agrees promptly to pay such compensation and to reimburse the Warrant Agent for
its reasonable out-of-pocket expenses (including reasonable fees and expenses of
counsel) incurred without gross negligence or willful
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misconduct on its part in connection with the services rendered by it hereunder.
The Company also agrees to indemnify the Warrant Agent and any predecessor
Warrant Agent, their directors, officers, affiliates, agents and employees for,
and to hold them and their directors, officers, affiliates, agents and employees
harmless against, any loss, liability or expense of any nature whatsoever
(including, without limitation, reasonable fees and expenses of counsel)
incurred without gross negligence or willful misconduct on the part of the
Warrant Agent, arising out of or in connection with its acting as such Warrant
Agent hereunder and its exercise of its rights and performance of its
obligations hereunder. The obligations of the Company under this Section 6.02
shall survive the exercise and the expiration of the Warrant Certificates and
the resignation and removal of the Warrant Agent.
(b) In acting under this Agreement and in connection with the Warrant
Certificates, the Warrant Agent is acting solely as agent of the Company and
does not assume any obligation or relationship of agency or trust for or with
any of the owners or holders of the Warrant Certificates.
(c) The Warrant Agent may consult with counsel of its selection and any
advice or written opinion of such counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in accordance with such advice or opinion.
(d) The Warrant Agent shall be fully protected and shall incur no
liability for or in respect of any action taken or omitted to be taken or thing
suffered by it in reliance upon any Warrant Certificate, notice, direction,
consent, certificate, affidavit, opinion of counsel, instruction, statement or
other paper or document reasonably believed by it to be genuine and to have been
presented or signed by the proper parties.
(e) The Warrant Agent, and its officers, directors, affiliates and
employees ("RELATED PARTIES"), may become the owners of, or acquire any interest
in, Warrant Certificates, shares or other obligations of the Company with the
same rights that it or they would have if it were not the Warrant Agent
hereunder and, to the extent permitted by applicable law, it or they may engage
or be interested in any financial or other transaction with the Company and may
act on, or as depositary, trustee or agent for, any committee or body of holders
of shares or other obligations of the Company as freely as if it were not the
Warrant Agent hereunder. Nothing in this Agreement shall be deemed to prevent
the Warrant Agent or such Related Parties from acting in any other capacity for
the Company.
(f) The Warrant Agent shall not be under any liability for interest on,
and shall not be required to invest, any monies at any time received by it
pursuant to any of the provisions of this Agreement or of the Warrant
Certificates.
(g) The Warrant Agent shall not be under any responsibility in respect
of the validity of this Agreement (or any term or provision hereof) or the
execution and delivery hereof (except the due execution and delivery hereof by
the Warrant Agent) or in respect of the validity or execution of any Warrant
Certificate (except its authentication thereof).
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(h) The recitals and other statements contained herein and in the
Warrant Certificates (except as to the Warrant Agent's authentication thereon)
shall be taken as the statements of the Company, and the Warrant Agent assumes
no responsibility for the correctness of the same. The Warrant Agent does not
make any representation as to the validity or sufficiency of this Agreement or
the Warrant Certificates, except for its due execution and delivery of this
Agreement; provided, however, that the Warrant Agent shall not be relieved of
its duty to authenticate the Warrant Certificates as authorized by this
Agreement. The Warrant Agent shall not be accountable for the use or application
by the Company of the proceeds of the exercise of any Warrant.
(i) Before the Warrant Agent acts or refrains from acting with respect
to any matter contemplated by this Warrant Agreement, it may require:
(1) an Officers' Certificate (as defined in the Indenture) stating on
behalf of the Company that, in the opinion of the signers, all
conditions precedent, if any, provided for in this Warrant Agreement
relating to the proposed action have been complied with; and
(2) if reasonably necessary in the sole judgment of the Warrant Agent,
an opinion of counsel for the Company stating that, in the opinion
of such counsel, all such conditions precedent have been complied
with, provided that such matter is one customarily opined upon by
counsel.
Each Officers' Certificate or, if requested, an opinion of counsel with
respect to compliance with a condition or covenant provided for in this Warrant
Agreement shall include:
(1) a statement that the person making such certificate or opinion has
read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in
such certificate or opinion are based;
(3) a statement that, in the opinion of such person, he or she has made
such examination or investigation as is necessary to enable him or
her to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(4) a statement as to whether or not, in the opinion of such person,
such condition or covenant has been complied with.
(j) The Warrant Agent shall be obligated to perform such duties as are
specifically set forth herein and in the Warrant Certificates, and no implied
duties or obligations shall be read into this Agreement or the Warrant
Certificates against the Warrant Agent. The Warrant Agent shall not be
accountable or under any duty or responsibility for the use by the Company of
any of the Warrant Certificates duly authenticated by the Warrant Agent and
delivered by it to the Company
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pursuant to this Agreement. The Warrant Agent shall have no duty or
responsibility in case of any default by the Company in the performance of its
covenants or agreements contained in the Warrant Certificates or in the case of
the receipt of any written demand from a holder of a Warrant Certificate with
respect to such default, including, without limiting the generality of the
foregoing, any duty or responsibility to initiate or attempt to initiate any
proceedings at law or otherwise or, except as provided in Section 7.02 hereof,
to make any demand upon the Company.
(k) Unless otherwise specifically provided herein, any order,
certificate, notice, request, direction or other communication from the Company
made or given under any provision of this Agreement shall be sufficient if
signed by the chairman or a co-chairman of the board, the president, the chief
financial officer, any executive vice president or any senior vice president of
the Company signing alone, or by any vice president signing together with the
secretary, any assistant secretary, the treasurer, or any assistant treasurer of
the Company.
(l) The Warrant Agent shall have no responsibility in respect of any
adjustment pursuant to Article V hereof.
(m) The Company agrees that it will perform, execute, acknowledge and
deliver, or cause to be performed, executed, acknowledged and delivered, all
such further and other acts, instruments and assurances as may reasonably be
required by the Warrant Agent for the carrying out or performing by the Warrant
Agent of the provisions of this Agreement.
(n) The Warrant Agent is hereby authorized and directed to accept
written instructions with respect to the performance of its duties hereunder
from any one of the chairman or a co-chairman of the board, the president, the
chief financial officer, any executive vice president or any senior vice
president alone, or any vice president together with the secretary, assistant
secretary, the treasurer or any assistant treasurer, of the Company or any other
officer or official of the Company reasonably believed to be authorized to give
such instructions and to apply to such officers or officials for advice or
instructions in connection with its duties, and it shall not be liable for any
action taken or suffered to be taken by it in good faith in accordance with
instructions with respect to any matter arising in connection with the Warrant
Agent's duties and obligations arising under this Agreement. Such application by
the Warrant Agent for written instructions from the Company may, at the option
of the Warrant Agent, set forth in writing any action proposed to be taken or
omitted by the Warrant Agent with respect to its duties or obligations under
this Agreement and the date on or after which such action shall be taken and the
Warrant Agent shall not be liable for any action taken or omitted in accordance
with a proposal included in any such application on or after the date specified
therein (which date shall be not less than 10 Business Days after the Company
receives such application unless the Company consents to a shorter period);
provided that (i) such application includes a statement to the effect that it is
being made pursuant to this paragraph (n) and that unless objected to prior to
such date specified in the application, the Warrant Agent will not be liable for
any such action or omission to the extent set forth in this paragraph (n) and
(ii) prior to taking or omitting any such action, the Warrant Agent has not
received written instructions objecting to such proposed action or omission.
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(o) Whenever in the performance of its duties under this Agreement the
Warrant Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed on behalf of the Company by any one of the
chairman of the board of directors, the president, the treasurer, the
controller, any vice president or the secretary or assistant secretary of the
Company or any other officer or official of the Company reasonably believed to
be authorized to give such instructions and delivered to the Warrant Agent; and
such certificate shall be full authorization to the Warrant Agent for any action
taken or suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(p) The Warrant Agent shall not be required to risk or expend its own
funds in the performance of its obligations and duties hereunder.
SECTION 6.03. RESIGNATION AND APPOINTMENT OF SUCCESSOR. (a) The Company
agrees, for the benefit of the holders from time to time of the Warrant
Certificates, that there shall at all times be a Warrant Agent hereunder.
(b) The Warrant Agent may at any time resign as Warrant Agent by giving
written notice to the Company of such intention on its part, specifying the date
on which its desired resignation shall become effective; PROVIDED, HOWEVER, that
such date shall be at least 60 days after the date on which such notice is given
unless the Company agrees to accept less notice. Upon receiving such notice of
resignation, the Company shall promptly appoint a successor Warrant Agent,
qualified as provided in Section 6.03(d) hereof, by written instrument in
duplicate signed on behalf of the Company, one copy of which shall be delivered
to the resigning Warrant Agent and one copy to the successor Warrant Agent. As
provided in Section 6.03(d) hereof, such resignation shall become effective upon
the earlier of (x) the acceptance of the appointment by the successor Warrant
Agent or (y) 60 days after receipt by the Company of notice of such resignation.
The Company may, at any time and for any reason, and shall, upon any event set
forth in the next succeeding sentence, remove the Warrant Agent and appoint a
successor Warrant Agent by written instrument in duplicate, specifying such
removal and the date on which it is intended to become effective, signed on
behalf of the Company, one copy of which shall be delivered to the Warrant Agent
being removed and one copy to the successor Warrant Agent. The Warrant Agent
shall be removed as aforesaid if it shall become incapable of acting, or shall
be adjudged a bankrupt or insolvent, or a receiver of the Warrant Agent or of
its property shall be appointed, or any public officer shall take charge or
control of it or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation. Any removal of the Warrant Agent and any
appointment of a successor Warrant Agent shall become effective upon acceptance
of appointment by the successor Warrant Agent as provided in Section 6.03(d). As
soon as practicable after appointment of the successor Warrant Agent, the
Company shall cause written notice of the change in the Warrant Agent to be
given to each of the registered holders of the Warrants in the manner provided
for in Section 7.04 hereof.
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<PAGE>
(c) Upon resignation or removal of the Warrant Agent, if the Company
shall fail to appoint a successor Warrant Agent within a period of 60 days after
receipt of such notice of resignation or removal, then the holder of any Warrant
Certificate or the retiring Warrant Agent may apply to a court of competent
jurisdiction for the appointment of a successor to the Warrant Agent. Pending
appointment of a successor to the Warrant Agent, either by the Company or by
such a court, the duties of the Warrant Agent shall be carried out by the
Company.
(d) Any successor Warrant Agent, whether appointed by the Company or by
a court, shall be a bank or trust company in good standing, incorporated under
the laws of the United States of America or any State thereof and having (or, in
the case of a Warrant Agent that is an affiliate of a bank holding company, such
bank holding company shall have), at the time of its appointment, a combined
capital surplus of at least $50 million. Such successor Warrant Agent shall
execute and deliver to its predecessor and to the Company an instrument
accepting such appointment hereunder and all the provisions of this Agreement,
and thereupon such successor Warrant Agent, without any further act, deed or
conveyance, shall become vested with all the rights, powers, duties and
obligations of its predecessor hereunder, with like effect as if originally
named as Warrant Agent hereunder, and such predecessor shall thereupon become
obligated to (i) transfer and deliver, and such successor Warrant Agent shall be
entitled to receive, all securities, records or other property on deposit with
or held by such predecessor as Warrant Agent hereunder and (ii) upon payment of
the amounts then due it pursuant to Section 6.02(a) hereof, pay over, and such
successor Warrant Agent shall be entitled to receive, all monies deposited with
or held by any predecessor Warrant Agent hereunder.
(e) Any corporation or bank into which the Warrant Agent hereunder may
be merged or converted, or any corporation or bank with which the Warrant Agent
may be consolidated, or any corporation or bank resulting from any merger,
conversion or consolidation to which the Warrant Agent shall be a party, or any
corporation or bank to which the Warrant Agent shall sell or otherwise transfer
all or substantially all of its corporate trust business, shall be the successor
to the Warrant Agent under this Agreement (provided that such corporation or
bank shall be qualified as aforesaid) without the execution or filing of any
document or any further act on the part of any of the parties hereto.
(f) No Warrant Agent under this Warrant Agreement shall be personally
liable for any action or omission of any successor Warrant Agent.
ARTICLE VII. MISCELLANEOUS
SECTION 7.01. AMENDMENT. This Agreement and the terms of the Warrants
may be amended by the Company and the Warrant Agent, without the consent of the
holder of any Warrant Certificate, for the purpose of curing any ambiguity, or
of curing, correcting or supplementing any defective or inconsistent provision
contained herein or therein, or to effect any assumptions of the Company's
obligations hereunder and thereunder by a successor corporation under certain
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circumstances or in any other manner which the Company may deem necessary or
desirable and which shall not adversely affect the interests of the holders of
the Warrant Certificates.
The Company and the Warrant Agent may amend, modify or supplement this
Agreement and the terms of the Warrants, and waivers to departures from the
terms hereof and thereof may be given, with the consent of the Requisite Warrant
Holders (as defined below) for the purpose of adding any provision to or
changing in any manner or eliminating any of the provisions of this Agreement or
modifying in any manner the rights of the holders of the outstanding Warrants.
"REQUISITE WARRANT HOLDERS" means (i) in the case of any amendment,
modification, supplement or waiver that does not affect Article IV hereof,
holders of a majority in number of the outstanding Warrants, voting separately
as a class, or (ii) in the case of any amendment, modification, supplement or
waiver that affects Article IV hereof, the holders of a majority of (x) the
Shares issued upon exercise of the Warrants that, at the date of determination,
are "restricted securities" within the meaning of the Securities Act and (y) of
the outstanding Warrants (treating for approval purposes each Warrant as
entitling the holder to a vote in an amount equal to the number of Shares
issuable upon exercise of such Warrant in full). Notwithstanding any other
provision of this Agreement, the Warrant Agent's consent must be obtained
regarding any supplement or amendment which alters the Warrant Agent's rights or
duties (it being expressly understood that the foregoing shall not be in
derogation of the right of the Company to remove the Warrant Agent in accordance
with Section 6.03 hereof). For purposes of any amendment, modification or waiver
hereunder, Warrants held by the Company or any of its Affiliates shall be
disregarded.
Any modification or amendment made in accordance with this Agreement will
be conclusive and binding on all present and future holders of Warrant
Certificates whether or not they have consented to such modification or
amendment or waiver and whether or not notation of such modification or
amendment is made upon such Warrant Certificates. Any instrument given by or on
behalf of any holder of a Warrant Certificate in connection with any consent to
any modification or amendment will be conclusive and binding on all subsequent
holders of such Warrant Certificate.
SECTION 7.02. NOTICES AND DEMANDS TO THE COMPANY AND WARRANT AGENT. If the
Warrant Agent shall receive any notice or demand addressed to the Company by the
holder of a Warrant Certificate pursuant to the provisions hereof or of the
Warrant Certificates, the Warrant Agent shall promptly forward such notice or
demand to the Company.
SECTION 7.03. ADDRESSES FOR NOTICES TO PARTIES AND FOR TRANSMISSION OF
DOCUMENTS. All notices hereunder to the parties hereto shall be deemed to have
been given when sent by certified or registered mail, postage prepaid, or by
facsimile transmission, confirmed by first class mail, postage prepaid,
addressed to any party hereto as follows:
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To the Company:
Rhythms NetConnections Inc.
7337 South Revere Parkway
Englewood, CO 80112-3931
Facsimile: (303) 706-4201
Attention: Chief Executive Officer
with copies to:
Brobeck Phleger & Harrison LLP
550 West "C" Street, Suite 1300
San Diego, CA 92101-3532
Facsimile: (619) 234-3848
Attention: John Denniston
To the Warrant Agent:
State Street Bank and Trust Company of California, N.A.
Library Tower
633 West 5th Street, 12th Floor
Los Angeles, CA 90071
Facsimile: (213) 362-7357
Attention: Corporate Trust Department (Rhythms NetConnections Inc.
Warrants)
or at any other address of which either of the foregoing shall have notified the
other in writing.
SECTION 7.04. NOTICES TO HOLDERS. Notices to holders of Warrants shall be
mailed to such holders at the addresses of such holders as they appear in the
Warrant Register. Any such notice shall be sufficiently given if sent by
first-class mail, postage prepaid to the address of such holder.
SECTION 7.05. APPLICABLE LAW. THIS AGREEMENT AND EACH WARRANT CERTIFICATE
ISSUED HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK.
SECTION 7.06. PERSONS HAVING RIGHTS UNDER AGREEMENT. Nothing in this
Agreement expressed or implied and nothing that may be inferred from any of the
provisions hereof is intended, or shall be construed, to confer upon, or give
to, any person or corporation other than the Company, the Warrant Agent and the
holders of the Warrant Certificates and the Warrant Shares any right, remedy or
claim under or by reason of this Agreement or of any covenant, condition,
stipulation, promise or agreement hereof; and all covenants, conditions,
stipulations, promises and agreements in this Agreement contained shall be for
the sole and exclusive benefit of the Company and the
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Warrant Agent and their successors and of the holders of the Warrant
Certificates and the Warrant Shares.
SECTION 7.07. HEADINGS. The descriptive headings of the several Articles
and Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
SECTION 7.08. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original; but
such counterparts shall together constitute but one and the same instrument.
SECTION 7.09. INSPECTION OF AGREEMENT. A copy of this Agreement shall be
available during regular business hours at the principal corporate trust office
of the Warrant Agent, for inspection by the holder of any Warrant Certificate.
The Warrant Agent may require such holder to submit his Warrant Certificate for
inspection by it.
SECTION 7.10. AVAILABILITY OF EQUITABLE REMEDIES. Since a breach of the
provisions of this Agreement could not adequately be compensated by money
damages, holders of Warrants shall be entitled, in addition to any other right
or remedy available to them, to an injunction restraining such breach or a
threatened breach and to specific performance of any such provision of this
Agreement, and in either case no bond or other security shall be required in
connection therewith, and the parties hereby consent to such injunction and to
the ordering of specific performance.
SECTION 7.11. OBTAINING OF GOVERNMENTAL APPROVALS. The Company will from
time to time take all action required to be taken by it which may be necessary
to obtain and keep effective any and all permits, consents and approvals of
governmental agencies and authorities and securities acts filings under U.S.
federal and state laws, and the rules and regulations of all stock exchanges on
which the Warrants may become listed, which may be or become requisite in
connection with the issuance, sale, transfer, and delivery of the Warrant
Certificates, the exercise of the Warrants or the issuance, sale, transfer and
delivery of the Warrant Shares issued upon exercise of the Warrants; provided,
however, that nothing in this Section 7.11 shall require the Company to take any
action with respect to federal securities laws and state "blue sky" or
securities laws that it would not be required to take pursuant to the Warrant
Registration Rights Agreement.
SECTION 7.12. REPORTS TO HOLDERS. At all times from and after the earlier
of (i) the date of effectiveness of a registration statement with respect to the
Notes and (ii) the Exercisability Date, whether or not the Company is then
required to file reports with the Securities and Exchange Commission, the
Company shall file with the Commission all such reports and other information it
would be required to file with the Securities and Exchange Commission by Section
13(a) or 15(d) under the Exchange Act if it were subject thereto. The Company
shall supply the Warrant Agent and each Holder or shall supply to the Warrant
Agent for forwarding to each such Holder, without cost to such Holder, copies of
such reports and other information. The Warrant Agent's receipt of such reports
and other information shall not constitute constructive notice of any
information contained
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<PAGE>
therein or determinable from information (including mathematical calculations)
contained therein, including the Company's compliance with any of its covenants
hereunder (as to which the Warrant Agent is entitled to rely exclusively on
Officers' Certificates). In addition, at all times prior to the earlier of (i)
the date of effectiveness of a registration statement with respect to the Notes
and (ii) the Exercisability Date, the Company shall, at its cost, deliver to
each holder of Warrants quarterly and annual reports substantially equivalent to
those that would be required by the Exchange Act if the Company were subject
thereto. In addition, at all times prior to the date that any registration
statement related to the Warrants is declared effective, upon the request of any
holder of Warrants or any prospective purchaser of the Warrants designated by a
holder of Warrants, the Company shall supply to such Holder or such prospective
purchaser the information required under Rule 144A.
[Signature Page Follows]
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IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the day and year first above written.
RHYTHMS NETCONNECTIONS INC.
By: /s/ Scott C. Chandler
---------------------------------------------------
Name: Scott C. Chandler
Title: Chief Financial Officer
STATE STREET BANK AND TRUST
COMPANY OF CALIFORNIA, N.A.,
Warrant Agent
By: /s/ Scott C. Emmons
---------------------------------------------------
Name: Scott C. Emmons
Title: Assistant Vice President
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<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
[FACE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE
OR OTHER SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS
ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B)
IT IS NOT A U.S. PERSON, IS NOT ACQUIRING THESE SECURITIES FOR THE ACCOUNT OR
BENEFIT OF A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES
THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) TAKING INTO
ACCOUNT THE PROVISIONS OF RULE 144(d), IF APPLICABLE, UNDER THE SECURITIES ACT
(THE "RESALE RESTRICTION TERMINATION DATE") RESELL OR OTHERWISE TRANSFER THE
WARRANTS REPRESENTED BY THIS CERTIFICATE EXCEPT (A) TO RHYTHMS NETCONNECTIONS
INC. (THE "COMPANY") OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL
BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) OUTSIDE THE
UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE
SECURITIES ACT, (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR (E) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (3) AGREES THAT THE WARRANTS
REPRESENTED BY THIS CERTIFICATE MAY NOT BE EXERCISED OR TRANSFERRED DURING THE
180-DAY PERIOD BEGINNING ON THE DAY OF THE COMPANY'S INITIAL PUBLIC OFFERING,
SUBJECT TO CERTAIN EXCEPTIONS, AND (4) AGREES THAT IT WILL DELIVER TO EACH
PERSON TO WHOM THE WARRANTS REPRESENTED BY THIS CERTIFICATE ARE TRANSFERRED A
NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE COMPANY AND
THE WARRANT AGENT SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER
(I) PURSUANT TO CLAUSE (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF
COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM,
AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF
TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED
AND DELIVERED BY THE TRANSFEROR TO THE WARRANT AGENT. THIS LEGEND WILL BE
REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE
A-1
<PAGE>
RESALE RESTRICTION TERMINATION DATE. HEDGING TRANSACTIONS INVOLVING THE WARRANTS
REPRESENTED HEREBY MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES
ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S.
PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES
ACT.
[THE WARRANTS EVIDENCED BY THIS CERTIFICATE ARE INITIALLY ISSUED AS PART OF AN
ISSUANCE OF UNITS, EACH OF WHICH CONSISTS OF $1,000 PRINCIPAL AMOUNT OF 13 1/2%
SENIOR DISCOUNT NOTES DUE 2008 OF RHYTHMS NETCONNECTIONS INC. (THE "NOTES") AND
FOUR WARRANTS, EACH INITIALLY ENTITLING THE HOLDER THEREOF TO PURCHASE 1.7
SHARES OF COMMON STOCK, PAR VALUE $0.001 PER SHARE, OF RHYTHMS NETCONNECTIONS
INC. PRIOR TO THE CLOSE OF BUSINESS UPON THE EARLIEST TO OCCUR OF: (i) NOVEMBER
1, 1998; (ii) THE DATE ON WHICH A REGISTRATION STATEMENT WITH RESPECT TO A
REGISTERED EXCHANGE OFFER FOR THE NOTES IS DECLARED EFFECTIVE UNDER THE
SECURITIES ACT; (iii) THE OCCURRENCE OF A CHANGE OF CONTROL (AS DEFINED IN THE
INDENTURE RELATING TO THE NOTES); AND (iv) SUCH EARLIER DATE AS DETERMINED BY
MERRILL LYNCH & CO. IN ITS SOLE DISCRETION, THE WARRANTS EVIDENCED BY THIS
CERTIFICATE MAY NOT BE TRANSFERRED OR EXCHANGED SEPARATELY FROM, BUT MAY BE
TRANSFERRED OR EXCHANGED ONLY TOGETHER WITH, THE NOTES.]*
- -------------------------------
* To be included on Warrant Certificates issued prior to the Separation Date.
A-2
<PAGE>
CUSIP#[_____________]
No. ______ [______] Warrants
WARRANT CERTIFICATE
RHYTHMS NETCONNECTIONS INC.
This Warrant Certificate certifies that [___________], or registered
assigns, is the registered holder of [____] Warrants (the "WARRANTS") to
purchase shares of Common Stock, par value $0.001 per share, issuable upon
exercise of the Warrants (the "WARRANT SHARES") of RHYTHMS NETCONNECTIONS INC.,
a Delaware corporation (the "COMPANY," which term includes its successors and
assigns). Each Warrant entitles the holder to purchase from the Company at any
time from 9:00 a.m. New York City time on or after the Exercisability Date until
5:00 p.m., New York City time, on May 15, 2008 (the "EXPIRATION DATE"), 1.7
fully paid, registered and non-assessable Warrant Shares, subject to adjustment
as provided in Article V of the Warrant Agreement, at an exercise price of $0.01
for each share purchased (the "Exercise Price"); upon surrender of this Warrant
Certificate and payment of the Exercise Price (i) in cash or by certified or
official bank check, (ii) by a Cashless Exercise or (iii) by any-combination of
(i) and (ii), at any office or agency maintained for that purpose by the Company
(the "WARRANT EXERCISE OFFICE"), subject to the conditions set forth herein and
in the Warrant Agreement; PROVIDED, HOWEVER, that no Warrant may be exercised
during the 180-day period commencing on the date of the closing of an initial
public offering of the Company's common stock (the "BLACKOUT PERIOD"), except
(x) in the event of receipt by the holder of such Warrant of the written consent
for such exercise by the Company and the managing underwriters in such initial
public offering or (y) in the event that such closing of the Company's initial
public offering occurs on or after the date that is 180 days prior to the
Expiration Date (the events referred to in these clauses (x) and (y), the
"BLACKOUT PERIOD EXCEPTIONS"); and PROVIDED FURTHER that either a registration
statement relating to the Warrant Shares underlying such Warrant is, at the time
of exercise, effective and available or the exercise of such Warrant is exempt
from the registration requirements of the Securities Act, and such Warrant
Shares are qualified for sale or exempt from qualification under the applicable
securities laws of the state or other jurisdiction in which the holder of such
Warrant resides. For purposes of this Warrant, a "CASHLESS EXERCISE" shall mean
an exercise of a Warrant in accordance with the immediately following two
sentences. To effect a Cashless Exercise, the holder may exercise a Warrant or
Warrants without payment of the Exercise Price in cash by surrendering such
Warrant or Warrants (represented by one or more Warrant Certificates) and in
exchange therefor, receiving such number of shares of Common Stock equal to the
product of (1) that number of shares of Common Stock for which such Warrant or
Warrants are exercisable and which would be issuable in the event of an exercise
with payment of the Exercise Price and (2) the Cashless Exercise Ratio. The
"CASHLESS EXERCISE RATIO" shall equal a fraction, the numerator of which is the
excess of the Current Market Value (calculated as set forth in this Warrant) per
share of Common Stock on the date of exercise over the Exercise Price per share
of Common Stock as of the date of exercise and the denominator of which is the
Current Market Value per share of Common Stock on the date of exercise. Upon
surrender of a Warrant
A-3
<PAGE>
Certificate representing more than one Warrant in connection with the holder's
option to elect a Cashless Exercise, the holder must specify the number of
Warrants for which such Warrant Certificate is to be exercised (without giving
effect to the Cashless Exercise). All provisions of the Warrant Agreement shall
be applicable with respect to a Cashless Exercise of a Warrant Certificate for
less than the full number of Warrants represented thereby. Capitalized terms
used herein without being defined herein shall have the definitions ascribed to
such terms in the Warrant Agreement.
"CURRENT MARKET VALUE" per share of Common Stock of the Company or any
other security at any date shall mean (i) if the security is not registered
under the Exchange Act, (a) the value of the security, determined in good faith
by the board of directors of the Company and certified in a board resolution,
based on the most recently completed arm's-length transaction between the
Company and a person other than an Affiliate of the Company and the closing of
which occurs on such date or shall have occurred within the six-month period
preceding such date, or (b) if no such transaction shall have occurred on such
date or within such six-month period, the fair market value of the security as
determined by an Independent Financial Expert (as defined herein) (PROVIDED
that, in the case of the calculation of Current Market Value for determining the
cash value of fractional shares, any such determination within six months that
is, in the good faith judgment of the board, a reasonable determination of
value, may be utilized) or (ii) (a) if the security is registered under the
Exchange Act, the average of the daily closing sales prices of the securities
for the 20 consecutive trading days immediately preceding such date, or (b) if
the security has been registered under the Exchange Act for less than 20
consecutive trading days before such date, then the average of the closing sales
prices for all of the trading days before such date for which closing sales
prices are available, in the case of each of (ii)(a) and (ii)(b), as certified
to the Warrant Agent by the president, any vice president or the chief financial
officer of the Company. The closing sales price for each such trading day shall
be: (A) in the case of a security listed or admitted to trading on any U.S.
national securities exchange or quotation system, the closing sales price,
regular way, on such day, or if no sale takes place on such day, the average of
the closing bid and asked prices on such day, (B) in the case of a security not
then listed or admitted to trading on any U.S. national securities exchange or
quotation system, the last reported sale price on such day, or if no sale takes
place on such day, the average of the closing bid and asked prices on such day,
as reported by a reputable quotation source designated by the Company, (C) in
the case of a security not then listed or admitted to trading on any U.S.
national securities exchange or quotation system and as to which no such
reported sale price or bid and asked prices are available, the average of the
reported high bid and low asked prices on such day, as reported by a reputable
quotation service, or a newspaper of general circulation in the Borough of
Manhattan, The City and State of New York customarily published on each Business
Day, designated by the Company, or, if there shall be no bid and asked prices on
such day, the average of the high bid and low asked prices, as so reported, on
the most recent day (not more than 30 days prior to the date in question) for
which prices have been so reported and (D) if there are not bid and asked prices
reported during the 30 days prior to the date in question, the Current Market
Value shall be determined as if the securities were not registered under the
Exchange Act.
A-4
<PAGE>
"INDEPENDENT FINANCIAL EXPERT" means any person listed on Appendix A to the
Warrant Agreement (i) that does not (and whose directors, executive officers and
5% stockholders do not) have a direct or indirect financial interest in the
Company or any of its subsidiaries or Affiliates and (ii) that has not been for
at least five years and, at the time that it is called upon to give independent
financial advice to the Company, is not (and none of its directors, executive
officers or 5% stockholders is) a promoter, director or officer of the Company
or any of its subsidiaries or Affiliates.
"SEPARABILITY DATE" means the earliest to occur of: (i) November 1, 1998;
(ii) the date on which a registration statement under the Securities Act of
1933, as amended (the "Securities Act") with respect to the Exchange Offer is
declared effective under the Securities Act; (iii) the occurrence of a Change of
Control (as defined in the Indenture); and (iv) such earlier date as determined
by Merrill Lynch & Co. in its sole discretion.
A "REPURCHASE EVENT", as defined in the Warrant Agreement, shall be deemed
to occur on any date when the Company (i) consolidates with or merges into or
with another person (but only where the holders of Common Stock receive
consideration in exchange for all or part of such Common Stock), if the Common
Stock (or other securities) thereafter issuable upon exercise of the Warrants is
not registered under the Exchange Act or (ii) sells all or substantially all of
its assets to another person, if the Common Stock (or other securities)
thereafter issuable upon exercise of the Warrants is not registered under the
Exchange Act; PROVIDED that, in each case, a "Repurchase Event" shall not be
deemed to have occurred if the consideration for such transaction consists
solely of cash.
Following a Repurchase Event, the Company must make an offer to repurchase
for cash all outstanding Warrants (a "Repurchase Offer"). If the Company makes a
Repurchase Offer, Holders may, until the expiration date of such offer,
surrender all or part of their Warrants for repurchase by the Company.
Warrants received by the Warrant Agent in proper form during a Repurchase
Offer will, except as otherwise provided in the Warrant Agreement, be
repurchased by the Company at a price in cash (the "REPURCHASE PRICE") equal to
the value on the date five Business Days prior to the date notice of the
Repurchase Offer is first given of the Common Shares issuable, and other
securities or property of the Company which would have been delivered upon
exercise of the Warrants had the Warrants been exercised (whether or not the
Warrants are then exercisable), less the Exercise Price in effect on the Notice
Date for such Repurchase Offer. The value of such Common Shares and other
securities will be determined by the Independent Financial Expert (as defined in
the Warrant Agreement), in each case as set forth in the Warrant Agreement.
The Company has initially designated the office of State Street Bank and
Trust Company, N.A., an affiliate of the Warrant Agent in the Borough of
Manhattan, The City of New York, as the initial Warrant Exercise Office. The
number of shares of Common Stock issuable upon exercise of
A-5
<PAGE>
the Warrants ("EXERCISE RATE") is subject to adjustment upon the occurrence of
certain events set forth in the Warrant Agreement.
Any Warrants not exercised on or prior to 5:00 p.m., New York City time, on
May 15, 2008 shall thereafter be void.
If the Company, in a single transaction or through a series of related
transactions, consolidates with or merges with or into, or sells all or
substantially all of its property and assets to, another Person (other than a
subsidiary of the Company) solely for cash, the holders of Warrants which are
then exercisable shall be entitled to receive distributions on the date of such
event on an equal basis with holders of shares of Capital Stock (or other
securities issuable upon exercise of the Warrants) as if the Warrants had been
exercised immediately prior to such event less the aggregate Exercise Price
therefor.
Reference is hereby made to the further provisions on the reverse hereof
which provisions shall for all purposes have the same effect as though fully set
forth at this place.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the day and year first above written.
RHYTHMS NETCONNECTIONS INC.
By:
----------------------------------------------
Name:
Title:
STATE STREET BANK AND TRUST
COMPANY OF CALIFORNIA, N.A.,
Warrant Agent
By:
----------------------------------------------
Name:
Title:
A-6
<PAGE>
[FORM OF WARRANT CERTIFICATE]
[REVERSE]
RHYTHMS NETCONNECTIONS INC.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring at 5:00 p.m., New York City time, on May
15, 2008 (the "EXPIRATION DATE"), each of which represents the right to purchase
at any time on or after the Exercisability Date (as defined in the Warrant
Agreement) and on or prior to the Expiration Date 1.7 Warrant Shares, subject to
adjustment as set forth in the Warrant Agreement; PROVIDED, HOWEVER, that no
Warrant may be exercised during the Blackout Period except in the case of a
Blackout Period Exception; and PROVIDED FURTHER that either a registration
statement relating to the Warrant Shares underlying such Warrant is, at the time
of exercise, effective and available or the exercise of such Warrant is exempt
from the registration requirements of the Securities Act, and such Warrant
Shares are qualified for sale or exempt from qualification under the applicable
securities laws of the state or other jurisdiction in which the holder of such
Warrant resides. The Warrants are issued pursuant to a Warrant Agreement dated
as of May 5, 1998 (the "WARRANT AGREEMENT"), duly executed and delivered by the
Company to State Street Bank and Trust Company of California, N.A., Warrant
Agent (the "Warrant Agent"), which Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Warrant Agent, the Company and the holders (the
words "HOLDERS" or "HOLDER" meaning the registered holders or registered holder)
of the Warrants.
Warrants may be exercised by (i) surrendering at any Warrant Exercise
Office this Warrant Certificate with the form of Election to Exercise set forth
hereon duly completed and executed and (ii) to the extent such exercise is not
being effected through a Cashless Exercise by paying in full the Warrant
Exercise Price for each such Warrant exercised and any other amounts required to
be paid pursuant to the Warrant Agreement.
If all of the items referred to in the last sentence of the preceding
paragraph are received by the Warrant Agent at or prior to 11:00 a.m., New York
City time, on a Business Day, the exercise of the Warrant to which such items
relate will be effective on such Business Day. If any items referred to in the
last sentence of the preceding paragraph are received after 11:00 a.m., New York
City time, on a Business Day, the exercise of the Warrants to which such item
relates will be deemed to be effective on the next succeeding Business Day.
Notwithstanding the foregoing, in the case of an exercise of Warrants on May 15,
2008, if all of the items referred to in the last sentence of the preceding
paragraph are received by the Warrant Agent at or prior to 5:00 p.m., New York
City time, on such Expiration Date, the exercise of the Warrants to which such
items relate will be effective on the Expiration Date.
A-7
<PAGE>
As soon as practicable after the exercise of any Warrant or Warrants, the
Company shall issue or cause to be issued to or upon the written order of the
registered holder of this Warrant Certificate, a certificate or certificates
evidencing such Warrant Share or Warrant Shares to which such holder is
entitled, in fully registered form, registered in such name or names as may be
directed by such holder pursuant to the Election to Exercise, as set forth on
the reverse of this Warrant Certificate. Such certificate or certificates
evidencing the Warrant Share or Warrant Shares shall be deemed to have been
issued and any persons who are designated to be named therein shall be deemed to
have become the holder of record of such Warrant Share or Warrant Shares as of
the close of business on the date upon which the exercise of this Warrant was
deemed to be effective as provided in the preceding paragraph.
The Company shall not be required to issue fractional Warrant Shares upon
exercise of the Warrants or distribute Warrant Certificates that evidence
fractional Warrant Shares. In lieu of fractional Warrant Shares, there shall be
paid to the registered Holder of this Warrant Certificate at the time such
Warrant Certificate is exercised an amount in cash equal to the same fraction of
the Current Market Value per share of Common Stock on the Business Day preceding
the date this Warrant Certificate is surrendered for exercise.
Warrant Certificates, when surrendered at any office or agency maintained
by the Company for that purpose by the registered holder thereof in person or by
legal representative or attorney duly authorized in writing, may be exchanged
for a new Warrant Certificate or new Warrant Certificates evidencing in the
aggregate a like number of Warrants, in the manner and subject to the
limitations provided in the Warrant Agreement, without charge except for any tax
or other governmental charge imposed in connection therewith.
Upon due presentment for registration of transfer of this Warrant
Certificate at any office or agency maintained by the Company for that purpose,
a new Warrant Certificate evidencing in the aggregate a like number of Warrants
shall be issued to the transferee in exchange for this Warrant Certificate,
subject to the limitations provided in the Warrant Agreement, without charge
except for any tax or other governmental charge imposed in connection therewith.
The Company and the Warrant Agent may deem and treat the registered holder
hereof as the absolute owner of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone) for the purpose of
any exercise hereof and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary.
The term "BUSINESS DAY" shall mean any day on which (i) banks in The City
of New York, (ii) banks in the city in which the principal corporate trust
office of the Warrant Agent is located, (iii) the principal U.S. securities
exchange or market, if any, on which the Common Stock is listed or admitted to
trading and (iv) the principal U.S. securities exchange or market, if any, on
which the Warrants are listed or admitted to trading, are open for business.
A-8
<PAGE>
The Warrants and the Warrant Shares are entitled to the benefits of a
registration rights agreement relating to the Warrants and the Warrant Shares
(the "WARRANT REGISTRATION RIGHTS AGREEMENT"), pursuant to which the holders of
the Warrants will be entitled to piggyback registration rights for the issuance
(if available) and resale of Warrant Shares in connection with (i) an initial
public offering of the Common Stock (or other securities issuable upon exercise
of the Warrants) if any stockholder of the Company participates in such public
offering or (ii) certain public offerings of shares of Common Stock (or other
securities issuable upon exercise of the Warrants) issuable upon exercise of the
Warrants conducted subsequent to the initial public offering of such stock,
subject to pro rata cut-back provisions with certain holders of contractual
registration rights described in the Warrant Registration Rights Agreement in
the event that the managing underwriter in any underwritten offering determines
that inclusion of the Warrant Shares would materially and adversely affect the
success of the offering. If only the Company sells shares in the initial public
offering or all of the Warrant Shares (or other securities issuable upon
exercise of the Warrants) are not sold in the initial public offering or any
subsequent public offering, the Company will be required to use its best efforts
to cause to be declared effective, no later than the later of (i) 180 days after
the closing date of the initial public offering, subject to certain exceptions
in the case of a "lock up" or "black out" imposed on the Company, or (ii) the
first anniversary of the Closing Date, a shelf registration statement (the
"WARRANT SHELF REGISTRATION STATEMENT") with respect to the issuance (if
available) or sale of Warrant Shares (or other securities issuable upon exercise
of the Warrants). The Company is required to use reasonable efforts to maintain
the effectiveness of the Warrant Shelf Registration Statement until the earlier
of (i) such time as all Warrants have been exercised and the Warrant Shares sold
and (ii) 120 days after the date of effectiveness of the Warrant Shelf
Registration Statement. During any consecutive 365-day period while the Warrants
are exercisable, the Company will have the ability to postpone the filing of or
suspend the availability of such registration statement for up to 60 days
(except during the 60 days immediately prior to the expiration of the Warrants)
if the Company's Board of Directors determines in good faith that there is a
valid purpose for the suspension and provides notice of such determination to
the holders at their addresses appearing in the register of Warrants maintained
by the Warrant Agent. Holders of Warrants will not be named as selling security
holders in the Warrant Shelf Registration Statement. The Warrant Agreement
requires the Company to pay the expenses associated with such registration.
A-9
<PAGE>
[FORM OF ELECTION TO EXERCISE]
(To be executed upon exercise of Warrants on the Exercise Date)
The undersigned hereby irrevocably elects to exercise [_______] of the
Warrants represented by this Warrant Certificate and purchase the whole number
of Warrant Shares issuable upon the exercise of such Warrants and herewith
tenders payment for such Warrant Shares as follows:
$________ in cash or by certified or official bank check; or by surrender
of Warrants pursuant to a Cashless Exercise (as defined in the Warrant
Agreement) for [________] shares of Common Stock at the current Cashless
Exercise Ratio.
The undersigned requests that a certificate representing such Warrant
Shares be registered in the name of __________________ whose address is
__________________ and that such shares be delivered to whose address is
___________________________. Any cash payments to be paid in lieu of a
fractional share of Common Stock should be delivered to ___________________
___________________________ whose address is _____________________ and the
check representing payment thereof should be delivered to whose address is
___________________________.
[FOR REGULATION S WARRANTS ONLY: The undersigned (i) certifies that it is
not a "U.S. Person," as defined in Regulation S under the Securities Act of
1933, and that the Warrants being exercised hereby are not being so exercised on
behalf of a U.S. Person or (ii) delivers herewith an opinion of counsel to the
effect that the Warrants hereby exercised, and the delivery of Warrant Shares
hereby, have been registered under the Securities Act of 1933 or are exempt from
registration thereunder.]
Dated _____________, ____
Name of holder of
Warrant Certificate:
------------------------------------------------------
(Please Print)
Tax Identification or
Social Security Number:
---------------------------------------------------
Address:
-------------------------------------------------------------------
--------------------------------------------------------------------
Signature:
----------------------------------------------------------------
Note: The above signature must correspond with the name as
written upon the face of this Warrant Certificate in
every particular, without
A-10
<PAGE>
alteration or enlargement or any change whatever and if
the certificate representing the Warrant Shares or any
Warrant Certificate representing Warrants not exercised
is to be registered in a name other than that in which
this Warrant Certificate is registered, or if any cash
payment to be paid in lieu of a fractional share is to
be made to a person other than the registered holder of
this Warrant Certificate, the signature of the holder
hereof must be guaranteed as provided in the Warrant
Agreement.
Dated _____________, _______
Signature:
-------------------------------------------------------
Note: The above signature must correspond with the name as
written upon the face of this Warrant Certificate in
every particular, without alteration or enlargement or
any change whatever.
Signature Guaranteed:
--------------------------------------------
[FORM OF CERTIFICATE FOR REPURCHASE OFFER]
(To be executed only upon repurchase
of Warrant by Rhythms NetConnections Inc.)
TO:
-----------------------------
The undersigned, having received prior notice of the consideration for
which RHYTHMS NETCONNECTIONS INC. will repurchase the Warrants represented by
the within Warrant Certificate, hereby surrenders this Warrant Certificate for
repurchase by RHYTHMS NETCONNECTIONS INC. of the number of Warrants specified
below for the consideration set forth in such notice.
Dated:
----------------
- ----------------------
(Number of Warrants)
- ----------------------
(Signature of Owner)
- ----------------------------------
(Street Address)
A-11
<PAGE>
- ---------------------------------
(City) (State) (Zip Code)
Signature Guaranteed By:
- --------------------------
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Warrant Agent, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the Warrant Agent in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
Securities and/or check to be issued to:
------------------------------
Please insert social security or identifying number:
--------------------
Name:
---------------------------------
Street Address:
-------------------------------
City, State and Zip Code:
--------------------------
[FORM OF ASSIGNMENT]
For value received ___________________ hereby sells, assigns and transfers
unto __________________________ the within Warrant Certificate, together
____________________ with all right, title and interest therein, and does hereby
irrevocably constitute and appoint ____________________ attorney, to transfer
said Warrant Certificate on the books of the within-named Company, with full
power of substitution in the premises.
Dated: _________________, _______
Signature:
--------------------------------------------
Note: The above signature must correspond with the
name as written upon the face of this Warrant
Certificate in every particular, without
alteration or enlargement or any change
whatever.
Signature Guaranteed:
---------------------------------
A-12
<PAGE>
SCHEDULE OF EXCHANGES OF CERTIFICATED WARRANTS
The following exchanges of a part of this Global Warrant for certificated
Warrants have been made:
<TABLE>
<CAPTION>
Number of
Amount of Amount of Warrants of this
decrease in increase in Global Warrant Signature of
Number of Number of following such authorized
Date of Warrants of this Warrants of this decrease (or officer of
Exchange Global Warrant Global Warrant increase) Warrant Agent
- ----------------- -------------------- --------------------- -------------------- -----------------
<S> <C> <C> <C> <C>
</TABLE>
A-13
<PAGE>
EXHIBIT B
FORM OF LEGEND FOR GLOBAL WARRANT
Any Global Warrant authenticated and delivered hereunder shall bear a
legend in substantially the following form:
THIS SECURITY IS A GLOBAL WARRANT WITHIN THE MEANING OF THE WARRANT
AGREEMENT HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A
DEPOSITARY OR A SUCCESSOR DEPOSITARY. THIS SECURITY IS NOT EXCHANGEABLE FOR
SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR
ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT
AGREEMENT, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS
SECURITY AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY
A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE
DEPOSITARY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED
IN THE WARRANT AGREEMENT.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER
NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF
FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
B-1
<PAGE>
EXHIBIT C
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF WARRANTS
Re: Warrants to Purchase Common Stock (the "WARRANTS") of RHYTHMS NETCONNECTIONS
INC.
This Certificate relates to ______ Warrants held in */ / book-entry or */ /
certificated form by ____________ (the "TRANSFEROR").
The Transferor:*
/ / has requested the Warrant Agent by written order to deliver in
exchange for its beneficial interest in the Global Warrant held by the
Depositary a Warrant or Warrants in definitive, registered form of authorized
denominations and an aggregate number equal to its beneficial interest in such
Global Warrant (or the portion thereof indicated above); or
/ / has requested the Warrant Agent by written order to exchange or
register the transfer of a Warrant or Warrants.
In connection with such request and in respect of each such Warrant, the
Transferor does hereby certify that the Transferor is familiar with the Warrant
Agreement relating to the above captioned Warrants and the restrictions on
transfers thereof as provided in Section 1.08 of such Warrant Agreement, that
the Resale Restriction Termination Date has not occurred, and that the transfer
of this Warrant does not require registration under the Securities Act of 1933,
as amended (the "Act") because*:
/ / Such Warrant is being acquired for the Transferor's own account,
without transfer (in satisfaction of Section 1.08(a)(y)(A) or Section
1.08(d)(i)(A) of the Warrant Agreement).
/ / Such Warrant is being transferred to a qualified institutional buyer
(as defined in Rule 144A under the ACT), in reliance on Rule 144A.
- -----------------------
* Check applicable box.
C-1
<PAGE>
/ / Such Warrant is being transferred in reliance on Regulation S under
the Act.
/ / Such Warrant is being transferred in accordance with Rule 144 under
the Act.
/ / Such Warrant is being transferred in reliance on and in compliance
with an exemption from the registration requirements of the Act.
----------------------------------------
[INSERT NAME OF TRANSFEROR]
By:
-------------------------------------
Date:
----------------
C-2
<PAGE>
EXHIBIT D
FORM OF CERTIFICATE TO BE
DELIVERED IN CONNECTION
WITH REGULATION S TRANSFERS
,
----------------------- --------
State Street Bank and Trust Company of California, N.A.
Library Tower
633 West 5th Street, 12th Floor
Los Angeles, California 90071
Attention: Corporate Trust Department
Ladies and Gentlemen:
In connection with our proposed sale of Warrants of Rhythms NetConnections
Inc. (the "Company"), we confirm that such sale has been effected pursuant to
and in accordance with Regulation S under the Securities Act of 1933, as amended
(the "Securities Act"), and, accordingly, we represent that:
(1) the offer of the Warrants was not made to a person in the United
States;
(2) either (a) at the time the buy offer was originated, the transferee
was outside the United States or we and any person acting on our behalf
reasonably believed that the transferee was outside the United States, or (b)
the transaction was executed in, on or through the facilities of a designated
off-shore securities market and neither we nor any person acting on our behalf
knows that the transaction has been pre-arranged with a buyer in the United
States;
(3) no directed selling efforts have been made in the United States in
contravention of the requirements of Rule 903(a) or Rule 904(a) of Regulation S
under the Securities Act, as applicable;
(4) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act;
(5) we have advised the transferee of the transfer restrictions
applicable to the Warrants; and
(6) if the circumstances set forth in Rule 904(b) under the Securities
Act are applicable, we have complied with the additional conditions therein,
including (if applicable)
D-1
<PAGE>
sending a confirmation or other notice stating that the Warrants may be offered
and sold during the distribution compliance period specified in Rule 903(b)(2)
or (3), as applicable, in accordance with the provisions of Regulation S;
pursuant to registration of the Warrants under the Securities Act; or pursuant
to an available exemption from the registration requirements under the Act.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Defined terms used herein without
definition have the respective meanings provided in Regulation S under the
Securities Act.
Very truly yours,
[Name of Transferor]
By:
--------------------------------------
[Authorized Signature]
Upon transfer the Warrants would be registered in the name of the new
beneficial owner as follows:
Name:
------------------------------------
Address:
----------------------------------
Taxpayer ID Number:
----------------------
D-2
<PAGE>
APPENDIX A
LIST OF FINANCIAL EXPERTS
Alex. Brown & Sons
Bear, Stearns & Co. Inc.
Credit Suisse First Boston Corporation
Dillon, Read & Co. Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
Furman Selz, LLP
Goldman, Sachs & Co.
Lazard Freres & Co.
Lehman Brothers
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
Oppenheimer & Co., Inc.
PaineWebber Incorporated
Prudential Securities Inc.
Salomon Brothers Inc.
App. A-1
<PAGE>
- --------------------------------------------------------------------------------
WARRANT REGISTRATION RIGHTS AGREEMENT
Dated as of May 5, 1998
Between
RHYTHMS NETCONNECTIONS INC.
And
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Section 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. REGISTRATION RIGHTS . . . . . . . . . . . . . . . . . . . . . 5
2.1 (a) PIGGY-BACK REGISTRATION . . . . . . . . . . . . . . . . . . . 5
(b) PRIORITY IN PIGGY-BACK REGISTRATION . . . . . . . . . . . . . . . . 6
(c) RESTRICTIONS ON SALE BY HOLDERS . . . . . . . . . . . . . . . . . . 7
2.2 (a) SHELF REGISTRATION. . . . . . . . . . . . . . . . . . . . . . 8
(b) EFFECTIVE REGISTRATION. . . . . . . . . . . . . . . . . . . . . . . 8
(c) RESTRICTIONS ON SALE BY HOLDERS . . . . . . . . . . . . . . . . . . 9
(d) SELECTION OF UNDERWRITER. . . . . . . . . . . . . . . . . . . . . . 9
(e) EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.3 LIMITATIONS, CONDITIONS AND QUALIFICATIONS TO OBLIGATIONS UNDER
REGISTRATION COVENANTS. . . . . . . . . . . . . . . . . . . . . . .10
2.4 RESTRICTIONS ON ACTIONS BY THE COMPANY AND OTHERS . . . . . . . . .10
2.5 RULE 144 AND RULE 144A. . . . . . . . . . . . . . . . . . . . . . .11
2.6 UNDERWRITTEN REGISTRATIONS. . . . . . . . . . . . . . . . . . . . .11
Section 3. REGISTRATION PROCEDURES . . . . . . . . . . . . . . . . . . .11
Section 4. INDEMNIFICATION AND CONTRIBUTION. . . . . . . . . . . . . . .17
Section 5. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . .20
(a) REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
(b) NO INCONSISTENT AGREEMENTS . . . . . . . . . . . . . . . . . . . .20
(c) NO PIGGY-BACK ON SHELF REGISTRATIONS . . . . . . . . . . . . . . .20
(d) AMENDMENTS AND WAIVERS . . . . . . . . . . . . . . . . . . . . . .20
(e) NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
(f) SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . . .21
(g) COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . .21
(h) GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . .21
(i) SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . .21
(j) HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
(k) ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . .21
(l) SECURITIES HELD BY THE COMPANY OR ITS AFFILIATES . . . . . . . . .22
</TABLE>
(i)
<PAGE>
WARRANT REGISTRATION RIGHTS AGREEMENT
This WARRANT REGISTRATION RIGHTS AGREEMENT (the "AGREEMENT" is made and
entered into as of May 5, 1998, between RHYTHMS NETCONNECTIONS INC. (the
"COMPANY") a Delaware corporation, MERRILL LYNCH & CO., MERRILL LYNCH, PIERCE,
FENNER & SMITH INCORPORATED ("MERRILL LYNCH") and DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION (together with Merrill Lynch, the "INITIAL PURCHASERS").
This Agreement is made pursuant to the Purchase Agreement dated as of April
28, 1998, between the Company and the Initial Purchasers (the "PURCHASE
AGREEMENT"), with respect to the issue and sale by the Company and the purchase
by the Initial Purchasers, severally, of the respective number of the Company's
Units (the "UNITS"), each Unit consisting of $1,000 aggregate principal amount
at maturity of the Company's 13 1/2% Senior Discount Notes due 2008 (the
"NOTES") and four warrants (the "WARRANTS"), each initially entitling the holder
thereof to purchase 1.7 shares of common stock, par value $0.001 per share (the
"COMMON STOCK"), of the Company, set forth opposite such Initial Purchaser's
name on Schedule A to the Purchase Agreement. The execution of this Agreement
is a condition to the obligations of the Initial Purchasers under the Purchase
Agreement.
In consideration of the foregoing, the parties hereto agree as follows:
Section 1. DEFINITIONS. As used in this Agreement, the following defined
terms shall have the following meanings:
"ADVICE" has the meaning ascribed to such term in Section 3 hereof.
"AFFILIATE" shall mean (i) any other Person which, directly or indirectly,
controls, is controlled by or is under direct or indirect common control with,
the specified Person, (ii) any other Person that owns, directly or indirectly,
10% or more of the specified Person's Voting Stock or (iii) any executive
officer or director of the specified Person; PROVIDED that Donaldson, Lufkin &
Jenrette, Inc. and its Affiliates shall not be deemed to be Affiliates of the
Company solely as a result of such entities holding the Units, the Notes, the
Warrants, the Company's Series A Preferred Stock or the Company's Series B
Preferred Stock (or any security which is convertible into or exchangeable for
any of the foregoing). For the purposes of this definition, "CONTROL" when used
with respect to any Person means the power to direct the management and policies
of such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise, and the terms "AFFILIATED," "CONTROLLING"
and "CONTROLLED" have meanings correlative to the foregoing.
"AGREEMENT" shall have the meaning ascribed to such term in the preamble
hereto.
"BUSINESS DAY" shall mean each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in The City of New York,
New York are authorized or obligated by law, regulation or executive order to
close.
<PAGE>
"CAPITAL STOCK" shall mean, with respect to any Person, any and all shares,
interests, partnership interests, participation, rights in or other equivalents
(however designated and whether voting or non-voting) of such person's capital
stock, and any rights (other than debt securities convertible into capital
stock), warrants or options exchangeable for or convertible into such capital
stock whether outstanding on the Issue Date or issued after the Issue Date.
"COMPANY" shall have the meaning ascribed to such term in the preamble of
this Agreement and shall also include the Company's permitted successors and
assigns.
"COMMON STOCK" shall have the meaning ascribed to such term in the preamble
of this Agreement.
"DTC" shall have the meaning ascribed to such term in Section 3(i) hereof.
"EFFECTIVENESS PERIOD" shall have the meaning ascribed to such term in
Section 2.2(a) hereof.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended
from time to time.
"HOLDER" shall mean each holder (including the Initial Purchasers) of any
Warrants, Warrant Shares or Registrable Securities, and each of their
successors, assigns and direct and indirect transferees who become registered
owners of such Warrants, Warrant Shares or Registrable Securities.
"INCLUDED SECURITIES" shall have the meaning ascribed to such tend in
Section 2.2(a) hereof.
"INDEMNIFIED PERSON" shall have the meaning ascribed to such term in
Section 4(a) hereof.
"INDENTURE" shall mean the Indenture, dated as of the date hereof, between
the Company and State Street Bank and Trust Company of California, N.A.,
Trustee, pursuant to which the Notes are issued.
"INITIAL PUBLIC EQUITY OFFERING" shall mean a primary public offering
(whether or not underwritten, but excluding any offering pursuant to Form S-8 or
F-8 under the Securities Act or any other publicly registered offering pursuant
to the Securities Act pertaining to an issuance of shares of Common Stock or
securities exercisable therefor under any benefit plan, employee compensation
plan, or employee or director stock purchase plan) of Capital Stock of the
Company pursuant to an effective registration statement under the Securities
Act.
"INITIAL PURCHASERS" shall have the meaning ascribed to such term in the
preamble hereof.
"INSPECTORS" shall have the meaning ascribed to such term in Section 3(m)
hereof.
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<PAGE>
"MERRILL LYNCH" shall have the meaning ascribed to such term in the
preamble hereto.
"NOTES" shall have the meaning ascribed to such term in the preamble
hereto.
"PERSON" shall mean any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof or any other entity, including any predecessor of any such entity.
"PIGGY-BACK REGISTRATION" shall have the meaning ascribed to such term in
Section 2.1 (a) hereof.
"PROSPECTUS" shall mean the prospectus included in any Registration
Statement (including, without limitation, any prospectus subject to completion
and a prospectus that includes any information previously omitted from a
prospectus filed as part of an effective registration statement in reliance upon
Rule 430A promulgated under the Securities Act), as amended or supplemented by
any prospectus supplement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.
"PURCHASE AGREEMENT" shall have the meaning ascribed to such term in the
preamble hereof.
"REGISTRABLE SECURITIES" shall mean any of (i) the Common Stock issued and
issuable upon exercise of the Warrants and (ii) any other securities issued or
issuable with respect to the Warrants or Warrant Shares by way of stock dividend
or stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization or otherwise. As to any
particular Registrable Securities, such securities shall cease to be Registrable
Securities when (a) a registration statement with respect to the offering of
such securities by the Holder thereof shall have been declared effective under
the Securities Act and such securities shall have been disposed of by such
Holder pursuant to such registration statement, (b) such securities have been
sold to the public pursuant to, or are eligible for sale to the public without
volume or manner of sale restrictions under, Rule 144(k) (or any similar
provision then in force, but not Rule 144A) promulgated under the Securities
Act, (c) such securities shall have been otherwise transferred and new
certificates for such securities not bearing a legend restricting further
transfer shall have been delivered by the Company or its transfer agent and
subsequent disposition of such securities shall not require registration or
qualification under the Securities Act or any similar state law then in force,
or (d) such securities shall have ceased to be outstanding.
"REGISTRATION EXPENSES" shall mean all expenses incident to the Company's
performance of or compliance with this Agreement, including, without limitation,
all SEC and stock exchange or National Association of Securities Dealers, Inc.
registration and filing fees and expenses, fees and expenses of compliance with
securities or blue sky laws (including, without limitation, reasonable fees and
disbursements of counsel for the underwriters in connection with blue sky
qualifications
- 3 -
<PAGE>
of the Registrable Securities in an amount not to exceed $10,000), printing
expenses, messenger, telephone and delivery expenses, fees and disbursements of
counsel for the Company and all independent certified public accountants, and
other reasonable out-of-pocket expenses of Holders (it being understood that
Registration Expenses shall not include, as to the fees and expenses of counsel,
the fees and expenses of more than one counsel for the underwriters and the
Holders as to blue sky matters).
"REGISTRATION STATEMENT" shall mean any appropriate registration statement
of the Company filed with the SEC pursuant to the Securities Act that covers any
of the Subject Equity pursuant to the provisions of this Agreement and all
amendments and supplements to any such Registration Statement, including
post-effective amendments, in each case including the Prospectus contained
therein, all exhibits thereto and all material incorporated by reference
therein.
"RULE 144" shall mean Rule 144 promulgated under the Securities Act, as
such Rule may be amended from time to time, or any similar rule (other than Rule
144A) or regulation hereafter adopted by the SEC providing for offers and sales
of securities made in compliance therewith resulting in offers and sales by
subsequent holders that are not affiliates of an issuer of such securities being
free of the registration and prospectus delivery requirements of the Securities
Act.
"RULE 144A" shall mean Rule 144A promulgated under the Securities Act, as
such Rule may be amended from time to time, or any similar rule (other than Rule
144) or regulation hereafter adopted by the SEC.
"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended from
time to time.
"SELLING HOLDER" shall mean a Holder who is selling Subject Equity in
accordance with the provisions of Section 2.2 or 2.1 hereof, respectively.
"SHELF REGISTRATION" shall have the meaning ascribed to such term in
Section 2.2(a) hereof.
"SUBJECT EQUITY" shall mean, collectively, Warrants, Warrant Shares and
Registrable Securities.
"SUSPENSION PERIOD" shall have the meaning ascribed to such term in Section
2.3(a) hereof.
"UNITS" shall have the meaning ascribed to such term in the preamble of
this Agreement.
"WARRANT AGENT" shall mean State Street Bank and Trust Company of
California, N.A. and any successor warrant agent for the Warrants pursuant to
the Warrant Agreement.
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<PAGE>
"WARRANT AGREEMENT" shall mean the Warrant Agreement dated as of the date
hereof, between the Company and the Warrant Agent, as amended or supplemented
from time to time in accordance with the terms thereof.
"WARRANT SHARES" shall mean shares of Common Stock issuable upon exercise
of the Warrants at an exercise price of $0.01 per share.
"WARRANTS" shall have the meaning ascribed to such term in the preamble
hereto.
Section 2. REGISTRATION RIGHTS.
2.1 (a) PIGGY-BACK REGISTRATION. If at any time the Company proposes to
file a Registration Statement under the Securities Act with respect to (i) an
Initial Public Equity Offering of Common Stock (or any other securities issuable
upon exercise of the Warrants) if any securities held by any stockholder of the
Company are registered in such Registration Statement or (ii) any offering by
the Company for its own account or for the account of any of its security
holders of Common Stock (or any other securities issuable upon exercise of the
Warrants) (other than (w) a registration statement on Form S-4 or S-8 (or any
substitute form that may be adopted by the SEC) or any other publicly registered
offering pursuant to the Securities Act pertaining to the issuance of shares of
Capital Stock or securities exercisable therefor under any benefit plan,
employee compensation plan, or employee or director stock purchase plan, (x) a
registration statement filed in connection with an offer of securities solely to
the Company's existing security holders, (y) a Shelf Registration or (z)
registrations of debt securities) conducted subsequent to the Initial Public
Equity Offering, then the Company shall give written notice of such proposed
filing to the Holders of Registrable Securities as soon as practicable (but in
no event fewer than 15 days before the anticipated filing date or 10 days if the
Company is subject to filing reports under the Exchange Act and able to use Form
S-3 under the Securities Act), and such notice shall offer such Holders the
opportunity to register such number of shares of Registrable Securities as each
such Holder may request in writing within 12 days (or 8 days if the Company is
subject to filing reports under the Exchange Act and able to use Form S-3 under
the Securities Act) after receipt of such written notice from the Company (which
request shall specify the Registrable Securities intended to be disposed of by
such Selling Holder and the intended method of distribution thereof) (a
"PIGGY-BACK REGISTRATION"). The Company shall use its commercially reasonable
efforts to keep such Piggy-Back Registration continuously effective under the
Securities Act in the qualifying jurisdictions until at least the earlier of (A)
60 days after the effective date thereof or (B) the consummation of the
distribution by the Holders of all of the Registrable Securities covered
thereby. The Company shall use its best efforts to cause the managing
underwriter or underwriters, if any, of such proposed offering to permit the
Registrable Securities requested to be included in a Piggy-Back Registration to
be included on the same terms and conditions as any similar securities of the
Company or any other security holder included therein and to permit the sale or
other disposition of such Registrable Securities in accordance with the intended
method of distribution thereof, subject to Section 2.1(b) hereof. Any Selling
Holder shall have the right to withdraw its request for inclusion of its
Registrable Securities in any Registration Statement pursuant to this Section
2.1 by giving written
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<PAGE>
notice to the Company of its request to withdraw. The Company may withdraw a
Piggy-Back Registration at any timeprior to the time it becomes effective or the
Company may elect to delay the registration; PROVIDED, HOWEVER, that the Company
shall give prompt written notice thereof to participating Selling Holders. The
Company will pay all Registration Expenses in connection with each registration
of Registrable Securities requested pursuant to this Section 2.1, and each
Holder of Registrable Securities shall pay all underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or disposition of
such Holder's Registrable Securities pursuant to a Registration Statement
effected pursuant to this Section 2.1.
No registration effected under this Section 2.1, and no failure to effect a
registration under this Section 2.1, shall relieve the Company of its obligation
to effect a registration upon the request of Holders of Registrable Securities
pursuant to Section 2.2 hereof, and no failure to effect a registration under
this Section 2.1 and to complete the sale of securities registered thereunder in
connection therewith shall relieve the Company of any other obligation under
this Agreement.
(b) PRIORITY IN PIGGY-BACK REGISTRATION. In a registration pursuant to
this Section 2.1 involving an underwritten offering, if the managing underwriter
or underwriters of such underwritten offering have informed, in writing, the
Company and the Selling Holders requesting inclusion in such offering that in
such underwriter's or underwriters' reasonable opinion the total number of
securities which the Company, the Selling Holders and any other persons desiring
to participate in such registration intend to include in such offering is such
as to materially and adversely affect the success of such offering, including
the price at which such securities can be sold, then the Company will be
required to include in such registration only the amount of securities which it
is so advised should be included in such registration. In such event: (x) in
cases only involving the registration for sale of securities for the Company's
own account (which may include securities included pursuant to the exercise of
piggy-back rights herein and in other contractual commitments of the Company),
securities shall be registered in such offering in the following order of
priority: (i) FIRST, the securities which the Company proposes to register, (ii)
SECOND, PROVIDED that no securities sought to be included by the Company have
been excluded from such registration, the securities which have been requested
to be included in such registration by the Holders of Registrable Securities
pursuant to this Agreement, the securities of other Persons entitled to exercise
"piggy-back" registration rights pursuant to contractual commitments of the
Company existing on the date hereof and the securities, if any, that may be
issued pursuant to warrants to purchase up to 290,000 shares of Common Stock at
an exercise price no less than $4.45 per share issued to any Person from which
the Company obtains lease financing subsequent to the date hereof (such
securities to be allocated pro rata based on the amount of securities sought to
be registered by such Holders or other Persons) and (iii) THIRD, PROVIDED that
no securities sought to be included by the Company, the Holders or such Persons
referred to in clause (ii) above have been excluded from such registration, the
securities of other Persons entitled to exercise "piggy-back" registration
rights pursuant to contractual commitments of the Company not existing on the
date hereof (pro rata based on the amount of securities sought to be registered
by such Persons); and (y) in cases not involving the registration for sale of
securities for the Company's own account only, securities shall be registered in
such offering in the following order of priority: (i) FIRST, securities of any
Person whose exercise of a "demand" registration right
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<PAGE>
pursuant to a contractual commitment of the Company is the basis for the
registration, (ii) SECOND, PROVIDED that no securities of such Person referred
to in the immediately preceding clause (i) have been excluded from such
registration, the securities requested to be included in such registration by
the Holders of Registrable Securities pursuant to this Agreement, the securities
of other Persons entitled to exercise "piggy-back" registration rights pursuant
to contractual commitments of the Company existing on the date hereof and the
securities, if any, that may be issued pursuant to warrants to purchase up to
290,000 shares of Common Stock at an exercise price no less than $4.45 per share
issued to any Person from which the Company obtains lease financing subsequent
to the date hereof (such securities to be allocated pro rata based on the amount
of securities sought to be registered by such Holders or other Persons) and
(iii) THIRD, PROVIDED that no securities of such Persons referred to in the
immediately preceding clauses (i) and (ii) or of the Holders have been excluded
from such registration, securities of other Persons entitled to exercise
"piggy-back" registration rights pursuant to contractual commitments of the
Company not existing on the date hereof (pro rata based on the amount of
securities sought to be registered by such Persons).
If, as a result of the provisions of this Section 2.1 (b), any Selling
Holder shall not be entitled to include all Registrable Securities in a
Piggy-Back Registration that such Selling Holder has requested to be included,
such Selling Holder may elect to withdraw his request to include Registrable
Securities in such registration.
(c) RESTRICTIONS ON SALE BY HOLDERS. Each Holder of Warrants and
Registrable Securities whose Warrants and Registrable Securities are covered by
a Registration Statement filed pursuant to this Section 2.1 and are to be sold
thereunder agrees, if and to the extent reasonably requested by the managing
underwriter or underwriters in an underwritten public offering, not to effect
any public sale or distribution of Warrants and Registrable Securities or of
securities of the Company of the same class as any securities included in such
Registration Statement, including a sale pursuant to Rule 144 (except as part of
such underwritten offering), during the 30-day period prior to, and during the
180-day period beginning on, the closing date of each underwritten offering made
pursuant to such Registration Statement, to the extent timely notified in
writing by the Company or such managing underwriter or underwriters. In order
to enforce the foregoing covenant, the Company shall have the right to impose
stop transfer instructions with respect to the Warrants and Registrable
Securities until the end of such period. The provisions of this Section 2.1 (c)
shall be binding upon any transferee of any Warrants or Registrable Securities.
The foregoing provisions of this Section 2.1 (c) shall not apply to any
Holders of Warrants and Registrable Securities if such Holder is prevented by
applicable statute or regulation from entering into any such agreement;
PROVIDED, HOWEVER, that any such Holder shall undertake, in its request to
participate in any such underwritten offering, not to effect any public sale or
distribution of any Warrants and Registrable Securities commencing on the date
of sale of such Warrants and Registrable Securities unless it has provided 45
days' prior written notice of such sale or distribution to the managing
underwriter or underwriters.
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<PAGE>
2.2 (a) SHELF REGISTRATION. If only the Company sells shares in an
Initial Public Equity Offering or if all of the Warrant Shares (or other
securities issuable upon exercise of the Warrants) are not sold in an Initial
Public Equity Offering or any subsequent public offering, the Company shall use
its best efforts to cause to be declared effective, no later than the later of
(i) 180 days after the closing date of the Initial Public Equity Offering
(PROVIDED that, if a "lock up" or "black out" period is imposed on the Company
pursuant to or in connection with any underwriting or purchase agreement
relating to an underwritten Rule 144A or registered public offering of Common
Stock or securities convertible into or exchangeable or exercisable for Common
Stock, then the Company shall not be required to file such registration
statement until the end of such "lock up" or "black out" period, in which case
the Company shall be required to use its best efforts to be declared effective
no later than 30 days after the end of the "lock up" or "black out" period, but
in no event later than 210 days after the closing date of the Initial Public
Equity Offering) or (ii) the first anniversary of the date hereof, a shelf
registration statement (the "SHELF REGISTRATION") with respect to the issuance
(if allowed by applicable rule or policy of the SEC) or sale of Warrant Shares
(or other securities issuable upon exercise of the Warrants). In furtherance of
the foregoing, the Company shall (i) notify the Holders of all Subject Equity
when a Shelf Registration is being prepared, (ii) prepare and file with the SEC
a Registration Statement with respect to such Subject Equity and (iii) keep such
Registration Statement continuously effective until the earlier to occur of (A)
the 120th day of effectiveness of such Registration Statement (the
"EFFECTIVENESS PERIOD") and (B) such period of time as all of the Warrants have
been exercised and the Subject Equity included in such registration statement
shall have been sold thereunder. Any such request will specify the number of
shares of Subject Equity proposed to be sold and will also specify the intended
method of disposition thereof. Within 30 days after receipt by any Holder of
Subject Equity of such notice from the Company, such Holder may request in
writing that such Holder's Subject Equity be included in such Registration
Statement and the Company shall include in such Registration Statement the
Subject Equity of any such Holder requested to be so included (the "INCLUDED
SECURITIES"). Each such request by such other Holders shall specify the number
of Included Securities proposed to be sold and the intended method of
disposition thereof. In the event of any "lock up" or "black out" period
imposed on the Company as described in the preceding paragraph, the Company
shall so notify the Holders of Registrable Securities.
(b) EFFECTIVE REGISTRATION. A Registration Statement shall not be deemed
to have been effected as a Shelf Registration unless it shall have been declared
effective by the SEC as set forth in Section 2.2(a) hereof and the Company has
complied in all material respects with all of its obligations under this
Agreement with respect thereto; PROVIDED, HOWEVER, that if, after such
Registration Statement has become effective, the offering of Subject Equity
pursuant to such Registration Statement is or becomes the subject of any stop
order, injunction or other order or requirement of the SEC or any other
governmental, judicial or administrative order or requirement that prevents,
restrains or otherwise limits the sale of Subject Equity pursuant to such
Registration Statement for any reason, and such Registration Statement has not
become effective within a reasonable time period thereafter, such Registration
Statement shall be deemed not to have been effected. If (i) a registration
requested pursuant to this Section 2.2 is deemed not to have been effected or
(ii) a Shelf Registration does not remain effective under the Securities Act
until at least
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<PAGE>
the earlier of (A) an aggregate of 120 days (subject to Section 2.3 hereof)
after the effective date thereof or (B) the consummation of the distribution by
the Holders of all of the Subject Equity covered thereby, then such Shelf
Registration shall not count towards determining if the Company has satisfied
its obligation to effect Shelf Registrations pursuant to this Section 2.2. For
purposes of calculating the 1 20-day period referred to in the preceding
sentence, any period of time during which such Registration Statement was not in
effect shall be excluded. The Holders of Subject Equity shall be permitted to
withdraw all or any part of the Registrable Securities from a Shelf
Registration. Notwithstanding any such withdrawal by a Holder of Subject
Equity, if the Company has complied with all of its obligations hereunder, such
withdrawal shall not require the Company to effect any additional Shelf
Registrations.
(c) RESTRICTIONS ON SALE BY HOLDERS. Each Holder of Warrants and
Registrable Securities whose Warrants and Registrable Securities are covered by
a Registration Statement filed pursuant to this Section 2.2 and are to be sold
thereunder agrees, if and to the extent reasonably requested by the managing
underwriter or underwriters in an underwritten public offering, not to effect
any public sale or distribution of Warrants and Registrable Securities or of
securities of the Company of the same class as any securities included in such
Registration Statement, including a sale pursuant to Rule 144 (except as part of
such underwritten offering), during the 30-day period prior to, and during the
180-day period beginning on, the closing date of each underwritten offering made
pursuant to such Registration Statement, to the extent timely notified in
writing by the Company or such managing underwriter or underwriters. In order
to enforce the foregoing covenant, the Company shall have the right to impose
stop transfer instructions with respect to the Warrants and Registrable
Securities until the end of such period. The provisions of this Section 2.2(c)
shall be binding upon any transferee of any Warrants or Registrable Securities.
The foregoing provisions of Section 2.2(c) shall not apply to any Holders
of Warrants and Registrable Securities if such Holder is prevented by applicable
statute or regulation from entering into any such agreement; PROVIDED, HOWEVER,
that any such Holder shall undertake, in its request to participate in any such
underwritten offering, not to effect any public sale or distribution of any
Warrants and Registrable Securities commencing on the date of sale of such
Warrants and Registrable Securities unless it has provided 45 days' prior
written notice of such sale or distribution to the managing underwriter or
underwriters.
(d) SELECTION OF UNDERWRITER. If the Holders so elect, the offering of
such Subject Equity pursuant to such Shelf Registration shall be in the form of
an underwritten offering. The Holders making such Shelf Registration shall
select one or more nationally recognized firms of investment bankers, who shall
be reasonably acceptable to the Company, to act as the managing underwriter or
underwriters in connection with such offering and shall select any additional
investment bankers and managers to be used in connection with the offering.
(e) EXPENSES. The Company will pay all Registration Expenses in
connection with the registrations required pursuant to Section 2.2(a) hereof.
Each Holder of Subject Equity shall pay all underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or disposition
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of such Holder's Subject Equity pursuant to a Registration Statement requested
pursuant to this Section 2.2.
2.3 LIMITATIONS, CONDITIONS AND QUALIFICATIONS TO OBLIGATIONS UNDER
REGISTRATION COVENANTS. The obligations of the Company set forth in Sections
2.1, 2.2 and 2.6 hereof are subject to each of the following limitations,
conditions and qualifications:
(a) Subject to the next sentence of this paragraph, the Company shall
be entitled to postpone, for a reasonable period of time, the filing of, or
suspend the effectiveness of, any registration statement or amendment
thereto, or suspend the use of any prospectus and shall not be required to
amend or supplement the registration statement, any related prospectus or any
document incorporated therein by reference (other than an effective
registration statement being used for an underwritten offering); PROVIDED
that the duration of such postponement or suspension (a "SUSPENSION PERIOD")
may not exceed an aggregate of 60 days after the event or circumstance giving
rise to such Suspension Period, and the duration of such Suspension Period
shall be excluded from the calculation of the 120-day period described in
Section 2.2(b) hereof; and PROVIDED, FURTHER, that the Company may not effect
such a postponement or suspension during the 60 days immediately prior to the
expiration of the Warrants. Such Suspension Period may be effected only if
the Company's Board of Directors determines in good faith that there is a
valid purpose for such Suspension Period and provides notice of such
determination to the Holders at their addresses appearing in the register of
Warrants maintained by the Warrant Agent; PROVIDED, that the Company shall
not be entitled to such postponement or suspension more than once in any
365-day period. If the Company shall so postpone the filing of a
Registration Statement it shall, as promptly as possible, deliver a
certificate signed by the chief executive officer of the Company to the
Selling Holders as to such determination, and the Selling Holders shall (1)
have the right, in the case of a postponement of the filing or effectiveness
of a Registration Statement, upon the affirmative vote of the Holders of not
less than a majority of the Registrable Securities to be included in such
Registration Statement, to withdraw the request for registration by giving
written notice to the Company within 10 days after receipt of such notice or
(2) in the case of a suspension of the right to make sales, receive an
extension of the registration period equal to the number of days of the
suspension.
(b) The Company's obligations shall be subject to the obligations of the
Selling Holders, which the Selling Holders acknowledge, to furnish all
information and materials and to take any and all actions as may be required
under applicable federal and state securities laws and regulations to permit the
Company to comply with all applicable requirements of the SEC, if applicable,
and to obtain any acceleration of the effective date of such Registration
Statement.
2.4 RESTRICTIONS ON ACTIONS BY THE COMPANY AND OTHERS. The Company
covenants and agrees that it will not, and that it will not cause or permit any
of its subsidiaries to, after the date hereof, enter into any agreement or
contract that conflicts with or limits or prohibits the full and timely exercise
by the Holders of Warrants or Registrable Securities of the rights herein to
have a Shelf Registration or to join in any Piggy-Back Registration subject to
the other terms and provisions
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hereof. Notwithstanding the foregoing, the Company shall not be deemed to have
breached its obligations pursuant to this Section 2.4 solely as a result of its
granting to any Person (a) "piggyback" registration rights that are junior in
all respects to the rights granted under this Agreement or (b) "demand"
registration rights.
2.5 RULE 144 AND RULE 144A. The Company covenants that it will take such
action as any Holder of Warrants or Registrable Securities may reasonably
request, all to the extent required from time to time to enable such Holder to
sell Warrants or Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule
144(k) and Rule 144A under the Securities Act, as such Rules may be amended from
time to time, or (b) any similar rule or regulation hereafter adopted by the
SEC.
2.6 UNDERWRITTEN REGISTRATIONS. No Holder of Registrable Securities may
participate in any underwritten registration pursuant to a Registration
Statement filed under this Agreement unless such Holder (a) agrees to (i) sell
such Holder's Registrable Securities on the basis provided in and in compliance
with any underwriting arrangements approved by the Holders of not less than a
majority of the Registrable Securities to be sold thereunder and (ii) comply
with Rules 101, 102 and 104 of Regulation M under the Exchange Act and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements.
Section 3. REGISTRATION PROCEDURES. In connection with the obligations
of the Company with respect to any Registration Statement pursuant to Sections
2.1, 2.2 and 2.6 hereof, the Company shall, except as otherwise provided:
(a) A reasonable period of time prior to the initial filing of a
Registration Statement or Prospectus and a reasonable period of time prior to
the filing of any amendment or supplement thereto (including any document that
would be incorporated or deemed to be incorporated therein by reference),
furnish to the Holders and the managing underwriters, if any, upon written
request therefor, copies of all such documents proposed to be filed, which
documents (other than those incorporated or deemed to be incorporated by
reference) shall be subject to the review of such Holders, and such
underwriters, if any, and cause the officers and directors of the Company,
counsel to the Company and independent certified public accountants to the
Company to respond to such reasonable inquiries as shall be necessary, in the
opinion of counsel to such underwriters, to conduct a reasonable investigation
within the meaning of the Securities Act; PROVIDED that the foregoing inspection
and information gathering shall be coordinated on behalf of the Holders by
Merrill Lynch. The Company shall not file any such Registration Statement or
related Prospectus or any amendments or supplements thereto which the Holders of
a majority of the Registrable Securities included in such Registration Statement
shall reasonably object on a timely basis.
(b) Prepare and file with the SEC such amendments, including
post-effective amendments, to each Registration Statement as may be necessary to
keep such Registration Statement continuously effective for the applicable time
period required hereunder; cause the related
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Prospectus to be supplemented by any required Prospectus supplement, and as so
supplemented to be filed pursuant to Rule 424 (or any similar provisions then in
force) promulgated under the Securities Act; and comply with the provisions of
the Securities Act and the Exchange Act with respect to the disposition of all
securities covered by such Registration Statement during such period in
accordance with the intended methods of disposition by the sellers thereof set
forth in such Registration Statement as so amended or in such Prospectus as so
supplemented.
(c) Notify the Holders of Registrable Securities to be sold and the
managing underwriters, if any, promptly, and (if requested by any such person)
confirm such notice in writing, (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment is proposed to be filed, and (B) with
respect to a Registration Statement or any post-effective amendment, when the
same has become effective, (ii) of any request by the SEC or any other Federal
or state governmental authority for amendments or supplements to a Registration
Statement or related Prospectus or for additional information, (iii) of the
issuance by the SEC, any state securities commission, any other governmental
agency or any court of any stop order suspending the effectiveness of such
Registration Statement or of any order or injunction suspending or enjoining the
use of a Prospectus or the effectiveness of a Registration Statement or the
initiation of any proceedings for that purpose, (iv) of the receipt by the
Company of any notification with respect to the suspension of the qualification
or exemption from qualification of any of the Registrable Securities for sale in
any jurisdiction, or the initiation or threatening of any proceeding for such
purpose, and (v) of the happening of any event, the existence of any information
becoming known that makes any statement made in a Registration Statement or
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference untrue in any material respect or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, not misleading, and that in the case of the Prospectus, it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(d) Use its best efforts to avoid the issuance of or, if issued, obtain
the withdrawal of any order enjoining or suspending the effectiveness of the
Registration Statement or the use of a Prospectus or the lifting of any
suspension of the qualification (or exemption from qualification) of any of the
Registrable Securities covered thereby for sale in any jurisdiction described in
Section 3(h) hereof at the earliest practicable moment.
(e) If requested by the managing underwriters, if any, or if none, by the
Holders of a majority of the Registrable Securities being sold pursuant to such
Registration Statement, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment such information as the managing underwriters, if any,
or if none, such Holders reasonably believe should be included therein, and (ii)
make all required filings of such Prospectus supplement or such post-effective
amendment under the Securities Act as soon as practicable after the Company has
received notification of the matters to be incorporated in such prospectus
supplement or post-effective amendment; PROVIDED, HOWEVER, that the Company
shall not be required to take any action pursuant to this Section 3(e) that
would in the opinion of counsel for the Company, violate applicable law.
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<PAGE>
(f) Upon written request to the Company, furnish to each Holder of
Registrable Securities to be sold pursuant to a Registration Statement and each
managing underwriter, if any, without charge, at least one conformed copy of the
Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested
(including those previously furnished or incorporated by reference) as soon as
practicable after the filing of such documents with the SEC.
(g) Deliver to each Holder of Registrable Securities to be sold pursuant
to a Registration Statement and each managing underwriter, if any, without
charge, as many copies of each Prospectus (including each form of prospectus)
and each amendment or supplement thereto as such Persons may reasonably request;
and the Company hereby consents to use of such Prospectus (except upon the
occurrence of any event contemplated by Section 3(c)(v) hereof) and each
amendment or supplement thereto and each document supplemental thereto by each
of the selling Holders of Registrable Securities and the underwriters or agents,
if any, in connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto.
(h) Prior to any offering of Registrable Securities, use its best efforts
to register or qualify or cooperate with the Holders of Registrable Securities
to be sold, the managing underwriter or underwriters, if any, and their
respective counsel in connection with the registration or qualification (or
exemption from such registration or qualification) of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions as any such Holder or underwriter reasonably requests in writing;
keep each such registration or qualification (or exemption therefrom) effective
during the period such Registration Statement is required to be kept effective
hereunder and do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdictions of the Registrable Securities
covered by the applicable Registration Statement; PROVIDED, HOWEVER, that the
Company shall not be required to (i) qualify generally to do business in any
jurisdiction where it is not then so qualified or (ii) take any action that
would subject it to general service of process in any such jurisdiction where it
is not then so subject or to taxation in any jurisdiction where it is not so
subject or to taxation in any jurisdiction where it is not so subject.
(i) In connection with any sale or transfer of Registrable Securities that
will result in such securities no longer being Registrable Securities, cooperate
with the Holders of Registrable Securities and the managing underwriters, if
any, to facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be sold, which certificates shall not
bear any restrictive legends whatsoever and shall be in a form eligible for
deposit with The Depository Trust Company ("DTC"); and to enable such
Registrable Securities to be in such denominations and registered in such names
as the managing underwriter or underwriters, if any, or such Holders may
reasonably request at least two business days prior to any sale of Registrable
Securities.
(j) Upon the occurrence of any event contemplated by Section 3(c)(v)
above, as promptly as practicable prepare a supplement or amendment, including
if appropriate a post-effective amendment to each Registration Statement or a
supplement to the related Prospectus or any
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document incorporated or deemed to be incorporated therein by reference, and
file any other required document so that, as thereafter delivered, such
Prospectus will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Upon notification by the Company of the occurrence of such
event, and until the preparation of a supplement or amendment by the Company,
the Holders shall not use such Prospectus in connection with the sale of any
Registrable Securities.
(k) Prior to the effective date of a Registration Statement, (i) provide
the registrar for the Registrable Securities with certificates for such
securities in a form eligible for deposit with DTC and (ii) provide a CUSIP
number for such securities.
(l) Enter into such agreements (including an underwriting agreement in
such form, scope and substance as is customary in underwritten offerings) and
take all such other reasonable actions in connection therewith (including those
reasonably requested by the managing underwriters, if any, or the Holders of a
majority of the Registrable Securities being sold) in order to expedite or
facilitate the disposition of such Registrable Securities, and, if the
registration is an underwritten registration, (i) make such representations and
warranties to the underwriter or underwriters with respect to the business of
the Company and the subsidiaries of the Company (including with respect to
businesses or assets acquired or to be acquired by any of them), and the
Registration Statement, Prospectus and documents, if any, incorporated or deemed
to be incorporated by reference therein, in each case, in form, substance and
scope as are customarily made by issuers to underwriters in underwritten
offerings, and confirm the same if any when requested; (ii) obtain opinions of
counsel to the Company and updates thereof (which counsel and opinions (in form,
scope and substance) shall be reasonably satisfactory to the managing
underwriters, addressed to each of the underwriters), covering the matters
customarily covered in opinions requested in underwritten offerings and such
other matters as may be reasonably requested by such underwriters; (iii) use
their best efforts to obtain customary "cold comfort" letters and updates
thereof from the independent certified public accountants of the Company (and,
if necessary, any other independent certified public accountants of any
subsidiary of the Company or of any business acquired by the Company for which
financial statements and financial data are, or are required to be, included in
the Registration Statement), addressed (where reasonably possible) to each of
the underwriters, such letters to be in customary form and covering matters of
the type customarily covered in "cold comfort" letters in connection with
underwritten offerings; (iv) the underwriting agreement entered into shall
contain customary indemnification provisions and procedures no less favorable to
the underwriters, if any, than those set forth in Section 4 hereof (or such
other provisions and procedures acceptable to the managing underwriter); and (v)
deliver such documents and certificates as may be reasonably requested by the
managing underwriter or underwriters to evidence the continued validity of the
representations and warranties made pursuant to clause (i) above and evidence
compliance with any customary conditions contained in the underwriting agreement
or other agreements entered into by the Company.
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<PAGE>
(m) Make available for inspection by a representative of any underwriter
participating in any such disposition of Registrable Securities. and any
attorney, consultant or accountant retained by such underwriter (collectively,
the "INSPECTORS"), at the offices where normally kept, during the reasonable
business hours, all financial and other records, pertinent corporate documents
and properties of the Company and the subsidiaries of the Company (including
with respect to businesses and assets acquired or to be acquired to the extent
that such information is available to the Company), and cause the officers,
directors, agents and employees of the Company and its subsidiaries of the
Company (including with respect to businesses and assets acquired or to be
acquired to the extent that such information is available to the Company) to
supply all information in each case reasonably requested by any such Inspector
in connection with such Registration Statement; PROVIDED, HOWEVER, that such
persons shall first agree in writing with the Company that any information that
is reasonably and in good faith designated by the Company in writing as
confidential at the time of delivery of such information shall be kept
confidential by such Persons, unless (i) disclosure of such information is
required by court or administrative order or is necessary to respond to
inquiries of regulatory authorities, (ii) disclosure of such information is
required by law (including any disclosure requirements pursuant to U.S.
securities laws in connection with the filing of the Registration Statement or
the use of any Prospectus), (iii) such information becomes generally available
to the public other than as a result of a disclosure or failure to safeguard
such information by such person or (iv) such information becomes available to
such person from a source other than the Company and its subsidiaries and such
source is not bound by a confidentiality agreement; PROVIDED, FURTHER that the
foregoing investigation shall be coordinated on behalf of the selling Holders of
Registrable Securities by Merrill Lynch.
(n) Comply with all applicable rules, regulations and policies of the SEC
and make generally available to its security holders earnings statements
satisfying the provisions of Section 1l(a) of the Securities Act and Rule 158
thereunder no later than 60 days after the end of any 12-month period (or 135
days after the end of any 12-month period if such period is a fiscal year) (i)
commencing at the end of any fiscal quarter in which Registrable Securities are
sold to an underwriter or to underwriters in a firm commitment or reasonable
efforts underwritten offering and (ii) if not sold to an underwriter or to
underwriters in such an offering, commencing on the first day of the first
fiscal quarter of the Company after the effective date of the relevant
Registration Statement, which statements shall cover said such period,
consistent with the requirements of Rule 158 under the Securities Act.
(o) Use its best efforts to cause all Registrable Securities relating to
such Registration Statement to be listed on each securities exchange, if any, on
which similar securities issued by the Company are then listed.
(p) Cooperate with each seller of Registrable Securities to facilitate the
timely preparation and delivery of certificates representing Registrable
Securities to be sold and not bearing any restrictive legends and registered in
such names as the Selling Holders may reasonably request at least two business
days prior to the closing of any sale of Registrable Securities.
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<PAGE>
(q) Cooperate with each seller of Registrable Securities covered by any
Registration Statement and each underwriter, if any, participating in the
disposition of such Registrable Securities and its respective counsel in
connection with any filings required to be made with the National Association of
Securities Dealers, Inc.
The Company may require a Holder of Registrable Securities to be included
in a Registration Statement to furnish to the Company such information regarding
(i) the intended method of distribution of such Registrable Securities, (ii)
such Holder and (iii) the Registrable Securities held by such Holder as is
required by law to be disclosed in such Registration Statement, and the Company
may exclude from such Registration Statement the Registrable Securities of any
Holder who fails to furnish such information within a reasonable time after
receiving such request.
If any such Registration Statement refers to any Holder by name or
otherwise as the Holder of any securities of the Company, then such Holder shall
have the right to require (i) the insertion therein of language, in form and
substance reasonably satisfactory to such Holder, to the effect that the holding
by such Holder of such securities is not to be construed as a recommendation by
such Holder of the investment quality of the Company's securities covered
thereby and that such holding does not imply that such Holder will assist in
meeting any future financial requirements of the Company, or (ii) in the event
that such reference to such Holder by name or otherwise is not required by the
Securities Act, the deletion of the reference to such Holder in such amendment
or supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
Each Holder of Registrable Securities agrees by acquisition of such Subject
Equity that, upon receipt of any notice from the Company of the happening of any
event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv) or 3(c)(v)
hereof or of a Suspension Period pursuant to Section 2.3(a) hereof, such Holder
will forthwith discontinue disposition of such Subject Equity covered by the
Registration Statement or Prospectus until such Holder's receipt of the copies
of the supplemented or amended Prospectus contemplated by Section 3(j) hereof,
or until it is advised in writing (the "Advice") by the Company that the use of
the applicable Prospectus may be resumed, and in either case has received copies
of any additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus. If the Company shall give any
such notice, the Effectiveness Period shall be extended by the number of days
during such periods from and including the date of the giving of such notice to
and including the date when each seller of Subject Equity covered by such
Registration Statement shall have received (x) the copies of the supplemented or
amended Prospectus contemplated by Section 3(j) hereof or (y) the Advice, and,
in either case, has received copies of any additional or supplemental filings
that are incorporated or deemed to be incorporated by reference in such
Prospectus.
Holders of the Subject Equity shall be obligated to keep confidential the
existence of a Suspension Period or any confidential information communicated by
the Company to the Holder with respect thereto.
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Section 4. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each Initial Purchaser, each Holder, each
underwriter, if any, who participates in an offering of Registrable Securities
and each Person, if any, who controls any of such parties within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement
(or any amendment thereto) pursuant to which Registrable Securities were
registered under the Securities Act, including all documents incorporated
therein by reference, or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading or arising out of any untrue statement or alleged
untrue statement of a material fact contained in any Prospectus (or any
amendment or supplement thereto) or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever, in each case, based upon any such untrue statement or omission,
or any such alleged untrue statement or omission; PROVIDED that (subject to
Section 4(d) below) any such settlement is effected with the written
consent of the Company; and
(iii) against any and all expenses whatsoever, as incurred (including
the reasonable fees and disbursements of one counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any court or
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such expense
is not paid under subparagraph (i) or (ii) of this Section 4(a);
PROVIDED, HOWEVER, that this indemnity agreement does not apply to any loss,
liability, claim, damage or expense to the extent arising out of an untrue
statement or omission or alleged untrue statement or omission (A) made in or
omitted from a preliminary Prospectus or Registration Statement and corrected or
included in a subsequent Prospectus or Registration Statement or any amendment
or supplement thereto, (B) made in reliance upon and in conformity with written
information furnished to the Company by the Selling Holders of Registrable
Securities, any Holder, any Initial Purchaser or any underwriter expressly for
use in the Registration Statement (or any amendment thereto) or the Prospectus
(or any amendment or supplement thereto) or (C) resulting from the use of the
Prospectus during a period when the use of the Prospectus has been suspended or
is otherwise unavailable for sales thereunder in accordance with Sections
2.1(c), 2.2(b), 2.2(c), 2.3, 2.4, 2.6 or
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the penultimate paragraph of Section 3 hereof, PROVIDED, in each case, that
Holders received prior notice of such suspension or other unavailability.
(b) In the case of any registration of Registrable Securities, each Holder
agrees, severally and not jointly, to indemnify and hold harmless the Company,
each Initial Purchaser, each underwriter, if any, who participates in an
offering of Registrable Securities and the other Selling Holders and each of
their respective directors and officers (including each officer of the Company
who signed the Registration Statement) and each Person, if any, who controls the
Company, any Initial Purchaser, any underwriter or any other Selling Holder
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, against any and all loss, liability, claim, damage and expense
described in the indemnity contained in Section 4(a) hereof, as incurred, but
only with respect to untrue statements or omissions, or alleged untrue
statements or omissions, made in the Registration Statement (or any amendment
thereto) or the Prospectus (or any amendment or supplement thereto) in reliance
upon and in conformity with written information furnished to the Company by such
Holder expressly for use in the Registration Statement (or any amendment
thereto), or the Prospectus (or any amendment or supplement thereto); PROVIDED,
HOWEVER, that no such Holder shall be liable for any claims hereunder in excess
of the amount of net proceeds received by such Holder from the sale of
Registrable Securities pursuant to such Registration Statement.
(c) In case any action shall be commenced involving any Person in respect
of which indemnity may be sought pursuant to either paragraph (a) or (b) above,
such Person (the "INDEMNIFIED PARTY") shall give notice as promptly as
reasonably practicable to each Person against whom such indemnity may be sought
(the "INDEMNIFYING PARTY"), but failure to so notify an indemnifying party shall
not relieve such indemnifying party from any liability hereunder to the extent
it is not materially prejudiced as a result thereof and in any event shall not
relieve it from any liability which it may have otherwise than on account of
this indemnity agreement.
An indemnifying party may participate at its own expense in the defense of
such action; PROVIDED, HOWEVER, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying party or parties be
liable for the fees and expenses of more than one counsel (in addition to any
local counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 4 (whether or not the indemnified parties are actual or
potential parties thereof), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
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(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 4(a)(ii) hereof effected
without its written consent if (i) such settlement is entered into more than 45
days after receipt by such indemnifying party of the aforesaid request, (ii)
such indemnifying party shall have received notice of the terms of such
settlement at least 30 days prior to such settlement being entered into and
(iii) such indemnifying party shall not have reimbursed such indemnified party
in accordance with such request prior to the date of such settlement.
(e) If the indemnification provided for in any of the indemnity provisions
set forth in this Section 4 is for any reason unavailable to or insufficient to
hold harmless an indemnified party in respect of any losses, liabilities,
claims, damages or expenses referred to therein, then each indemnifying party
shall contribute to the aggregate amount of such losses, liabilities, claims,
damages and expenses incurred by such indemnified party, as incurred, in such
proportion as is appropriate to reflect the relative fault of such indemnifying
party or parties on the one hand, and such indemnified party or parties on the
other hand, in connection with the statements or omissions which resulted in
such losses, liabilities, claims, damages or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying
party or parties on the one hand, and such indemnified party or parties on the
other hand shall be determined by reference to, among other things, whether any
such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by
such indemnifying party or parties or such indemnified party or parties and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, the Initial
Purchasers and the Holders of the Registrable Securities agree that it would not
be just and equitable if contribution pursuant to this Section 4 were determined
by pro rata allocation (even if the Selling Holders of Registrable Securities
were treated as one entity, and the Holders were treated as one entity, for such
purpose) or by another method of allocation which does not take account of the
equitable considerations referred to above in this Section 4. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 4 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by an governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11 (f) of the 1993 Act) shall
be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 4, each Person, if
any, who controls an Initial Purchaser or Holder within the meaning of this
Section 15 of the Securities Act or Section 20 of the Exchange Act shall have
the same rights to contribution as such Initial Purchaser or Holder, and each
director of the Company, each officer of the Company who signed the Registration
Statement, and each Person, if any, who controls the Company within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have
the same rights to contribution as the Company.
- 19 -
<PAGE>
Section 5. MISCELLANEOUS.
(a) REMEDIES. In the event of a breach by the Company of any of its
obligations under this Agreement, each Holder, in addition to being entitled to
exercise all rights provided herein, in the Purchase Agreement or granted by
law, including recovery of damages, will be entitled to specific performance of
its rights under this Agreement. The Company agrees that monetary damages would
not be adequate compensation for any loss incurred by reason of a breach by it
of any of the provisions of this Agreement.
(b) NO INCONSISTENT AGREEMENTS. The Company will not enter into any
agreement which is inconsistent with the rights granted to the Holders of
Warrants and Registrable Securities in this Agreement or otherwise conflicts
with the provisions hereof. The rights granted to the Holders hereunder do not
in any way conflict with and are not inconsistent with the rights granted to the
holders of the Company's other issued and outstanding securities, if any, under
any such agreements.
(c) NO PIGGY-BACK ON SHELF REGISTRATIONS. The Company shall not grant to
any of its security holders (other than the Holders in such capacity) the right
to include any of their securities in any Registration Statement filed pursuant
to a Shelf Registration.
(d) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, otherwise than with the prior written consent of the Holders of not less
than a majority of the then outstanding Warrants and each class and series of
Registrable Securities. Notwithstanding the foregoing, a waiver or consent to
depart from the provisions hereof with respect to a matter that relates
exclusively to the rights of one or more Holders and that does not directly or
indirectly affect the rights of other Holders may be given by a majority of the
Holders so affected; PROVIDED, HOWEVER, that the provisions of this sentence may
not be amended, modified or supplemented except in accordance with the
provisions of the immediately preceding sentence. Notwithstanding the
foregoing, no amendment, modification, supplement, waiver or consent with
respect to Section 4 hereof shall be made or given otherwise than the prior
written consent of each Person affected thereby.
(e) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand delivery, registered
first-class mail, telecopier, or any courier guaranteeing overnight delivery (i)
if to a Holder, at the most current address of such Holder as set forth in the
register for the Warrants or the Registrable Securities, which address initially
is, with respect to each Initial Purchaser, the address set forth with respect
to such Initial Purchaser in the Purchase Agreement; and (ii) if to the Company,
initially at the address set forth below the Company's name on the signature
pages hereto and thereafter at such other address, notice of which is given in
accordance with the provisions of this Section 5(e), with a copy to Brobeck
Phleger & Harrison LLP, 550 West "C" Street, Suite 1300, San Diego, CA
92101-3532, Attention: John Denniston, and thereafter at such other address
notice of which is given in accordance with the provisions of this Section 5(e).
- 20 -
<PAGE>
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt is acknowledged, if telecopied; and on
the next Business Day, if timely delivered to an air courier guaranteeing
overnight delivery.
(f) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the successors and permitted assigns of each of the parties
and shall inure to the benefit of each Holder. If any transferee of any Holder
shall acquire Registrable Securities, in any manner, whether by operation of law
or otherwise, such Registrable Securities shall be held subject to all of the
terms of this Agreement, and by taking and holding such Registrable Securities
such Person shall be conclusively deemed to have agreed to be bound by and to
perform all of the terms and provisions of this Agreement and such Person shall
be entitled to receive the benefits hereof. The Company may not assign any of
its rights or obligations hereunder without the prior written consent of each
Holder of Registrable Securities. Notwithstanding the foregoing, no successor
or assignee of the Company shall have any rights granted under the Agreement
until such person shall acknowledge its rights and obligations hereunder by a
signed written statement of such person's acceptance of such rights and
obligations.
(g) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same Agreement.
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(i) SEVERABILITY. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, illegal,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their best efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such that may be
hereafter declared invalid, illegal, void or unenforceable.
(j ) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(k) ENTIRE AGREEMENT. This Agreement, together with the Purchase
Agreement and the Warrant Agreement, is intended by the parties as a final
expression of their agreement, and is intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein and therein. This Agreement, the Purchase
- 21 -
<PAGE>
Agreement and the Warrant Agreement supersede all prior agreements and
understandings between the parties with respect to such subject matter.
(l) SECURITIES HELD BY THE COMPANY OR ITS AFFILIATES. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities or Warrants is required hereunder, Registrable Securities or Warrants
held by the Company or by any of its Affiliates shall not be counted (in either
the numerator or the denominator) in determining whether such consent or
approval was given by the Holders of such required percentage.
[SIGNATURE PAGE FOLLOWS]
- 22 -
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
RHYTHMS NETCONNECTIONS INC.
7337 South Revere Parkway
Englewood, CO 80112-3931
By: /s/ Scott C. Chandler
-------------------------------------------
Name: Scott C. Chandler
Title: Chief Financial Officer
Confirmed and accepted as of
the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
By: /s/ Marcy Becker
-----------------------------
Name: M. Becker
Title: Vice President
- 23 -
<PAGE>
VOTING TRUST AGREEMENT
Relating to Shares of
Rhythms NetConnections Inc.
THIS VOTING TRUST AGREEMENT (the "Agreement') is made and entered into
as of May 5, 1998, by and among Sprout Capital VII, L.P. ("Sprout VII"), First
Union Trust Company, National Association, as voting trustee (together with its
successors in such capacity, the "Trustee") and Donaldson, Lufkin & Jenrette,
Inc. ("DLJ").
WHEREAS, the parties hereto desire to record their arrangements with
respect to shares of Series A Convertible Preferred Stock ("Series A
Preferred"), and Series B Convertible Preferred Stock ("Series B Preferred") of
Rhythms NetConnections Inc., a Delaware corporation (the "Corporation").
NOW, THEREFORE, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. In this Agreement:
(a) "Control Affiliate" means DLJ or any or entity controlling,
controlled by or under common control with, directly or indirectly, DLJ.
(b) "DLJ" means Donaldson, Lufkin & Jenrette, Inc., a Delaware
corporation, and its successors.
(c) "DLJSC" means Donaldson, Lufkin & Jenrette Securities
Corporation, a Delaware corporation, and its successors.
(d) "DLJ Affiliate" means any person or entity who is a Control
Affiliate, Employee Affiliate or Other Affiliate.
(e) "Employee Affiliate" means any person employed by (or who is the
spouse, relative or relative of a spouse, in each case residing in the home of a
person employed by) a Control Affiliate, as reflected in the records of the
Trustee.
(f) "Holder" means from time to time, any person or entity for whom
Shares are held hereunder by the Trustee.
(g) "Other Affiliate" means any person or entity which has a
substantial business relationship with a Control Affiliate and which is not
itself a Control Affiliate.
(h) "Securities Act" means the Securities Act of 1933, as amended.
(i) "Share" means a share of Common Stock or a Share Equivalent.
<PAGE>
(j) "Share Equivalent" means any security convertible into,
exchangeable for, or carrying the right to acquire Common Stock of the
Corporation ("Common Stock") or subscriptions, warrants, options, rights or
other arrangements obligating the Corporation to issue or dispose of any shares
or other voting securities of the Corporation, including, without limitation,
the Series A Preferred and the Series B Preferred.
2. DEPOSIT.
(a) Sprout VII, by delivery to the Trustee of certificates
representing the same, duly endorsed or accompanied by appropriate instruments
of transfer herewith, duly assigns and delivers or has caused to be duly
assigned and delivered to the Trustee to be held pursuant to this Agreement
2,609,686 shares of Series A Preferred and 390,966 shares of Series B Preferred
(the "initial deposit"). Sprout VII represents that the Shares in the initial
deposit are all of the Shares beneficially owned by Sprout VII. Subject to the
provisions of Section 2(b) below, DLJ, by delivery to the Trustee of
certificates representing the same, duly endorsed or accompanied by appropriate
instruments of transfer, shall duly assign and deliver or cause to be duly
assigned and delivered to the Trustee all Shares (i) received upon conversion of
Shares held by the Trustee and (ii) owned by any DLJ Affiliate or acquired by
any DLJ Affiliate at any time in excess of 5% in the aggregate of the total
number of shares of the voting capital stock (of any class) of the Corporation
then outstanding. Each person or entity for whom Shares are held from time to
time by the Trustee hereunder as reflected in the records of the Trustee shall
be a Holder and shall be bound by all the provisions of this Agreement
applicable to Holders.
(b) In determining, for purposes of Section 2(a) only, whether more
than 5% in the aggregate of the total number of shares of the voting capital
stock (of any class) of the Corporation at any time then outstanding are owned
by DLJ Affiliates, there shall be excluded from the calculation of shares owned
by DLJ Affiliates, and no deposit of Shares shall be required hereunder as a
consequence of any Shares:
(i) held by DLJSC or any other Control Affiliate which is registered
as a broker-dealer under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), if such Shares are held in connection with its normal
trading activities as a broker-dealer; PROVIDED, HOWEVER, that DLJ will
cause DLJSC or such other Control Affiliate to agree that it will not vote
such Shares,
(ii) held by DLJSC or any other Control Affiliate which is a
registered broker-dealer under the Exchange Act, if such Shares are held in
a syndicate or trading account and were acquired in its capacity as an
underwriter or placement agent whether in an offering registered under the
Securities Act or otherwise; PROVIDED, HOWEVER, that DLJ will cause DLJSC
or such other Control Affiliate to agree that it will not vote such Shares,
(iii) held by DLJSC for the account of any person or entity other
than a Control Affiliate or Employee Affiliate or in the name of a customer
account, which customer is a person or entity other than a Control
Affiliate or Employee Affiliate; PROVIDED, HOWEVER, that DLJSC may vote the
Shares only when instructed by the beneficial owner thereof or
2
<PAGE>
as otherwise permitted under the rules of all exchanges, if any, on which
any class of Shares is listed,
(iv) held by an Employee Affiliate other than a person holding the
position of Senior Vice President or above (or performing the comparable
function) of DLJ or any of its subsidiaries, unless in either case a
contract or other arrangement (other than this Agreement) regarding the
voting of such Shares exists between such Employee Affiliate or Other
Affiliate and any Control Affiliate, or
(v) held by the Trustee pursuant to this Agreement.
3. TRANSFER ON BOOKS OF CORPORATION. The Trustee shall, to the
extent applicable, cause all Shares transferred to or deposited with it in its
capacity as Trustee hereunder to be represented by new certificates issued to
the Trustee. The Trustee's newly issued certificates shall state that they are
issued pursuant to this Agreement, and shall bear the legend required under the
Voting Agreement (as hereinafter defined). The Trustee will issue and deliver
(at the address of such Holder provided in writing to the Trustee) to each
Holder a Voting Trust Certificate (a "Trust Certificate") for the number of
Shares so transferred or deposited with the Trustee and held for the Trustee for
such Holder.
4. FORM. Trust Certificates shall be in substantially the following
form (with such modifications as may be appropriate if the applicable Trust
Certificate represents Share Equivalents);
TRANSFER OF THIS VOTING TRUST CERTIFICATE IS SUBJECT TO
TERMS AND CONDITIONS SET FORTH IN THE VOTING TRUST AGREEMENT
DATED AS OF MAY 5, 1998 (THE "VOTING TRUST AGREEMENT"), AND
THE AMENDED AND RESTATED VOTING AGREEMENT DATED AS OF MARCH
12, 1998 (THE"VOTING AGREEMENT"), COPIES OF WHICH HAVE BEEN
FILED IN THE REGISTERED OFFICE IN THE STATE OF DELAWARE OF
RHYTHMS NETCONNECTIONS INC, A DELAWARE CORPORATION (THE
"CORPORATION"). SUCH COPIES ARE OPEN TO INSPECTION DAILY
DURING BUSINESS HOURS BY ANY STOCKHOLDER OF THE CORPORATION
OR ANY BENEFICIARY OF THE VOTING TRUST AGREEMENT OR PARTY TO
THE VOTING AGREEMENT.
Certificate No.____
3
<PAGE>
RHYTHMS NETCONNECTIONS INC.
VOTING TRUST CERTIFICATE
This certifies that ("Holder") has
transferred to the undersigned Trustee or is otherwise the beneficial
owner of shares of [COMMON STOCK], [SERIES A
PREFERRED STOCK] [SERIES B PREFERRED STOCK] of the Corporation, to be
held by the Trustee pursuant to the terms of the Voting Trust
Agreement and Voting Agreement, copies of which have been delivered to
the above-named Holder and filed in the registered office of the
Corporation in the State of Delaware. The Holder, or his registered
assigns, will be entitled (i) to receive payments equal to any and all
cash dividends collected by the Trustee on the above stated number of
shares, (ii) to receive all other dividends or distributions in
respect of such Shares received by the Trustee except to the extent
that property received is required to be deposited in the trust
created by the Voting Trust Agreement, and (iii) to the delivery of a
certificate or certificates for that number of shares on the
termination of the Voting Trust Agreement, in accordance with its
provisions.
This Voting Trust Certificate is transferable on the books
maintained by the Trustee at the principal corporate trust office of
the Trustee by the Holder hereof, in person or by duly authorized
attorney, and upon surrender hereof; and until so transferred the
Trustee may treat the registered Holder hereof as the absolute owner
hereof for all purposes.
The Holder, by the acceptance of this Voting Trust Certificate,
agrees to be bound by all of the provisions of the Voting Trust
Agreement and Voting Agreement as fully as if its terms were set forth
in this Voting Trust Certificate.
EXECUTED this _____ day of ______________, ____
-------------------------------------------------
By:
----------------------------------------------
Name:
--------------------------------------------
Title:
------------------------------------------
"Trustee"
[Form of Assignment for Reverse of Voting Trust Certificate]
For value received,_________________ hereby sells, assigns, and
transfers unto _________________ the within Voting Trust Certificate
and all rights and
4
<PAGE>
interests represented thereby, and does hereby irrevocably constitute and
appoint _____________ attorney to transfer such Voting Trust Certificate on
the books of the within-named Trustee with full power of substitution in
the premises.
Date:___________________________
Signed:_________________________
5. ADDITIONAL TRUST CERTIFICATES. Any Holder may at any time
deposit with the Trustee additional certificates (or the equivalent evidence of
ownership in the case of Share Equivalents) for Shares. Any DLJ Affiliate
acquiring Shares shall, if required under this Agreement, become a Holder by (a)
depositing, or causing to be deposited, certificates (or the equivalent evidence
of ownership in the case of Share Equivalents) for Shares, duly endorsed for
transfer, with the Trustee and (b) accepting a Voting Trust Certificate in
respect of such Shares.
6. VOTING; POWERS. At all times prior to the termination of the
voting trust created herein, the Trustee shall have the exclusive right to vote
the Shares deposited with it hereunder (the "Deposited Shares"), or give written
consent, in person or by proxy, at all meetings of stockholders of the
Corporation, and in all proceedings in which the vote or consent, written or
otherwise, of the holders of Shares may be required or authorized by law.
The Trustee shall vote all Deposited Shares in accordance with this
Agreement and with the Amended and Restated Voting Agreement dated as of March
12, 1998 by and among the Corporation, Sprout VII and the other investors listed
therein, as the same may be amended from time to time (as so amended, the
"Voting Agreement"). The Trustee shall have full power and authority, and it is
hereby empowered and authorized, to become a party to and perform its
obligations under, to consent to waivers and amendments of, and otherwise take
or refrain from taking discretionary action under or pursuant to, the Voting
Agreement, in its sole and absolute discretion, and, subject to the Voting
Agreement, to vote the Deposited Shares in its sole and absolute discretion, it
being understood that the Trustee will not consult with any DLJ Affiliate
regarding such voting of such Shares, and to do any and all other things and
take any and all other actions as fully as any stockholder of the Corporation
might do if personally present at a meeting of the stockholders of the
Corporation. The Trustee may rely (and shall be fully protected in so relying)
upon advisors; PROVIDED THAT such advisors are not DLJ Affiliates. At any time
upon the written request of the Trustee, DLJ shall promptly provide to the
Trustee such information as is reasonably necessary (including certificates
and/or other documents) in order to enable the Trustee to carry out the
foregoing obligations; PROVIDED THAT, for all purposes of this Agreement, the
Trustee shall have no duty to inquire or investigate whether a person or entity
is a DLJ Affiliate, shall not be responsible for and shall have no personal
liability in connection with identifying or failing to identify a person or
entity as a DLJ Affiliate unless a Responsible Officer of the Trustee has actual
knowledge that such person or entity is a DLJ Affiliate, and shall be entitled
to assume and be fully protected in assuming that a person or entity is not a
DLJ Affiliate unless a Responsible Officer of the Trustee has actual knowledge
that such person or entity is a DLJ Affiliate. "Responsible Officer of the
Trustee" shall mean an officer of the Trustee in its principal corporate trust
office having primary responsibility for the administration of the voting trust
created under this Agreement.
5
<PAGE>
7. DIVIDENDS. If the Corporation pays or issues dividends or makes
other distributions on the Deposited Shares, the Trustee shall accept and
receive such dividends and distributions. Upon receipt of dividends and
distributions the same shall be prorated among the Holders that have a
beneficial interest hereunder in the Deposited Shares with respect to which such
dividend or other distribution was made in accordance with their interests and,
subject to the next sentence, the amount shall be distributed promptly pursuant
to transfer instructions set forth on Schedule B attached hereto or otherwise
communicated in writing to the Trustee. If the dividend or distribution is paid
or made in the form of Shares, such Shares shall be held by the Trustee under
the voting trust created herein and new Trust Certificates representing the
Shares received shall be issued to the applicable Holders. Holders entitled to
receive such dividends or distributions, or Trust Certificates in respect
thereof, described in this Section 7 shall be those Holders registered as such
on the transfer books of the Trustee at the close of business on the day fixed
by the Corporation for the taking of a record to determine those holders of its
stock entitled to receive such dividends or distributions. In the performance
of its duties to deliver dividends or distributions received by it under this
Agreement, the Trustee shall not be obligated to risk its own funds and will not
be personally liable for taxes or other charges related to the delivery of such
dividends or distributions.
8. TERMINATION. The voting trust created herein is expressly
declared irrevocable and such voting trust and this Agreement shall terminate on
the earlier to occur of:
(a) ten years from the date hereof; or
(b) The written election of DLJ or the Holder(s) of Trust
Certificates representing the beneficial interest in 50% or more of the
Deposited Shares (notice of which shall be provided to all other parties hereto
and all other Holders), but only if prior to the time notice is given:
(i) DLJ shall have received an opinion of independent nationally
recognized counsel who are experts in matters involving the
federal securities law, that, immediately after such
termination, no DLJ Affiliate will be an of "affiliate" of
the Corporation within the meaning of Rule 144 under the
Securities Act; and
(ii) Trustee shall have received a certificate of an officer of
DLJ (in relying on which the Trustee shall be fully
protected) to the effect that clause (i) above has been
satisfied, together with a copy of the opinion called for
thereby; or
(c) The written election of DLJ or the Holders of Trust Certificates
representing the beneficial interest in 50% or more of the Deposited Shares
(notice of which shall be provided to all other parties here to and all other
Holders) but only if prior to the time the notice is given the Trustee shall
have received a certificate of an officer of DLJ to the effect that no DLJ
Affiliate intends to make a market in any security of the Corporation (in
relying on which the Trustee shall be fully protected); or
(d) transfer of all of the Deposited Shares in accordance with
Section 9; or
6
<PAGE>
(e) the effective date of a liquidation or dissolution of the
Corporation.
An election pursuant to section 8(b) or 8(c) above shall be effective upon
delivery of notice hereof (together with the required copy of the opinion) to
the Trustee.
Upon the termination of the voting trust herein created, the Holders
shall surrender their Trust Certificates to the Trustee, and shall execute and
deliver any agreement or other document required by the Voting Agreement, and
the Trustee shall deliver or cause to be delivered to the Holders certificates
(or the equivalent evidence of ownership in the case of Share Equivalents) for
Shares, properly endorsed for transfer (to the extent necessary), equivalent to
the number and type of Shares the beneficial interest in which was represented
by the respective Trust Certificates surrendered.
9. TRANSFER. Except as provided in Sections 8 and 10 and in
subsections (a), (b), and (c) of this Section 9, certificates (or the equivalent
evidence of ownership in the case of Share Equivalents) for Deposited Shares may
not be delivered by the Trustee to a Holder, a Holder's designee or any other
third party prior to the termination of the voting trust created herein.
(a) A Holder may notify the Trustee in writing that the Holder
desires to cause a certificate or certificates (or the equivalent evidence of
ownership in the case of Share Equivalents) for Shares in which the Holder has a
beneficial interest hereunder to be transferred to any person or entity,
including such Holder, only if such transfer is an Eligible Transfer as defined
herein. Any person or entity that acquires Shares pursuant to an Eligible
Transfer is hereinafter referred to as an "Eligible Transferee".
For purposes of this Section 9, an "Eligible Transfer" is defined as
(i) any transfer of Shares to a person or entity who is not a DLJ Affiliate,
(ii) any transfer of Shares to an Other Affiliate or to any Employee Affiliate
other than a person holding the position of Senior Vice President or above (or
performing the comparable function) of any Control Affiliate; PROVIDED THAT, in
each case, a contract or other arrangement (other than this Agreement or the
Voting Agreement) regarding the voting of such Shares does not exist between any
Control Affiliate or Employee Affiliate and such transferee and (iii) any
transfer of Shares to DLJSC for the account of any person or entity other than a
Control Affiliate or Employee Affiliate or in the name of a customer account,
which customer is a person or entity other than a Control Affiliate or Employee
Affiliate; PROVIDED, HOWEVER, that DLJ shall cause DLJSC to vote such Shares
only when instructed by the beneficial owner therefor as otherwise permitted
under the rules of all exchanges, if any, on which any class of Shares is
listed.
Such notice shall name such Eligible Transferee and shall state (i)
its name and mailing address, (ii) the proposed transfer date (which date shall
be not less than five days after the Trustee's receipt of such notice), (iii)
the number and type of Shares to be transferred and (iv) the consideration, if
any, to be paid by such Eligible Transferee therefor. The notice to the Trustee
shall also contain a representation that such transferee is an Eligible
Transferee and shall be accompanied by a written agreement and representation
executed by the Eligible Transferee (in relying on which the Trustee shall be
fully protected) that it will execute and deliver any agreement
7
<PAGE>
or other document required by the Voting Agreement and Trust Certificate or
Certificates of the Holder, duly endorsed for transfer, representing the
beneficial interest in not less than the number of Shares of the type to be
transferred to the Eligible Transferee. On the date specified in such notice,
and upon receipt by the Trustee from such Eligible Transferee of the specified
consideration, if any, the Trustee shall deliver: (i) to the Eligible
Transferee, a certificate (or the equivalent evidence of ownership in the case
of Share Equivalents) for the number of Shares of the type specified in such
notice, issued in the name of the Trustee and duly endorsed for transfer, and
(ii) to the Holder, (x) a Trust Certificate representing the beneficial interest
in a number of Shares, if any, equal to the number of Shares of the type
represented by the surrendered Trust Certificate less the number of Shares of
the type transferred to such Eligible Transferee, and (y) the consideration, if
any, received from such Eligible Transferee. Such consideration shall be
distributed promptly to such Holder pursuant to the transfer instructions set
forth on Schedule B attached hereto or otherwise communicated to the Trustee in
writing.
(b) A Holder (hereinafter referred to as a "Requesting Party" for the
purpose of this Section 9(b)) may request of the Trustee in writing that the
Trustee transfer to such Requesting Party a certificate or certificates (or the
equivalent evidence of ownership in the case of Share Equivalents) for Shares in
which the Requesting Party has a beneficial interest hereunder; provided,
however, that no such request shall be made if immediately after giving effect
thereto DLJ Affiliates will own in the aggregate in excess of 5% in the
aggregate of the total number of shares of the voting capital stock (of any
class) of the Corporation then outstanding, and provided further if the
Requesting Party is not DLJ, the Trustee shall not honor such request unless DLJ
consents in writing to such request. In determining, for purposes of this
section 9(b) only, whether DLJ Affiliates will own in the aggregate in excess of
5% in the aggregate of the total number of shares of the voting capital stock
(of any class) of the Corporation then outstanding, (x) no effect shall be given
to the exclusions set forth in Section 2(b), (y) shares of Common Stock
underlying Share Equivalents owned by a DLJ Affiliate shall be deemed to be
outstanding and owned by such DLJ Affiliate and (z) shares of Common Stock held
by the Trustee pursuant to this Agreement shall be excluded. Such written
request (in relying on which the Trustee shall be fully protected) shall contain
the Requesting Party's agreement and representation that it will execute and
deliver any agreement or other document required by the Voting Agreement, and
shall name such Requesting Party and shall state (i) the proposed transfer date
(which date shall be not less than five days after the Trustee's receipt of such
request) and (ii) the number and type of Shares to be transferred. The written
request to the Trustee shall also be accompanied by (i) a Trust Certificate or
Certificates of the Requesting Party, duly endorsed for transfer, representing
the beneficial interest in not less than the number of Shares of the type to be
transferred to the Requesting Party and (ii) a certificate of an officer of the
Requesting Party and of DLJ (in relying on which the Trustee shall be fully
protected) certifying that immediately after giving effect to such request DLJ
Affiliates will own in the aggregate not more than 5% in the aggregate of the
total number of shares of the voting capital stock (of any class) of the
Corporation then outstanding. On the date specified in such request, and upon
receipt by the Trustee from the Requesting Party of such certificates, the
Trustee shall deliver to the Requesting Party a certificate (or the equivalent
evidence of ownership in the case of Share Equivalents) for the number of Shares
of the type specified in such notice, issued in the name of the Trustee and duly
endorsed for transfer.
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(c) A Holder may at any time direct the Trustee by notice in writing
to transfer a certificate or certificates (or the equivalent evidence of
ownership in the case of Share Equivalents) for Shares in which the Holder has a
beneficial interest hereunder (i) to an underwriter (including DLJSC) in
connection with a public offering of the Shares registered under the Securities
Act or (ii) in connection with sales made pursuant to Rule 144 (other than
subsection (k) thereof) under the Securities Act through a broker-dealer
(including DLJSC). Such notice shall state (a) the underwriter's or broker
dealer's (and transferee's if different) name and mailing address, (b) the
proposed transfer date (which date shall not be less than five days after the
Trustee's receipt of such notice), (c) the number and type of Shares to be
transferred, and (d) the consideration, if any, to be paid. The notice shall
also be accompanied by a written agreement and representation executed by the
underwriter or other transferee (in relying on which the Trustee shall be fully
protected) that it will execute and deliver any agreement or other document
required by the Voting Agreement, and a certificate of an officer of the Holder
(in relying on which the Trustee shall be fully protected) certifying that such
request is being made solely for sales made in connection with a public offering
of the Shares registered under the Securities Act or sales made pursuant to Rule
144 (other than subsection (k) thereof) under the Securities Act through a
broker dealer and a Trust Certificate or Certificates of the Holder, duly
endorsed for transfer, representing the beneficial interest in not less than the
number of Shares of the type to be transferred. The Trustee shall be entitled
to conclusively rely upon such certificate. On the date specified in such
notice, and upon receipt by the Trustee from such underwriter or such other
transferee of the specified consideration, if any, the Trustee shall deliver:
(x) to the underwriter or such other transferee, a certificate (or the
equivalent evidence of ownership in the case of Share Equivalents) for the
number of Shares of the type specified in such notice, issued in the name of the
Trustee and duly endorsed for transfer, and (y) to the Holder, a Trust
Certificate representing the beneficial interest in a number of Shares, if any,
equal to the number of Shares represented by the surrendered Trust Certificate
less the number of Shares transferred to such underwriter or such other
transferee, and (z) to the Holder, the consideration, if any, received from such
underwriter or such other transferee. Such consideration shall be distributed
promptly to the Holder pursuant to the transfer instructions set forth on
Schedule B attached hereto or otherwise communicated to the Trustee in writing.
Notwithstanding the foregoing, if the Holder intends to transfer
Shares pursuant to the exercise of the over-allotment option granted to the
underwriters in connection with a public offering of shares of Common Stock of
the Corporation, the transfer date in the notice may be less than five but shall
not be less than two days after the Trustee's receipt of such notice, provided
that if the transfer date in the notice is less than five business days after
the Trustee's receipt of the notice, the Trustee shall only be obligated to use
its reasonable best efforts to effect the transfer of such Shares by such
transfer date.
Nothing in this Section 9 or elsewhere in this Agreement shall
prohibit a Holder from transferring Trust Certificates in accordance with the
terms of the Trust Certificates.
10. EXERCISE, CONVERSION, EXCHANGE OR CANCELLATION OF SHARES. The
Trustee shall, upon written instruction of a Holder, submit to the Corporation
for exercise, conversion, exchange or cancellation any Share in which such
Holder has a beneficial interest hereunder. Such instruction shall state (a)
whether such Shares are to be exercised, converted, exchanged or canceled, and
the basis for such action, (b) the date on which a certificate or certificates
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representing such Shares are to be submitted to the Corporation (which date
shall not be less than five days after the Trustee's receipt of such
instruction),(c) the number and type of Shares to be submitted to the
Corporation and (d) the consideration, if any, to be received upon such
exercise, conversion, exchange or cancellation from the Corporation. The
instruction (in relying on which the Trustee shall be fully protected) shall be
accompanied by (x) a Trust Certificate or Certificates of the Holder, duly
endorsed for transfer, representing the beneficial interest in not less than the
number of Shares of the type to be submitted to the Corporation and (y) any
exercise price or other payment and any agreement, certificate or other
documentation required in connection with such exercise, conversion, exchange or
cancellation. On the date specified in such instruction, and against receipt
from the Corporation of the specified consideration, if any, the Trustee shall
deliver: (i) to the Corporation, (x) a certificate or certificates for the
number of Shares of the type specified in such instruction issued in the name of
the Trustee and duly endorsed for transfer and (y) any exercise price or other
payment and any agreement, certificate or other documentation delivered to the
Trustee by such Holder with such notice and (ii) to the Holder, (x) a Trust
Certificate representing the beneficial interest in a number of shares equal to
the number of Shares represented by the surrendered Trust Certificate or
Certificates less the number of Shares submitted to the Corporation and (y) upon
receipt, the consideration, if any, received by the Trustee pursuant to such
exercise, conversion, exchange or cancellation; PROVIDED THAT if such
consideration includes Shares, such Shares shall be held by the Trustee pursuant
to this Agreement and new Trust Certificates representing the beneficial
interest in such Shares shall be issued to such Holder.
11. INCREASE OR DECREASE IN NUMBER OF SHARES. In the event of an
increase in the number of outstanding Shares by virtue of a stock split or the
decrease in the number of outstanding Shares because of a contraction of shares
or a change in the number of outstanding Shares as a result of some other
recapitalization in which the Corporation receives no consideration for the
issuance of the additional or reduced number of Shares, the new additional or
changed number of Shares shall be held by the Trustee under this Agreement, the
Trust Certificates outstanding immediately prior to such increase, decrease, or
change in the number of outstanding Shares shall thereupon represent the
beneficial interest in the number of Shares to which the Holders are entitled as
a result of such increase, decrease, or change, and new Trust Certificates
representing the beneficial interest in the appropriate changed number of Shares
shall be issued to Holders upon surrender of the then existing Trust
Certificates.
12. SUCCESSOR TRUSTEE. There shall initially be one Trustee of the
voting trust created herein. Upon the liquidation, dissolution, winding-up,
suspension, incapacity, resignation or removal (in accordance with Section 13
below) of the initial Trustee, DLJ or the Holders of Trust Certificates
representing the beneficial interest in 50% or more of the Deposited Shares
shall appoint a successor Trustee by written notice to the other parties hereto
and the other Holders; PROVIDED, HOWEVER, that such successor Trustee shall not
be a Control Affiliate, an Employee Affiliate, or an other DLJ Affiliate. In
the event a successor Trustee shall not have been appointed within 30 days of
such liquidation, dissolution, winding-up, suspension, incapacity or removal,
the Trustee may petition a court of competent jurisdiction to appoint such a
successor. In the event that the Trustee consolidates with, merges or converts
into, or transfers all or substantially all of its corporate trust assets to
another entity that is a bank or trust company, the resulting, surviving, or
transferee entity shall become the successor Trustee upon notice to the
signatories hereto but without further action by the signatories or any Holder.
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13. REMOVAL/RESIGNATION OF TRUSTEE. (a) A Trustee may be removed by
DLJ or the Holders of Trust Certificates representing the beneficial interest in
50% or more of the Deposited Shares by written notice to the other parties
hereto and the other Holders;
(i) if it is determined as a result of binding arbitration pursuant
to this Section 13 that either (A) the Trustee has willfully and materially
violated the terms of this Agreement, or (B) the Trustee has been guilty of
malfeasance, misfeasance or dereliction of duty hereunder;
(ii) if the Trustee shall have commenced a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect
to itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect, or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or shall have consented to any such
relief or to the appointment of or taking possession by any such official
in an involuntary case or other proceeding commenced against it, or shall
have made a general assignment for the benefit of creditors, or shall have
failed generally to pay its debts as they become due, or shall have taken
any corporate action to authorize any of the foregoing; or
(iii) if an involuntary case or other proceeding shall have been
commenced against the Trustee seeking liquidation, reorganization or other
relief with respect to it or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect, or seeking the appointment of
a trustee, receiver, liquidator, custodian or other similar official of it
or any substantial part of its property, and such involuntary case or other
proceeding shall have remained undismissed and unstayed for a period of 60
days; or an order for relief shall have been entered against the Trustee
under the federal bankruptcy laws as now or hereafter in effect.
(b) If DLJ or the Holders of Trust Certificates representing the
beneficial interest in 50% or more of the Shares then deposited hereunder
determine that a basis exists for removal of the Trustee under Section 13(a)
above, they shall deliver written notice of such determination to the Trustee
stating the basis for such removal.
(c) Any arbitration pursuant to this Section 13 shall be conducted in
accordance with this Section 13(c). DLJ, the Holders and the Trustee agree and
hereby acknowledge that only the propriety of the removal of the Trustee
pursuant to this Section 13 shall be subject to arbitration and that no other
controversies arising under this Agreement shall be subject to arbitration
unless otherwise expressly agreed by the Trustee, DLJ, and the Holders in a
separate document. Such arbitration shall be governed by the commercial rules
of the American Arbitration Association to the extent not inconsistent with this
Agreement. Such arbitration shall be conducted in New York, New York. Within
15 days after the notice required by Section 13(b) above, the Trustee shall
choose one arbitrator and DLJ or the Holders of Trust Certificates representing
the beneficial interest in 50% or more of the Shares then deposited hereunder
shall choose one arbitrator; and, within 15 days after the selection of both
such chosen arbitrators, the two chosen arbitrators shall choose an impartial
third arbitrator. The decision of a majority of such arbitrators shall be final
and binding on DLJ, the Holders and the Trustee.
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(d) The Trustee may resign its position as such (i) upon ten days'
written notice to DLJ, but only if a successor Trustee, appointed as provided
for in Section 12 above, has agreed to serve as such effective upon the
effectiveness of the resignation of the Trustee then acting, or (ii) in any
event upon thirty days' written notice to DLJ.
14. TRUSTEE MAY OWN SHARES. Nothing in this Agreement shall prevent
the Trustee from owning Shares or options to purchase Shares in its individual
capacity or in any capacity other than as trustee hereunder or for any DLJ
Affiliate.
15. TRUSTEE NOT AN AFFILIATE. The Trustee represents that it is a
bank or trust company which is not a DLJ Affiliate.
16. COMPENSATION; EXPENSES. The Trustee in its individual capacity
shall receive a fee from DLJ of $1,500 for its services in connection with the
establishment of the voting trust, and DLJ will reimburse the Trustee in its
individual capacity in respect of the Trustee's reasonable expenses (including,
without limitation, for up to $2,000 in attorney's fees) lawfully incurred in
connection therewith. During the period of its services hereunder, the Trustee
in its individual capacity shall receive a fee from DLJ of $2,500 per year.
Reasonable expenses (including, without limitation, attorney's fees) lawfully
incurred in the administration or performance of the Trustee's duties or the
exercise of the Trustee's rights, powers and authority hereunder shall be
reimbursed to it in its individual capacity by DLJ on behalf of the Holders.
The provisions of the preceding sentence of this Section 16 shall survive the
termination of this Agreement and the resignation, removal or other cessation of
service of the Trustee.
17. MERGER, ETC. Upon any merger, consolidation, reorganization or
dissolution of the Corporation or the sale of all or substantially all of the
assets of the Corporation pursuant to which shares of capital stock or other
voting securities of another entity are to be issued in payment or exchange for
or upon conversion of Shares and other voting securities, the shares or other
voting securities of said other entity shall, to the fullest extent permitted by
law, automatically be and become subject to the terms of this Agreement and be
held by the Trustee hereunder in the same manner and upon the same terms as the
Shares, and in such event the Trustee shall issue to the Holders that have
deposited Shares with the Trustee new Trust Certificates in lieu of and upon
surrender of the old Trust Certificates for the appropriate number of shares or
other voting securities of such other entity. At the request of any Holder, the
Trustee may transfer, sell or exchange or join with the Holder in a transfer,
sale or exchange of Shares and other voting securities in exchange for shares or
other voting securities of another entity, and in said event the shares and
other voting securities of the other entity received by the transferor shall be
and become subject to this Agreement and be held by the Trustee hereunder in the
same manner as the Shares.
18. NOTICES. All notices, reports, statements and other written
communications directed to the Trustee from the Corporation shall be forwarded
promptly by the Trustee to DLJ and each Holder. All notices, notices of
election and other communications required herein shall be given in writing by
overnight courier, telegram or facsimile transmission and shall be addressed, or
sent, to the appropriate addresses as set forth beneath the signature of each
party hereto, or at such other address as to which notice is given in accordance
with this Section 18.
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19. INDEMNITY ETC. The Trustee, as such and in its individual
capacity, and its directors, officers, employees, and agents, shall be
indemnified, defended and held harmless from and against any and all loss,
liability, claim, damage and expense whatsoever (including, but not limited to,
any and all expense whatsoever reasonably incurred in investigating, preparing
for or defending against any litigation, commenced or threatened, or any claims
whatsoever) (the "Indemnified Claims") arising out of, in connection with, or
based upon this Agreement or the actions or failures to act of the Trustee
hereunder or thereunder, except to the extent such loss, liability, claim,
damage or expense is caused by or results from the Trustee's malfeasance (as
determined by a final and unappealable order of a court of competent
jurisdiction). DLJ agrees on behalf of itself and the Holders that it will
indemnify, defend and hold harmless the Trustee, as such and in its individual
capacity, and its directors, officers, employees, and agents, from and against
any Indemnified Claims. DLJ's obligation hereunder shall survive the transfer
of all or any portions of its respective shares and interests, the termination
of the voting trust created herein, or the resignation, removal or other
cessation of service of the Trustee.
The Trustee as such and in its individual capacity shall be entitled
to the prompt reimbursement from DLJ and the Holders, jointly and severally, for
its out-of-pocket expenses (including, without limitation, reasonable attorneys'
fees and other professional's fees and expenses) incurred in investigating,
preparing for or defending against any litigation, commenced or threatened,
arising out of or based upon this Agreement, or the actions or failures to act
of the Trustee hereunder or thereunder, without regard to the outcome of such
litigation; provided, however, that the Trustee shall be obligated to return any
such portion of such reimbursement as may be subsequently determined by a final
and unappealable order of a court of competent jurisdiction to have been
incurred by the Trustee as a result of the Trustee's malfeasance in the matter
in question. Such expenses payable under this Section 19 shall be prorated
among the Holders in accordance with their respective interests in the Shares
then deposited hereunder.
If a claim under this Section 19 is not paid in full within 30 days
after a written claim has been submitted by the Trustee, the Trustee may at any
time thereafter bring suit to recover the unpaid amount of the claim and, if
successful in whole or in part, the Trustee as such and in its individual
capacity shall be entitled to be paid also the expense of prosecuting such
claims.
The Trustee is authorized and empowered to construe this Agreement and
its construction of the same, made in good faith, shall be final, conclusive,
and binding upon all Holders and all other parties interested. The Trustee may,
in its discretion, consult with counsel to be selected and employed by it, and
the reasonable fees and expenses of such counsel shall be an expense for which
the Trustee as such and in its individual capacity is entitled to reimbursement
under this Agreement, and shall have no personal liability.
The Trustee hereby accepts the voting trust created hereby and agrees
to perform the obligations expressly required hereunder to be performed by the
Trustee, but assumes no other obligations and shall have no responsibility and
shall have no personal liability for the management of the Corporation or for
any action taken by it, by any person elected as a director of the Corporation
or by the Corporation pursuant to any vote cast or consent given by the Trustee.
The Trustee, whether or not acting upon the advice of counsel, shall incur no
personal liability to any
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person or entity because of any error of law or fact, mistake of judgment or any
matter or thing done or omitted under this Agreement, except for its own
malfeasance. Anything done or suffered in good faith by the Trustee in
accordance with the advice of counsel chosen as indicated above or in good faith
reliance on the provisions of this Agreement shall be conclusive in favor of the
Trustee against the Holders and any other interested party and shall give rise
to no personal liability on the part of the Trustee.
The Trustee shall not be personally liable in any event for acts or
defaults of any other trustee or trustees (under this or any other voting trust
of the Corporation's securities) or for acts or defaults of any employee, agent,
proxy or attorney-in-fact of any other trustee or trustees. The Trustee shall
be fully protected and free from personal liability in relying or acting upon
any notice, request, consent, certificate, declaration, guarantee, affidavit or
other paper or document or signature reasonably believed by it to be genuine and
to have been signed by the proper party or parties or by the party or parties
purporting to have signed the same.
No provision of this Agreement shall require the Trustee to expend or
risk its own funds or otherwise incur any personal financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
20. CERTAIN CALCULATIONS. For purposes of Sections 8, 9, 12, 13, 19
and 26, a Holder owning a Trust Certificate representing the beneficial interest
in Share Equivalents shall, in respect of such ownership, be deemed to be the
Holder of a Trust Certificate representing the beneficial interest in the number
of shares of Common Stock that the Trustee, acting on behalf of such Holder, may
then acquire, whether by exercise, conversion, subscription or otherwise,
pursuant to or by reason of ownership of such Share Equivalents.
21. COUNTERPARTS. This Agreement may be executed in multiple
counterparts all of which counterparts together shall constitute one agreement.
Upon execution of this Agreement and the establishment of the voting trust
created herein, the Trustee shall cause a copy of this Agreement to be filed in
the registered office of the Corporation in the State of Delaware and the
Agreement shall be open to inspection in the manner provided for inspection
under the laws of the State of Delaware.
22. CHOICE OF LAW . This Agreement is intended by the parties to be
a voting trust agreement under Section 218 of the General Corporation Law of the
State of Delaware and shall be governed and construed in accordance with the
laws of the State of Delaware.
23. BOND. The Trustee shall not be required to provide any bond to
secure the performance of its duties hereunder.
24. RELIANCE. DLJ and each Holder acknowledge that DLJ will rely on
this Agreement in complying with the federal securities laws. The Trustee
acknowledges that DLJ will rely on the Trustee abiding by the terms of this
Agreement, including, without limitation, that (x) subject to the Voting
Agreement, the Trustee will vote the Deposited Shares in its sole and absolute
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discretion and will not consult with any DLJ Affiliate regarding the voting of
such Shares and (y) the Trustee will not consent to any amendment or waiver of
this Agreement prohibited by Section 26 hereof whether or not such amendment or
waiver is approved by each of the parties hereto and the Holders.
25. COVENANT OF DLJ. DLJ will cause each Control Affiliate to
perform the covenants hereof that are applicable to Control Affiliates.
26. AMENDMENTS AND WAIVER. This Agreement may not be amended or
waived in any material respect unless DLJ shall have delivered to the Trustee an
opinion (in relying on which the Trustee shall be fully protected) of
independent nationally recognized counsel who are experts in matters involving
the federal securities law, that, immediately after such amendment or waiver, no
DLJ Affiliate will be an "affiliate" of the Corporation within the meaning of
Rule 144 under the Securities Act. Subject to the foregoing, this Agreement may
be amended with the written consent of the Trustee, DLJ and the Holders of Trust
Certificates representing the beneficial interest in 50% or more of the Shares
then deposited hereunder, and if so amended then this Agreement (as so amended)
shall bind all of the parties hereto and all of the Holders.
27. SEVERABILITY. In case any provision in this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
28. VOTING AGREEMENT. Simultaneously with the execution of this
Agreement, the Trustee will execute an amendment to the Voting Agreement,
substantially in the form set forth in Exhibit A, and will thereby, INTER ALLA,
become a party to the Voting Agreement.
29. AUTHORIZATION. Each party to this Agreement hereby represents,
severally and not jointly, that this Agreement has been duly and validly
authorized, executed, and delivered and, assuming, due authorization, execution
and delivery by the other parties hereto, is a valid, binding and enforceable
agreement of such party.
30. BENEFITS AND ASSIGNMENT. Nothing in this Agreement, expressed or
implied, shall give or be constructed to give any person or entity other than
the parties hereto and their successors and permitted assigns, any legal claim
under any covenant, condition or provision hereof, all the covenants, conditions
and provisions contained in this Agreement being for the sole benefit of the
parties hereto and their successors and permitted assigns. No party may assign
any of its rights or obligations under this Agreement (except as provided in
Section 12) without the written consent of all the other parties, which consent
may be withheld in the sole discretion of the party whose consent is sought.
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EXECUTED as of the date and year first above written.
FIRST UNION TRUST COMPANY,
NATIONAL ASSOCIATION
Trustee
By: /s/ EDWARD L. TRUITT, JR.
----------------------------------------
Name: EDWARD L. TRUITT, JR.
Title: Assistant Vice President
Address: One Rodney Square
First Floor
920 King Street
Wilmington, DE 19801
Attention: Corporate Trust Administration
Telephone: 302-888-7539
Facsimile: 302-888-7544
DONALDSON, LUFKIN & JENRETTE, INC.
By: /s/ Marjorie S. White
----------------------------------------
Name: Marjorie S. White
Title: Vice President and Secretary
Address: 277 Park Avenue
New York, New York 10172
Attention: Marjorie White
Telephone: 212-892-2933
Facsimile: 212-892-8216
SPROUT CAPITAL VII, L.P.
By: DLJ CAPITAL CORPORATION,
as Managing General Partner
By: /s/ Arthur S. Zuckerman
----------------------------------------
Name: Arthur S. Zuckerman
Title: Vice President
Address: 277 Park Avenue, 20th Floor
New York, New York 10172
Attention: Arthur S. Zuckerman
Telephone: 212-892-4866
Facsimile: 212-892-3444
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SCHEDULE B
TRANSFER INSTRUCTIONS
SPROUT CAPITAL VII, L.P.
All payments shall be made by check mailed to:
Sprout Capital VII, L.P.
277 Park Avenue, 20th Floor
New York, New York 10172
Attention: Arthur S. Zuckerman
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VOTING TRUST AGREEMENT
THIS VOTING TRUST AGREEMENT (the "Agreement"), dated as of March 12, 1998,
by and between Enron Communications Group, Inc., a stockholder of Rhythms
NetConnections Inc., a Delaware corporation (the "Company") (together with
transferees of voting trust certificates subsequently agreeing to be bound by
this Agreement, collectively referred to herein as the "Beneficiaries" or
individually as the "Beneficiary"), and the Company, as voting trustee (with any
successor to him as voting trustee, referred to herein as the "Trustee").
WHEREAS, the Beneficiary owns or may in the future own shares of Series B
Preferred Stock, $0.001 par value ("Series B Preferred"), of the Company in the
amount set forth opposite its name on SCHEDULE A;
WHEREAS, the Beneficiary believes it is in its best interests and in the
best interests of the Company to transfer to the Trustee in trust for the
purpose of voting in elections on matters as described herein all of the shares
of Series B Preferred Stock of the Company either presently owned by it or
hereafter acquired by it by any means (all such shares to be collectively
referred to herein as "Shares"); and
WHEREAS, the Beneficiary desires to empower the Trustee to vote the Shares
owned by it in trust for it for the purpose of voting on stockholder matters as
described herein for the term of this Agreement in the following manner.
NOW, THEREFORE, in consideration of the foregoing and of the agreements
contained herein, and in consideration of the transfer in trust to Trustee of
the Shares, it is hereby agreed:
1. APPOINTMENT OF TRUSTEE. The Beneficiary hereby appoints the Trustee
to serve as trustee of the Rhythms NetConnections Inc. Voting Trust, the trust
established by this Agreement (the "Trust") and the Trustee hereby accepts such
appointment and agrees to act as trustee of the Trust in accordance with the
terms of this Agreement.
2. DEPOSIT OF STOCK AND ISSUANCE OF VOTING CERTIFICATES.
(a) The Beneficiary shall forthwith deliver to the Trustee
certificates for all Shares now owned by it, and will deliver to the Trustee
certificates for all Shares hereafter acquired by it by any means, immediately
upon becoming the owner thereof, duly endorsed for transfer or accompanied by
duly executed instruments of transfer. Promptly upon receipt of such
certificates, the Trustee shall cause such Shares to be transferred and
registered in the stock records of the Company in the name of "Trustee of the
Rhythms NetConnections Inc. Voting Trust" or a nominee name designated by him,
and shall cause the new share certificates to bear a legend stating that the
Shares evidenced thereby (the "Trustee Shares") are subject to the terms of this
Agreement.
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(b) The Trustee shall issue and deliver to the Beneficiary a Voting
Trust Certificate (a "Certificate") in respect of the number and type of Shares
transferred to and held of record by the Trustee for the benefit of the
Beneficiary under this Agreement, in the form of EXHIBIT A hereto (except that
the Trustee may affix to a Certificate any restrictive legend borne by the
certificates for Shares in respect of which Shares the Certificate is issued).
Such Certificates shall be signed by the Trustee.
3. TRUSTEE'S POWERS AND DUTIES.
(a) STOCKHOLDER MATTERS. The Trustee shall vote the Trustee Shares
as follows:
(i) VOTE OF THE SERIES B PREFERRED. Except as provided in
subsection (ii) below, with respect to any proposal submitted for stockholder
vote (a "Stockholder Proposal") including without limitation any matters on
which the Preferred Stock or Series B Preferred Stock has class or series voting
rights (including without limitation a proposed Corporate Transaction (defined
below) to the extent such Corporate Transaction is submitted for a stockholder
vote), the Trustee shall vote the Trustee's Shares for or against such
Stockholder Proposal, in the same proportion as a majority of the then
outstanding shares of Series A Preferred, voting as a separate class (the
"Series A Majority"), are voted or abstain. For purposes of this subsection
(i), a Corporate Transaction shall mean (A) any consolidation or merger
reorganization with or into any other corporation or corporations (including
without limitation a merger or consolidation as contemplated under Subchapter IX
of the Delaware General Corporation Law), or the effectuation of a transaction
in which more than 50% of the voting power is disposed of, or a sale, conveyance
or disposition of all or substantially all of the Company's assets, (B) a
corporate partnering or similar transaction, (C) any subsequent equity
financings of the Company including without limitation the creation of any new
class or series of stock or any other securities convertible into equity
securities of the corporation having a preference over, or being on parity with,
the Series A Preferred Stock or Series B Preferred Stock with respect to voting,
dividends or upon liquidation or (D) any amendment to the Company's Restated
Certificate of Incorporation as it may be amended from time to time.
(ii) OTHER STOCKHOLDER MATTERS. Notwithstanding subsection (i)
above, with respect to any proposal submitted for stockholder vote that meets
the criteria set forth in Article IV, Sections B(4)(b) or (5)(a) of the Restated
Certificate of Incorporation, the Trustee shall vote the Trustee's Shares in the
manner directed (whether for, against or to abstain) by the Beneficiary
hereunder for whom the Trustee Shares are held.
(b) NOTICE TO BENEFICIARIES. With respect to any proposal submitted
for stockholder vote or written consent of which the Trustee receives notice,
the Trustee shall give written notice thereof, including a copy of any such
notice received by Trustee and any other written material addressing such
proposal provided to stockholders or to Trustee, to the record holders of
Certificates (as of the record date applicable to the Trustee for Shares as to
such vote) promptly upon receipt thereof by Trustee. For all matters covered by
Section 3(a)(ii) above, the Trustee shall request instructions from such holders
as soon as reasonably
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possible, but not later than ten (10) days prior to the date such vote is
required; provided, however, that if the Trustee does not receive notice prior
to ten (10) days before such vote is due, the Trustee shall provide notice as
soon as reasonably possible as to the manner in which the Trustee Shares in
which they respectively have beneficial interests should be voted. Each record
holder of Certificates shall "vote" such beneficial interests for such matters
by returning written instructions to the Trustee, who shall vote the shares in
accordance with such instructions. For all matters covered by Section 3(a)(i)
above, the Trustee shall request from the Company and the Company shall provide
to Trustee on the day prior to the deadline for voting, the percentage of the
Series A Preferred Stock voting on the proposal and the percentage of those
voting that voted in favor of the proposal, against the proposal, or that
abstained with respect to the proposal. The Trustee shall vote the Shares in
the same percentage as the Series A Preferred Stock and in the same percentage
for, against and abstain as the vote of the Series A Preferred Stock.
(c) SALES. The Trustee shall have no authority to sell or otherwise
dispose of or to pledge, encumber or hypothecate, any of the Trustee Shares.
4. DIVIDENDS AND DISTRIBUTIONS. Upon the declaration of any dividends or
the payment of any other distribution of the Company with respect to Trustee
Shares held for the Beneficiary other than pro rata distributions of additional
voting shares of the Company, the Trustee shall distribute or cause all such
dividends and distributions to be distributed by the Company to the Beneficiary.
In the event of dissolution or liquidation of the Company during the term of
this Agreement in such manner as to entitle the holders of shares to liquidating
dividends in respect thereof, the Trustee shall distribute or cause all such
liquidating dividends with respect to the Trustee Shares to be distributed by
the Company to the Beneficiary.
5. THE TRUSTEE.
(a) TRUSTEE AS BENEFICIARY OR AFFILIATE. Any Trustee and any firm or
corporation of which such Trustee may be a member, agent, partner or employee
and any corporation, trust, or association of which such Trustee may be a
trustee, stockholder, director, officer, agent, or employee may contract with or
be or become pecuniarily interested, directly or indirectly, in any matter or
transaction to which the Company or any subsidiary or controlled or affiliated
corporation may be a party or in which it may be concerned, as fully and freely
as though such Trustee were not a Trustee hereunder. The Trustee may act as an
agent, employee, director and/or officer of the Company or of any such
subsidiary or controlled or affiliated corporation and, subject to the terms of
this Agreement, may vote the Trustee Shares in favor of matters in which the
Trustee or his affiliates are interested.
(b) SUCCESSOR TRUSTEES. The Trustee may resign by giving notice of
resignation to the Company and to the Beneficiary. Any successor Trustee shall
enjoy all the rights, powers, interests, and immunities of the Trustee as
originally constituted, and the title to the Trustee Shares of any Trustee who
may resign or be removed or become incapacitated (by death, disability or
otherwise) to act shall, upon such resignation or removal or incapacity, vest in
the successor Trustee. In the event of the removal, resignation, or incapacity
to act of
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any Trustee, a successor shall be appointed by the Beneficiary, which is
reasonably acceptable to the Company. If, within 45 days following such
removal, resignation or incapacity of the Trustee the Beneficiary has not
appointed a successor, a successor shall be appointed by a majority vote of the
Series A Preferred Stock and Series B Preferred Stock voting as a single class.
The Beneficiary may remove any Trustee with cause by written notice to the
Trustee and Board of Directors of the Company. In addition, a majority of the
Board of Directors of the Company may determine that any Trustee has become
incapacitated to act or may remove any Trustee for cause, in either case by
written consents. Notwithstanding any change in the Trustee, the Certificates
for Trustee Shares may be (i) voted and/or (ii) endorsed and transferred, by any
successor Trustee with the same effect as if voted, endorsed and transferred by
the former Trustee. The Trustee is authorized and empowered to cause any
further transfer of said shares to be made which may be necessary through the
occurrence of any change of person acting as Trustee hereunder.
(c) RELATIONSHIP OF PARTIES. The Trust created by this Agreement is
not intended to be, and shall not be deemed to be, and shall not be treated as a
general partnership, limited partnership, joint venture, corporation, or joint
stock company or association. The relationship of the Beneficiary to the
Trustee shall be solely that of beneficiary of the Trust created by this
Agreement and its rights shall be limited to those conferred upon it by this
Agreement.
(d) CONSULTATION WITH OUTSIDE ADVISORS. The Trustee may consult with
legal counsel, which may be counsel to the Company or any of its affiliates or
any of its or its affiliates' officers, directors or partners.
(e) LIABILITY. In voting on all matters which may come before any
meeting of stockholders of the Company the Trustee shall vote the Trustee Shares
in the manner prescribed by this Agreement, and it is understood that the
Trustee shall not incur responsibility by reason of any error of judgment or of
law or by any matter or thing done or omitted under this Agreement, except for
his own individual gross negligence or willful misconduct. No Trustee shall be
liable in any event for acts or defaults of any other Trustee or for acts or
defaults of any employee, agent, proxy, or attorney in fact of any other
Trustee. The Trustee shall always be protected and free from liability in
acting upon any notice, request, consent, instruction, certificate, declaration,
telefax, guarantee, affidavit, or other paper or document or signature
reasonably believed by him to be genuine and to have been signed by the proper
party or parties or by the party or parties purporting to have signed the same.
(f) TRUSTEE'S INDEMNITY. The Company shall indemnify, defend and
hold harmless the Trustee against any and all losses, damages, liabilities,
obligations, claims, demands, judgments, settlements, governmental
investigations, costs and expenses of any nature whatsoever, including the
reasonable fees and expenses of attorneys, accountants and consultants
(collectively, "Damages"), incurred in connection with or arising from the
performance of his duties under this Agreement (except for his gross negligence
or willful misconduct). Such indemnification shall be paid as incurred and on
demand, subject to an undertaking by the Trustee to repay if it is ultimately
determined that he is not entitled to
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<PAGE>
such indemnification. In the event the Beneficiary shall request the Trustee to
bring an action on its behalf, such party shall pay in advance all the expense
of prosecuting such action and shall indemnify, defend and hold harmless the
Trustee against all Damages incurred in connection with such action; the Trustee
shall have no obligation to commence or proceed with such suit unless he is
satisfied that all necessary monies have been paid in advance or advanced to the
Trustee for this purpose.
6. RESTRICTIONS ON TRANSFER. The Certificates shall be transferable only
as provided in said Certificates and this Agreement. The Beneficiary shall be
at liberty to sell, transfer or otherwise dispose of its Certificates issued
hereunder; PROVIDED, that the transferee shall have agreed in writing to be
bound by this Agreement as though such transferee originally executed this
Agreement as a Beneficiary. All sales or transfers shall be recorded in the
Certificate Book (defined in Section 10 below) and any proper sale or transfer
made of any Certificate shall vest in the purchaser or transferee all rights of
the transferror and shall subject the purchaser or transferee to the same
limitations as those imposed on the transferror by the terms of the Certificate
so transferred, and by this Agreement. Upon any such transfer, following
execution of an agreement to be bound by this Agreement by a purchaser or
transferee and upon surrender to the Trustee of any Certificate sold or
transferred, duly endorsed for transfer, the Trustee shall deliver a Certificate
or Certificates to the purchaser or transferee for the beneficial interest in
the number and type of Trustee Shares represented by the Certificate so sold or
transferred. The Trustee shall not be required to recognize any sale or
transfer of a Certificate not made in accordance with the provisions hereof
unless the person or persons claiming such ownership shall have produced indicia
of title satisfactory to the Trustee, and shall have deposited with the Trustee
indemnity satisfactory to him, and shall have executed an agreement to be bound
by this Agreement.
7. CONTINUANCE AND TERMINATION OF TRUST.
(a) TERM AND TERMINATION. This Agreement shall terminate on the
earlier of (i) March 11, 2008; (ii) the date of the closing of a bona fide,
firmly underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the offer and
sale of Common Stock of the Company to the public (the "Qualified Public
Offering"); (iii) effectuation by the Company of a transaction or series of
transactions in which the Company is consolidated or merged with or into any
other corporation or corporations and in which the Company is not the surviving
entity (but excluding a merger or consolidation of the Company with the parent
of the Company or one of the Company's majority owned subsidiaries or an entity
in which more than fifty percent (50%) of the voting control is controlled by
the persons or entities controlling more than fifty percent (50%) of the voting
control of the Company, whether or not the Company is the surviving entity
("Excluded Merger")) or in which the Company sells all or substantially all of
its assets (other than to the parent of the Company or one of the Company's
majority owned subsidiaries an entity in which more than fifty percent (50%) of
the voting control is controlled by the persons or entities controlling more
than fifty percent (50%) of the voting control of the Company ("Excluded Sale");
or (iv) the effective date of the liquidation or dissolution of the Company
(other than as a result of an Excluded Merger or Excluded Sale).
Notwithstanding the foregoing, this Agreement may (before a Qualified Public
Offering has
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<PAGE>
occurred) be extended to a date certain after a Qualified Public Offering by the
written consent of the Beneficiary and of the Trustee (such extension not to be
beyond March 11, 2008). This Agreement may be renewed and the term of the Trust
extended at any time within the two (2) years prior to the expiration of the
Trust for additional periods not exceeding ten (10) years from the expiration
date of the Trust as originally fixed, or as last extended, by the written
agreement of the Beneficiary and of the Trustee (an "Extension Agreement"), as
to the Shares beneficially owned by the Beneficiary. In the event of such
extension, the Trustee shall, prior to the expiration as hereinabove provided,
as originally fixed, or as theretofore extended, as the case may be, file in the
Executive Office (as defined below) a copy of the agreement extending the
expiration date of this Agreement and thereupon the duration of this Agreement
shall be extended for the period fixed by such Extension Agreement; PROVIDED,
however, that no such Extension Agreement shall affect the rights or obligations
of persons not parties thereto. Except as otherwise provided in this Agreement,
the trust created by this Agreement is hereby expressly declared to be
irrevocable.
(b) CONSOLIDATION, EXCHANGE, RECAPITALIZATION. In the event of a
consolidation, share-for-share exchange, recapitalization or other
reorganization involving the Company (other than a transaction described in
Section 7(a) herein), this Agreement shall be effective and shall remain in
force for its full term, substituting, where appropriate, for the Shares issued
in such consolidation, exchange, recapitalization or other reorganization.
(c) ACTIONS FOLLOWING TERMINATION.
(i) As soon as practicable after the termination of this
Agreement, the Trustee shall by formal assignment of Trustee Shares cause the
Company to deliver to the Beneficiary share certificates or securities
representing the number of Shares together with any other property distributed
in respect of such Shares and not yet delivered to the beneficial owner, upon
the surrender of such Certificates properly endorsed.
(ii) If the Beneficiary cannot be located or fails or refuses to
surrender Certificates in exchange for shares and/or other property as
aforesaid, the Trustee may in his discretion deliver said shares and/or other
property to the Company for the benefit of the person or persons entitled
thereto. Upon any such delivery the Trustee shall be fully acquitted and
discharged with respect to the delivery of said shares and/or other property.
8. CONVERSION OF PREFERRED STOCK SUBJECT TO AGREEMENT. Upon the written
request of any holder of a Certificate representing Shares of Preferred Stock
and the surrender of the Certificate, the Trustee shall cause the number and
type of Trustee Shares of Preferred Stock designated by the holder and
underlying the Certificate to be converted into shares of Common Stock of the
Company. This Agreement shall apply in its entirety as to such shares issued
upon conversion. The Trustee shall issue a new Certificate in the form of
EXHIBIT A hereto to such holder in respect of the beneficial interests in shares
of Common Stock and, if any, the remaining unconverted shares of Preferred
Stock.
9. RECORD DATE. The Trustee shall use, as the record date for the
determination of the Beneficiary entitled to receive payment of any dividend or
other distribution, or any
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<PAGE>
allotment of rights, or to exercise rights in respect of any other lawful
action, or to vote on any matter, the record date so fixed by the Company with
respect to the Shares. When a record date is so fixed, the Beneficiary of
record on that date is entitled to receive the dividend, distribution, or
allotment of rights, or to vote, or to exercise of the rights, as the case may
be, notwithstanding any transfer of Certificates after the record date. The
record date for determining Beneficiaries for any purpose other than set forth
in this Section shall be at the close of business on the day on which the
Trustee adopts the resolution relating thereto, or the sixtieth day prior to the
date of such other action, whichever is later.
10. INSPECTION OF RECORDS. The Trustee shall keep at 7737 South Revere
Parkway, Englewood, Colorado 80112-3731, or such other address at which the
Company's principal executive office may be located (the "Executive Office"),
correct books of account of all his business and transactions, and a book to be
known as the "Certificate Book" containing the names of all persons who are
Beneficiaries, showing their places of residence, the number and type of shares
represented by the Certificates held by them, and the date they became the
owners thereof. This Agreement shall be open for inspection by any stockholder
of the Company, a Beneficiary, or the agent of either upon the same terms as the
record of stockholders of the Company is open to inspection by stockholders.
11. LOST OR STOLEN CERTIFICATES. If a Certificate shall be lost, stolen,
mutilated, or destroyed, the Trustee, in his discretion, may issue a duplicate
of such Certificate upon receipt of evidence of such fact satisfactory to him,
and upon receipt of an indemnity satisfactory to him, and upon receipt of the
existing Certificate, if mutilated.
12. MISCELLANEOUS.
(a) FILING OF AGREEMENT. The Trustee shall cause to be filed a copy
of this Agreement, and every amendment (including the written consent of the
Trustee as required pursuant to Section 7(a) hereof) or supplement hereto, in
the registered office of the Company in the State of Delaware and at the
Executive Office, which Agreement shall be open to the inspection of any
stockholder of the Company or any Beneficiary of this Agreement during business
hours of the Company.
(b) SUCCESSORS AND ASSIGNS.This Agreement shall bind the Trustee and
the Beneficiary hereunder and each and all of the heirs, executors,
administrators, personal representatives, successors, and assigns thereof, and
shall inure to the benefit of the Trustee, his successors, the Beneficiary, and
its permitted transferees.
(c) NOTICES. Unless otherwise expressly provided herein, all
notices, requests, demands, instructions, documents and other communications to
be given hereunder by any party to another shall be in writing, shall be sent to
the address/fax number set forth below (provided that any party may at any time
change its address for notice or other such information by giving written notice
thereof in accordance with this Section), and shall be deemed to be duly given
upon the earliest of (i) hand delivery, (ii) the first business day after
sending by reputable overnight delivery service for next-day delivery, (ii) the
third business day after sending by first class United States mail, postage
prepaid, (iv) the time of successful
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facsimile transmission (or in the event the time of receipt of the fax in the
city where the fax is received is not during regular business hours on a
business day, then at the customary hour for the opening of business on the next
business day), or (v) the date actually received by the other party:
(x) If to Beneficiary, to the address of the Beneficiary
appearing on the records of the Trustee.
(y) If to Trustee to: Rhythms NetConnections Inc.
7737 South Revere Parkway
Englewood, CO 80112-3931
FAX No.: (303) 706-9564
(d) COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original but all of which taken
together shall constitute one instrument.
(e) ENFORCEABILITY. If in any judicial proceedings, a court shall
refuse to enforce any of the provisions of this Agreement, then such
unenforceable provision shall be deemed modified or limited so as to effectuate,
to the maximum extent possible, the parties' expressed intent, and if no such
modification or limitation could render it enforceable it shall be eliminated
from this Agreement, and in any event the remaining provisions of this Agreement
shall remain in full force and effect.
(f) ENTIRE AGREEMENT. This Agreement is the entire agreement of the
parties with respect to the subject matter hereof, and supersedes all prior and
contemporaneous negotiations, understandings, arrangements and agreements;
provided, however, that the Amended and Restated Voting Agreement dated
March 12, 1998 among the Company and certain Beneficiaries shall remain in full
force and effect. The Beneficiary represents and warrants that this Agreement
is fully integrated and not in need of parol evidence in order to reflect the
intention of the parties. Moreover, the Beneficiary acknowledges (i) that it
intends the literal words of the Agreement to govern and for all prior and
contemporaneous negotiations, drafts and other extrinsic communications to have
no significance or evidentiary effect and (ii) that this Agreement has been
fully negotiated by the parties and that accordingly it shall be construed
"evenly" and not for or against any party. By signing this Agreement, the
Beneficiary further acknowledges that it has consulted with legal counsel about
the effect of this Section 12(f) and understands its effect.
(g) COMPENSATION OF TRUSTEE; PAYMENT OF COSTS. The Trustee shall not
be entitled to any compensation for his services as Trustee. The Trustee agrees
that Beneficiary shall have no obligation to pay to the Trustee any amount
whatsoever as fees or in respect to the Trustee's costs or expenses related to
this Agreement, except as provided in Sections 5(f) and 12(k). The Trustee will
look solely to the Company for reimbursement of any amounts incurred or expended
by him in connection with his duties under this Agreement, except as provided in
Sections 5(f) and 12(k), and expressly waives any rights which he might
otherwise have to charge the trust corpus for any costs, fees or expenses
related to this
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Agreement, or to withhold any amounts from or set off any amounts against the
shares received by him in trust or any distributions thereon.
(h) AMENDMENT AND MODIFICATION. This Agreement may not be amended,
modified or terminated, except with the written consent of the Trustee, holders
of 55% in interest of the Shares and a Series A Majority; PROVIDED, however,
that the addition of Beneficiaries or Shares after the original date of
execution of this Agreement shall not be considered an amendment or
modification.
(i) GOVERNING LAW. This Agreement shall be governed by the internal
laws of the State of Delaware without regard to principles of conflict of laws.
(j) SECTION 218. This Agreement is intended to create a voting trust
pursuant to and subject to Section 218 of the Delaware General Corporation Law.
If for any reason such voting trust is determined to be invalid or
unenforceable, this Agreement and the relationship of the parties hereunder
shall be deemed to be and shall be reconstituted as a voting agreement under
Section 218(c), and all provisions of this Agreement shall apply to the maximum
extent possible to effectuate the intention of the parties that the substantive
provisions hereof shall govern the voting of Shares by or for the parties
hereto.
(k) COSTS AND EXPENSES. If the Beneficiary unsuccessfully challenges
all or any portion of this Agreement, or if the Trustee successfully sues the
Beneficiary to enforce or confirm this Agreement, the Beneficiary shall be
liable for the other party's or parties' attorneys' fees, costs and expenses.
In no event shall the Trustee be liable for the Beneficiary's attorneys' fees,
costs and expenses.
(l) EQUITABLE REMEDIES. Each of the parties hereby acknowledges and
agrees that the legal remedies available, in the event the covenants and
agreements made in this Agreement are violated, would be inadequate and that any
party shall be entitled, without posting any bond or other security, to
temporary, preliminary and permanent injunctive relief, specific performance and
other equitable remedies in the event of such a violation, in addition to any
other remedies which such party may have at law or in equity.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Beneficiary has set its hands on the signature page
attached hereto, and the Trustee, in token of its acceptance hereby created, has
hereunto set its hand.
"TRUSTEE"
RHYTHMS NETCONNECTIONS INC.
By: /s/ Catherine M. Hapka
----------------------------------------------
Its:
---------------------------------------------
"BENEFICIARY"
ENRON COMMUNICATIONS GROUP, INC.
By: /s/ K. L. Harrison
----------------------------------------------
Its:
---------------------------------------------
AGREED TO:
"COMPANY"
RHYTHMS NETCONNECTIONS INC.
By: /s/ Catherine M. Hapka
-------------------------------------
Title:
----------------------------------
[SIGNATURE PAGE FOR VOTING TRUST AGREEMENT]
<PAGE>
Schedule A
BENEFICIARY
ENRON COMMUNICATIONS GROUP, INC.
210 Southwest Morrison Street, Suite 400
Portland, OR 97204
Schedule A
<PAGE>
Exhibit A
VOTING TRUST CERTIFICATE
<PAGE>
RHYTHMS NETCONNECTIONS INC.
A Delaware Corporation
Voting Trust Certificate
Certificate
No. ________ _________ shares of Series B Preferred Stock
This certifies that ________________________________________ (or his or
its predecessor in interest) has deposited for transfer in trust to the Trustee
of the Rhythms NetConnections Inc. Voting Trust ___________ shares of Series B
Preferred Stock, par value $0.001 per share, of Rhythms NetConnections Inc., a
Delaware corporation, under a Voting Trust Agreement, dated as of March 12, 1998
by and between Enron Communications Group, Inc., a stockholder of Rhythms
NetConnections Inc., and Rhythms NetConnections Inc., as Trustee under said
Voting Trust Agreement. This certificate and the interest represented hereby
may be transferred only if permitted under the terms of said Voting Trust
Agreement and is transferable only on the books of the Trustee upon the
execution of said Voting Trust Agreement by such transferee and the presentation
and surrender of this certificate duly endorsed for transfer. The holder of
this certificate takes the same subject to all the terms and conditions of said
Voting Trust Agreement, is entitled to the rights and benefits thereof and is
subject to the obligations thereof. A copy of said Voting Trust Agreement may
be obtained from the undersigned Trustee.
IN WITNESS WHEREOF, the Trustee has caused this certificate to be signed
this 12th day of March, 1998.
RHYTHMS NETCONNECTIONS INC., TRUSTEE
By:
----------------------------------------------
Title:
-------------------------------------------
<PAGE>
AMENDED AND RESTATED VOTING AGREEMENT
THIS AMENDED AND RESTATED VOTING AGREEMENT (this "Agreement") is made as
of the 12th day of March, 1998, by and among Rhythms NetConnections Inc., a
Delaware corporation (the "Company") and the parties listed on the Schedule of
Investors attached hereto as SCHEDULE A.
RECITALS
A. In connection with the Company's sale and issuance of its Series A
Preferred Stock (the "Series A Shares"), the Company and the Investors listed
under the heading "Series A Investors" on the Schedule of Investors attached
hereto as SCHEDULE A (the "Series A Investors") entered into that certain Voting
Agreement dated June 3, 1997 (the "Prior Agreement") which provided that each of
the following Series A Investors be given the right to designate one (1) nominee
to serve as one of the directors: The Sprout Group funds (collectively,
"Sprout"); Enterprise Partners funds (collectively, "Enterprise"), Kleiner
Perkins Caufield & Byers funds (collectively, "KPCB") and Brentwood Associates
funds (collectively, "Brentwood") (collectively, the "Series A Directors" as
defined in Recital D below); and which provided further that the Company be
given the right to designate its Chief Executive Officer as a nominee to serve
as one of the directors (the "Common/Series A Director" as defined in Recital D
below);
B. The Investors listed under the heading "Series B Investors" on the
Schedule of Investors attached hereto as SCHEDULE A (the "Series B Investors")
desire to purchase from the Company shares of the Company's Series B Preferred
Stock (the "Series B Shares"), and the Company desires to sell such Series B
Shares to the Series B Investors;
C. As a condition of its agreement to purchase the Series B Shares from
the Company, Enron Communications Group, Inc. ("Enron") has requested that it be
given the right to designate a nominee to serve as one of the directors (the
"Series B Director" as defined in Recital D below);
D. The terms Series A Directors, Series B Director and Common/Series A
Director shall have the meanings ascribed to them in the Company's Restated
Certificate of Incorporation
E. The Series A Investors, the Series B Investors (collectively, the
"Preferred Investors") and the Company acknowledge that they are entering into
this Voting Agreement to amend and restate in its entirety the Prior Agreement
and as an inducement to and in consideration of the purchase of the Series B
Shares by the Series B Investors pursuant to that certain Series B Preferred
Stock Purchase Agreement dated as of the date hereof (the "Purchase Agreement").
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
<PAGE>
1. SERIES A DIRECTORS. During the term of this Agreement, each of the
Series A Investors agrees to vote all of its Series A Shares now or hereafter
owned by it as follows:
a. For so long as Sprout holds at least 1,000,000 Preferred Shares,
(i) to elect the nominee of Sprout (the "Sprout Nominee") as one of the Series A
Directors and (ii) if requested by Sprout, to remove the incumbent Sprout
Nominee and elect a new Sprout Nominee as one of the Series A Directors or to
fill a vacancy created by death of such Sprout Nominee or otherwise.
b. For so long as Enterprise holds at least 1,000,000 Preferred
Shares, (i) to elect the nominee of Enterprise (the "Enterprise Nominee") as one
of the Series A Directors and (ii) if requested by Enterprise, to remove the
incumbent Enterprise Nominee and elect a new Enterprise Nominee as one of the
Series A Directors or to fill a vacancy created by death of such Enterprise
Nominee or otherwise.
c. For so long as KPCB holds at least 1,000,000 Preferred Shares,
(i) to elect the nominee of KPCB (the "KPCB Nominee") as one of the Series A
Directors and (ii) if requested by KPCB, to remove the incumbent KPCB Nominee
and elect a new KPCB Nominee as one of the Series A Directors or to fill a
vacancy created by death of such KPCB Nominee or otherwise.
d. For so long as Brentwood holds at least 1,000,000 Preferred
Shares, (i) to elect the nominee of Brentwood (the "Brentwood Nominee") as one
of the Series A Directors and (ii) if requested by Brentwood, to remove the
incumbent Brentwood Nominee and elect a new Brentwood Nominee as one of the
Series A Directors or to fill a vacancy created by death of such Brentwood
Nominee or otherwise.
e. Each Series A Investor shall designate its respective Nominee in
writing to the Company prior to each election of directors of the Company. The
Company shall promptly notify each of the Series A Investors of the choice of
such Nominee. Any vacancy occurring because of the death, resignation, removal
or disqualification of a Nominee shall be filled according to this Section 1.
2. COMMON/SERIES A DIRECTOR.
a. During the term of this Agreement, each of the Preferred
Investors agrees to vote all of its Series A Shares and/or shares of the
Company's Common Stock (the "Common Shares"), as applicable, now or hereafter
owned by it to elect the Company's Chief Executive Officer as the Common/Series
A Director.
b. In the event of the resignation, removal or disqualification of
the Chief Executive Officer of the Company, the Preferred Investors shall vote
to remove such Chief Executive Officer from the Board, and the remaining members
of the Board (the "Remaining Board Members") shall be entitled to nominate a
replacement director for the Chief Executive Officer (the "CEO Replacement
Nominee"), until such time as a new Chief Executive Officer is elected.
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<PAGE>
c. If the Company employs a Chief Executive Officer prior to the
time it sends notices to its stockholders of an annual meeting, the Remaining
Board Members shall, prior to the election of directors of the Company,
designate the newly employed Chief Executive Officer as the CEO Replacement
Nominee and the Company shall promptly notify, in writing, each of the Preferred
Investors of the Remaining Board Members' choice of such nominee. If
applicable, each of the Preferred Investors agrees to vote all of its Series A
Shares and/or Common Shares, as applicable, now or hereafter owned by it to
elect to the Board such CEO Replacement Nominee; provided, however, that in all
events, whenever the Company hires a new Chief Executive Officer of the Company,
such Chief Executive Officer shall, at the next regular or special meeting (or
by written consent) held for the purpose of electing or nominating directors, be
elected to the Board as provided in Section 2(a) above to replace the CEO
Replacement Nominee.
3. SERIES B DIRECTOR. During the term of this Agreement, each of the
Series B Investors agrees to vote all of its Series B Shares now or hereafter
owned by it as follows:
a. For so long as Enron holds at least 750,000 Series B Shares,
(i) to elect the nominee of Enron (the "Enron Nominee") as the Series B Director
and (ii) if requested by Enron, to remove the incumbent Enron Nominee and elect
a new Enron Nominee as the Series B Director or to fill a vacancy created by
death of such Enron Nominee or otherwise.
b. Enron shall designate its Enron Nominee in writing to the Company
prior to each election of directors of the Company. The Company shall promptly
notify each of the Series B Investors of the choice of such Enron Nominee. Any
vacancy occurring because of the death, resignation, removal or disqualification
of the Enron Nominee shall be filled according to this Section 3.
4. ADDITIONAL SERIES B DIRECTORS. In the event that the size of the
Company's board of directors (the "Board") is increased (the "Board Increase"),
then each of the Preferred Investors agrees to vote all of its Preferred Shares
and Common Shares now or hereafter owned by it to amend the Restated Certificate
of Incorporation and this Agreement such that the number of directors to be
elected by Series B Shares and the number of Enron Nominees shall be increased
so that (i) the proportion of the total number of directors elected by Series B
Shares and the number of Enron Nominees to the total size of the Board is
approximately equal (rounding to the nearest whole number of directors) to (ii)
the proportion of shares of Common Stock issued or issuable upon conversion of
the Series B Shares owned by Enron to the total outstanding capital stock of the
Company as of the time of the applicable Board Increase. At such time as the
number of Enron Nominees is increased as described above (the "Additional Enron
Nominee"), each of the Series B Investors agrees to vote all of its Series B
Shares now or hereafter owned by it to elect the Enron Nominees to the Board
consistent with the provisions of Section 3 above.
5. SUCCESSORS IN INTEREST.
a. The provisions of this Agreement shall be binding upon the
successors in interest to any of the Preferred Shares. The Company shall not
permit the transfer of any
-3-
<PAGE>
of the Preferred Shares on its books or issue new certificates representing any
shares of such securities unless and until the person(s) to whom such shares are
to be transferred shall have executed a written agreement, substantially in the
form of this Agreement, pursuant to which such person becomes a party to this
Agreement, and agrees to be bound by all the provisions hereof as if such person
was a party hereunder.
b. Each certificate representing any of the Preferred Shares shall
bear a legend reading as follows:
"The shares evidenced hereby are subject to the terms
of a Voting Agreement (a copy of which may be obtained
without charge from the issuer), and by accepting any
interest in such shares the person accepting such interest
shall be deemed to agree to and shall become bound by all
the provisions of such Voting Agreement."
6. TERMINATION. This Agreement shall terminate upon (i) the date the
Company consummates an underwritten public offering of its Common Stock under
the Securities Act of 1933, as amended (ii) the closing of a consolidation or
merger of the Company with or into any other corporation or corporations and in
which the Company is not the surviving entity (but excluding a merger or
consolidation of the Company with the parent of the Company or one of the
Company's majority owned subsidiaries or an entity in which more than fifty
percent (50%) of the voting control is controlled by the persons or entities
controlling more than fifty percent (50%) of the voting control of the Company,
whether or not the Company is the surviving entity ("Excluded Merger")), or
(iii) a sale, conveyance or disposition of all or substantially all of the
assets of the Company (other than to the parent of the Company or one of the
Company's majority owned subsidiaries an entity in which more than fifty percent
(50%) of the voting control is controlled by the persons or entities controlling
more than fifty percent (50%) of the voting control of the Company).
7. AMENDMENTS AND WAIVERS. The observance of any term hereof by any
party hereunder may be waived (either generally or in a particular instance and
either retroactively or prospectively) by the party so affected upon written
consent. Any term in Sections 1 through 4 hereof may be amended only with the
written consent of (a) the Company and (b) with respect to Section 1 hereof, the
Series A Investors, or their assigns, holding not less than 55% of the Series A
Shares then outstanding, (c) with respect to Section 2 hereof, the Preferred
Investors, or their assigns, holding not less than 55% of the Preferred Shares
then outstanding, and (d) with respect to Sections 3 and 4, the Series B
Investors, or their assigns, holding not less than a majority of the Series B
Shares then outstanding. Any term in Sections 5 through 15 hereof may be
amended only with the written consent of (a) the Company, (b) the Series A
Investors, or their assigns, holding not less than 55% of the Series A Shares
then outstanding and (c) the Series B Investors, or their assigns, holding not
less than a majority of the Series B Shares then outstanding. Any amendment so
effected shall be binding upon the Company and all Preferred Investors or Series
B Investors, as applicable,
-4-
<PAGE>
subject to the terms of this Agreement, whether or not such party, assignee, or
other stockholder entered into or approved such amendment.
8. STOCK SPLITS, STOCK DIVIDENDS, ETC. In the event of any stock split,
stock dividend, recapitalization, reorganization, or the like, any securities
issued with respect to the Preferred Shares shall become subject to this
Agreement and shall be endorsed with the legend set forth in Section 5(b)
hereof.
9. ENFORCEABILITY/SEVERABILITY. The parties hereto agree that each
provision of this Agreement shall be interpreted in such a manner as to be
effective and valid under applicable law. If any provision of this Agreement
shall nevertheless be held to be prohibited by or invalid under applicable law,
(a) such provision shall be effective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement, and (b) the parties shall, to the extent
permissible by applicable law, amend this Agreement, or enter into a voting
trust agreement under which the Preferred Shares shall be transferred to the
voting trust created thereby, so as to make effective and enforceable the intent
of this Agreement.
10. GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Delaware.
11. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided in
this Agreement, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors and assigns of the parties hereto.
13. NOTICES. All notices, requests and other communications to the
Company or any of the Investors hereunder shall be in writing, shall refer
specifically to this Agreement and shall be personally delivered or sent by
facsimile transmission, overnight delivery with a nationally recognized
overnight delivery service or by registered or certified mail, return receipt
requested, postage prepaid, in each case to the respective address specified on
the signature page hereof with respect to the Company and in the Schedule of
Investors attached as SCHEDULE A hereto with respect to the Preferred Investors
(or such other address as may be specified in writing to the other parties
hereto). Any notice or communication given in conformity with this Section 13
shall be deemed to be effective when received by the addressee, if delivered by
hand or facsimile transmission, one (1) business day after deposit with a
nationally recognized overnight delivery service and three (3) days after
mailing by first class U.S. Mail.
14. EQUITABLE REMEDIES. The Company and the Preferred Investors
acknowledge and agree that the legal remedies available to the Company and the
Preferred Investors in the event any party violates the covenants and agreements
made in this Agreement would be inadequate and that the Company and each of the
Preferred Investors shall be entitled, without
-5-
<PAGE>
posting any bond or other security, to temporary, preliminary, and permanent
injunctive relief, specific performance and other equitable remedies in the
event of such a violation, in addition to any other remedies which the Company
or any of the Preferred Investors may have at law or in equity.
15. FURTHER ASSURANCES. Each of the parties hereto shall execute and
deliver all additional documents and instruments and shall do any and all acts
and things reasonably requested in connection with the performance of the
obligations undertaken in this Agreement and/or otherwise to effectuate in good
faith the intent of the parties.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year hereinabove first written.
THE COMPANY:
RHYTHMS NETCONNECTIONS INC.
By: /s/ Catherine M. Hapka
----------------------------------------------
Catherine M. Hapka,
President and Chief Executive Officer
THE PREFERRED INVESTORS:
SPROUT CAPITAL VII, L.P.
By: DLJ Capital Corporation
Managing General Partner
By: /s/ Keith B. Geeslin
-----------------------------------------
Keith Geeslin, Attorney-in-Fact
THE SPROUT CEO FUND, L.P.
By: DLJ Capital Corporation
Its General Partner
By: /s/ Keith B. Geeslin
-----------------------------------------
Keith Geeslin, Attorney-in-Fact
DLJ CAPITAL CORPORATION
By: /s/ Keith B. Geeslin
----------------------------------------------
Keith Geeslin, Attorney-in-Fact
[COUNTERPART SIGNATURE PAGE TO VOTING AGREEMENT]
<PAGE>
DLJ FIRST ESC L.L.C.
By: DLJ LBO Plans Management Corporation
Its: Manager
By: /s/ Keith B. Geeslin
-----------------------------------------
Keith Geeslin, Attorney-in-Fact
ENTERPRISE PARTNERS III, L.P.
By: /s/ W. R. Stensrud
----------------------------------------------
Its: General Partner
---------------------------------------------
ENTERPRISE PARTNERS III
ASSOCIATES, L.P.
By: /s/ W. R. Stensrud
----------------------------------------------
Its: General Partner
---------------------------------------------
KLEINER PERKINS CAUFIELD & BYERS VIII
By: /s/ Kevin R. Compton
----------------------------------------------
Its: General Partner
---------------------------------------------
[COUNTERPART SIGNATURE PAGE TO VOTING AGREEMENT]
<PAGE>
KPCB VIII FOUNDERS FUND
By: /s/ Kevin R. Compton
----------------------------------------------
Its: General Partner
---------------------------------------------
KPCB VIII INFORMATION SCIENCES ZAIBATSU FUND II
By: /s/ Kevin R. Compton
----------------------------------------------
Its: General Partner
---------------------------------------------
BRENTWOOD ASSOCIATES VII, L.P.
By: /s/ John Walecka
----------------------------------------------
Its: General Partner
---------------------------------------------
BRENTWOOD AFFILIATE FUND, L.P.
By: /s/ John Walecka
----------------------------------------------
Its: General Partner
---------------------------------------------
ENRON COMMUNICATIONS GROUP, INC.
By: /s/ K. L. Harrison
----------------------------------------------
Its:
---------------------------------------------
[COUNTERPART SIGNATURE PAGE TO VOTING AGREEMENT]
<PAGE>
SCHEDULE A
SCHEDULE OF PREFERRED INVESTORS
Name and Address of Series A Investors Name and Address of Series B Investors
-------------------------------------- --------------------------------------
The Sprout Group The Sprout Group
3000 Sand Hill Road 3000 Sand Hill Road
Building 4, Suite 270 Building 4, Suite 270
Menlo Park, CA 94025 Menlo Park, CA 94025
Attn: Keith Geeslin Attn: Keith Geeslin
Fax: (415) 854-8779 Fax: (415) 854-8779
Enterprise Partners Enterprise Partners
7979 Ivanhoe Avenue, Suite 550 7979 Ivanhoe Avenue, Suite 550
La Jolla, CA 92037 La Jolla, CA 92037
Attn: William Stensrud Attn: William Stensrud
Fax: (619) 454-2489 Fax: (619) 454-2489
Kleiner Perkins Caufield & Byers Kleiner Perkins Caufield & Byers
2750 Sand Hill Road 2750 Sand Hill Road
Menlo Park, CA 94025 Menlo Park, CA 94025
Attn: Kevin Compton Attn: Kevin Compton
Fax: (415) 233-0300 Fax: (415) 233-0300
Brentwood Associates Brentwood Associates
3000 Sand Hill Road 3000 Sand Hill Road
Building 1, Suite 260 Building 1, Suite 260
Menlo Park, CA 94025 Menlo Park, CA 94025
Attn: John Walecka Attn: John Walecka
Fax: (415) 854-9513 Fax: (415) 854-9513
Enron Communications Group, Inc.
210 Southwest Morrison Street,
Suite 400
Portland, OR 97204
<PAGE>
AMENDMENT TO
AMENDED AND RESTATED VOTING AGREEMENT
THIS AMENDMENT (this "Amendment") TO THE AMENDED AND RESTATED VOTING
AGREEMENT dated as of the 12th day of March, 1998 (the "Agreement") is made as
of the 5th day of May, 1998, by and among Rhythms NetConnections Inc., a
Delaware corporation (the "Company") and the parties listed on the Schedule of
Investors attached thereto as SCHEDULE A.
1. VOTING TRUST. The Agreement is hereby amended to add a new section 16
to read as follows:
"16. VOTING TRUST. Notwithstanding anything to the contrary
herein, Sprout Capital VII, L.P. ("Sprout VII") may transfer its
Series A Shares and Series B Shares to First UnionTrust Company,
National Association, as Trustee (the "Trustee") pursuant to the
Voting Trust Agreement dated as of May 5, 1998 by and among Sprout
VII, Donaldson Lufkin & Jenrette, Inc. and the Trustee (the "Voting
Trust Agreement") and all of the Series A Shares and Series B Shares
held by the Trustee pursuant to the Voting Trust Agreement shall be
considered to be held by Sprout for purposes of determining the number
of Preferred Shares held by Sprout within the meaning of Section l.a
of the Agreement."
2. TRUSTEE. The Trustee hereby becomes a party to the Agreement, as
amended hereby, and agrees to be bound by all the provisions of the Agreement
(as amended from time to time) as if the Trustee was a party to the Agreement.
3. SCHEDULE OF PREFERRED INVESTORS. Schedule A, to the Agreement, the
Schedule of Preferred Investors, is hereby amended to add the name and address
of the Trustee as set forth below under the captions "NAME AND ADDRESS OF SERIES
A INVESTORS" and "NAME AND ADDRESS OF SERIES B INVESTORS":
First UnionTrust Company National Association, as Trustee
One Rodney Square
First Floor
920 King Street
Wilmington, DE 19801
4. GOVERNING LAW. This Amendment shall be governed by and construed
under the laws of the State of Delaware.
<PAGE>
5. COUNTERPARTS. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year hereinabove written.
THE COMPANY:
RHYTHMS NETCONNECTIONS INC.
By: /s/ Catherine M. Hapka
-----------------------------------------
Catherine M. Hapka,
President and Chief Executive Officer
THE PREFERRED INVESTORS:
SPROUT CAPITAL VII, L.P.
By: DLJ Capital Corporation
Managing General Partner
By: /s/ Keith B. Geeslin
-----------------------------------------
THE SPROUT CEO FUND, L.P.
By: DLJ Capital Corporation
Its General Partner
By: /s/ Keith B. Geeslin
-----------------------------------------
Keith B. Geeslin
Attorney-In-Fact
DLJ CAPITAL CORPORATION
By: /s/ Keith B. Geeslin
-----------------------------------------
Keith B. Geeslin
Attorney-In-Fact
[COUNTERPART SIGNATURE PAGE TO AMENDMENT TO VOTING AGREEMENT]
-3-
<PAGE>
DLJ FIRST ESC L.L.C.
By: DLJ LBO Plans Management Corporation
Its: Manager
By: /s/ Keith B. Geeslin
----------------------------------
Keith B. Geeslin
Attorney-In-Fact
ENTERPRISE PARTNERS III, L.P.
By: /s/ W. R. Stensrud
-----------------------------------------
Its: General Partner
-----------------------------------------
ENTERPRISE PARTNERS III ASSOCIATES, L.P.
By: /s/ W. R. Stensrud
-----------------------------------------
Its: General Partner
-----------------------------------------
KLEINER PERKINS CAUFIELD & BYERS VIII
By: /s/ Kevin R. Compton
-----------------------------------------
Its: General Partner
-----------------------------------------
KPCB VIII FOUNDERS FUND
By: /s/ Kevin R. Compton
-----------------------------------------
Its: General Partner
-----------------------------------------
[COUNTERPART SIGNATURE PAGE TO AMENDMENT TO VOTING AGREEMENT]
-4-
<PAGE>
KPCB VIII INFORMATION SCIENCES
ZAIBATSU FUND II
By: /s/ Kevin R. Compton
-----------------------------------------
Its: General Partner
-----------------------------------------
BRENTWOOD ASSOCIATES VII, L.P.
By: Brentwood VII Ventures, L.P.
its General Partner
By: /s/ John Walecka
-----------------------------------------
Its: General Partner
-----------------------------------------
BRENTWOOD AFFILIATE FUND, L.P.
By: Brentwood VII Ventures, L.P.
its General Partner
By: /s/ John Walecka
-----------------------------------------
Its: General Partner
-----------------------------------------
ENRON COMMUNICATIONS GROUP, INC.
By: /s/ Ken L. Harrison
-----------------------------------------
Its:
-----------------------------------------
FIRST UNION TRUST COMPANY, NATIONAL
ASSOCIATION,
not in its individual capacity but solely as
voting trustee
By: /s/ (illegible)
-----------------------------------------
Its: Assistant Vice President
-----------------------------------------
[COUNTERPART SIGNATURE PAGE TO AMENDMENT TO VOTING AGREEMENT]
-5-
<PAGE>
SCHEDULE A
SCHEDULE OF PREFERRED INVESTORS
<TABLE>
<CAPTION>
Name and Address of Series B
Name and Address of Series A Investors Investors
- -------------------------------------- ---------------------------------
<S> <C>
The Sprout Group The Sprout Group
3000 Sand Hill Road 3000 Sand Hill Road
Building 4, Suite 270 Building 4, Suite 270
Menlo Park, CA 94025 Menlo Park, CA 94025
Attn: Keith Geeslin Attn: Keith Geeslin
Fax: (415) 854-8779 Fax: (415) 854-8779
Enterprise Partners Enterprise Partners
7979 Ivanhoe Avenue, Suite 550 7979 Ivanhoe Avenue, Suite 550
La Jolla, CA 92037 LaJolla, CA 92037
Attn: William Stensrud Attn: William Stensrud
Fax: (619) 454-2489 Fax: (619) 454-2489
Kleiner Perkins Caufield & Byers Kleiner Perkins Caufield & Byers
2750 Sand Hill Road 2750 Sand Hill Road
Menlo Park, CA 94025 Menlo Park, CA 94025
Attn: Kevin Compton Attn: Kevin Compton
Fax: (415) 233-0300 Fax: (415) 233-0300
Brentwood Associates Brentwood Associates
3000 Sand Hill Road 3000 Sand Hill Road
Building 4, Suite 270 Building 4, Suite 270
Menlo Park, CA 94025 Menlo Park, CA 94025
Attn: John Walecka Attn: John Walecka
Fax: (415) 854-9513 Fax: (415) 854-9513
Enron Communications Group, Inc.
210 Southwest Morrison Street,
Suite 400
Portland, OR 97204
</TABLE>
-6-
<PAGE>
ACCELERATED CONNECTIONS, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
JULY 3, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Purchase and Sale of Stock. . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.1 Sale and Issuance of Series A Preferred Stock. . . . . . . . . . . . . . .1
1.2 First Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.3 Second Closing.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.4 Third Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.5 Discretionary Fourth Closing.. . . . . . . . . . . . . . . . . . . . . . .2
2. Representations and Warranties of the Company.. . . . . . . . . . . . . . . . .2
2.1 Organization, Good Standing and Qualification. . . . . . . . . . . . . . .2
2.2 Capitalization and Voting Rights.. . . . . . . . . . . . . . . . . . . . .2
2.3 Subsidiaries.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.4 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.5 Valid Issuance of Preferred and Common Stock.. . . . . . . . . . . . . . .3
2.6 Governmental Consents. . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.7 Returns and Complaints.. . . . . . . . . . . . . . . . . . . . . . . . . .4
2.8 Litigation.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.9 Proprietary Information Agreements.. . . . . . . . . . . . . . . . . . . .5
2.10 Patents and Trademarks.. . . . . . . . . . . . . . . . . . . . . . . . . .5
2.11 Compliance with Other Instruments. . . . . . . . . . . . . . . . . . . . .5
2.12 Agreements; Action.. . . . . . . . . . . . . . . . . . . . . . . . . . . .6
2.13 Related-Party Transactions.. . . . . . . . . . . . . . . . . . . . . . . .7
2.14 Permits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
2.15 Environmental and Safety Laws. . . . . . . . . . . . . . . . . . . . . . .7
2.16 Manufacturing and Marketing Rights.. . . . . . . . . . . . . . . . . . . .7
2.17 Disclosure.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
2.18 Registration Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . .8
2.19 Corporate Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . .8
2.20 Title to Property and Assets.. . . . . . . . . . . . . . . . . . . . . . .8
2.21 Employee Benefit Plans.. . . . . . . . . . . . . . . . . . . . . . . . . .8
2.22 Tax Returns, Payments and Elections. . . . . . . . . . . . . . . . . . . .8
2.23 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
2.24 Minute Books.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
2.25 Labor Agreements and Actions.. . . . . . . . . . . . . . . . . . . . . . .9
3. Representations and Warranties of the Investor. . . . . . . . . . . . . . . . .9
3.1 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
3.2 Purchase Entirely for Own Account. . . . . . . . . . . . . . . . . . . . .9
3.3 Disclosure of Information. . . . . . . . . . . . . . . . . . . . . . . . 10
3.4 Investment Experience. . . . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
<PAGE>
<TABLE>
<S> <C>
3.5 Accredited Investor. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.6 Restricted Securities. . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.7 Further Limitations on Disposition.. . . . . . . . . . . . . . . . . . . 10
3.8 Legends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4. California Commissioner of Corporations . . . . . . . . . . . . . . . . . . . 11
4.1 Corporate Securities Law . . . . . . . . . . . . . . . . . . . . . . . . 11
5. Conditions of Investor's Obligations at First Closing.. . . . . . . . . . . . 11
5.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . 12
5.2 Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.3 Compliance Certificate.. . . . . . . . . . . . . . . . . . . . . . . . . 12
5.4 Qualifications.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.5 Proceedings and Documents. . . . . . . . . . . . . . . . . . . . . . . . 12
5.6 Board of Directors.. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.7 Investors' Rights Agreement. . . . . . . . . . . . . . . . . . . . . . . 12
5.8 Voting Agreement.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6. Conditions of the Company's Obligations at the First Closing. . . . . . . . . 12
6.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . 13
6.2 California Qualification . . . . . . . . . . . . . . . . . . . . . . . . 13
7. Conditions of Investor's Obligations at Second Closing. . . . . . . . . . . . 13
7.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . 13
7.2 Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.3 Qualifications.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8. Conditions of Investor's Obligations at Third Closing.. . . . . . . . . . . . 13
8.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . 13
8.2 Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8.3 Qualifications.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
9. Conditions of Investor's Obligations at Fourth Closing. . . . . . . . . . . . 14
9.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . 14
9.2 Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
9.3 Qualifications.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
9.4 Approval.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
10. Miscellaneous.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
10.1 Survival of Warranties . . . . . . . . . . . . . . . . . . . . . . . . . 14
10.2 Successors and Assigns.. . . . . . . . . . . . . . . . . . . . . . . . . 14
10.3 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
10.4 Counterparts.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C>
10.5 Titles and Subtitles.. . . . . . . . . . . . . . . . . . . . . . . . . 15
10.6 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
10.7 Finder's Fee.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
10.8 Expenses.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
10.9 Amendments and Waivers.. . . . . . . . . . . . . . . . . . . . . . . . 15
10.10 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.11 Aggregation of Stock . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.12 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
SCHEDULE A -- Schedule of Investors
SCHEDULE B -- Schedule of Common Holders
EXHIBIT A -- Restated Certificate of Incorporation
EXHIBIT B -- Investors' Rights Agreement
EXHIBIT C -- Voting Agreement
-3-
<PAGE>
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES A PREFERRED STOCK PURCHASE AGREEMENT is made as of the 3rd
day of July 1997, by and between Accelerated Connections, Inc., a Delaware
corporation (the "Company'), and the investors listed on Schedule A hereto,
each of which is herein referred to as an "Investor.'
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK.
1.1 SALE AND ISSUANCE OF SERIES A PREFERRED STOCK.
(a) RESTATED CERTIFICATE. The Company shall adopt and file
with the Secretary of State of Delaware on or before the Closing (as defined
below) the Restated Certificate of Incorporation in the form attached hereto
as EXHIBIT A.
(b) PURCHASE OF SERIES A STOCK. Subject to the terms and
conditions of this Agreement, each Investor agrees, severally, to purchase as
applicable at the First Closing, Second Closing, Third Closing and Fourth
Closing (together the "Closings') and the Company agrees to sell and issue
to each such Investor at the Closings that number of shares of the Company's
Series A Preferred Stock set forth opposite each such Investor's name on
Schedule A hereto for the purchase price set forth hereon.
1.2 FIRST CLOSING. The first purchase and sale of the Series A
Preferred Stock shall take place at the offices of Brobeck, Phleger &
Harrison LLP, 550 West "C' Street, Suite 1200, San Diego California, at
10:00 A.M., on July 3, 1997, or at such other time and place as the Company
and Investors acquiring in the aggregate more than half the shares of Series
A Preferred Stock sold pursuant hereto mutually agree upon orally or in
writing (which time and place are designated as the "First Closing'). At
the First Closing the Company shall deliver to each applicable Investor a
certificate representing the Series A Preferred Stock which such Investor is
purchasing at the First Closing (as set forth on Schedule A) against delivery
to the Company by such Investor of a check or wire transfer in the amount of
the purchase price therefor payable to the Company's order.
1.3 SECOND CLOSING. The second purchase and sale of the Series A
Preferred Stock shall take place at the offices of Brobeck, Phleger &
Harrison LLP, 550 West "C' Street, Suite 1200, San Diego California, at the
date set by the Board of Directors of the Company, provided that such date be
no later than July 31, 1997, at which the Company may sell up to the number
of shares set forth on Schedule A to Brentwood Associates VII, L.P. and such
other purchasers as it shall select (which time and place are designated as
the "Second Closing'). At the Second Closing, the Company shall deliver to
each applicable Investor a certificate representing the Series A Preferred
<PAGE>
Stock which such Investor is purchasing at the Second Closing (as set forth
on Schedule A) against delivery to the Company by such Investor of a check or
wire transfer in the amount of the purchase price therefor payable to the
Company's order.
1.4 THIRD CLOSING. The third purchase and sale of the Series A
Preferred Stock shall take place at the offices of Brobeck, Phleger &
Harrison LLP, 550 West "C' Street, Suite 1200, San Diego California, at the
date set by the Company's Board of Directors, provided that such date shall
be no earlier than six (6) months following the date of the First Closing
(which time and place are designated as the "Third Closing'). At the Third
Closing the Company shall deliver to each applicable Investor a certificate
representing the Series A Preferred Stock which such Investor is purchasing
at the Third Closing (as set forth on Schedule A) against delivery to the
Company by such Investor of a check or wire transfer in the amount of the
purchase price therefor payable to the Company's order.
1.5 DISCRETIONARY FOURTH CLOSING. The fourth purchase and sale of
Series A Preferred Stock shall take place at the offices of Brobeck, Phleger
& Harrison LLP, 550 West "C' Street, Suite 1300, San Diego, California
92101, upon approval of the Board of Directors and the holders of a majority
of the Common Stock issued or issuable upon conversion of the Series A
Preferred Stock issued or issuable pursuant to the Series A Agreement, at the
date set by the Board of Directors, provided that such date is no earlier
than twelve (12) months and no later than eighteen (18) months from the date
of the First Closing (the "Fourth Closing'). At the Fourth Closing the
Company shall deliver to each Investor a certificate representing the Series
A Preferred Stock which such Investor is purchasing at the Fourth Closing (as
set forth on Schedule A) against delivery to the Company by such Investor of
a check or wire transfer in the amount of the purchase price therefor payable
to the Company's order.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to each Investor that, except as set forth on a
Schedule of Exceptions furnished each Investor, and special counsel for the
Investors, which exceptions shall be deemed to be representations and
warranties as if made hereunder:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to carry on its business as now conducted and as proposed to be
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure so to qualify would have a
material adverse effect on its business or properties.
2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of
the Company consists, or will consist prior to the Closing, of:
(i) PREFERRED STOCK. 17,000,000 shares of Preferred Stock
(the "Preferred Stock'), all of which have been designated Series A
Preferred Stock and of which 300,000 are issued and outstanding (as set forth
on Schedule A). The rights,
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privileges and preferences of the Series A Preferred Stock will be as stated
in the Company's Restated Articles Certificate of Incorporation attached
hereto as EXHIBIT A.
(ii) COMMON STOCK. 39,764,706 shares of common stock
("Common Stock'), of which 900,735 shares are issued and outstanding and
are owned by the persons, and in the numbers specified in Schedule B hereto.
The outstanding shares of common stock are all duly and validly authorized
and issued, fully paid and nonassessable, and were issued in accordance with
the registration or qualification provisions of the Securities Act of 1933,
as amended and any relevant state securities laws, or pursuant to valid
exceptions therefrom.
(iii) Except for (A) the conversion privileges of the Series
A Preferred Stock to be issued under this Agreement and (B) the rights
provided in paragraph 2.4 of the Investors' Rights Agreement, there are not
outstanding any options, warrants, rights (including conversion or preemptive
rights) or agreements for the purchase or acquisition from the Company of any
shares of its capital stock. The Company is not a party or subject to any
agreement or understanding, and, to the Company's knowledge, there is no
agreement or understanding between any persons and/or entities, which affects
or relates to the voting or giving of written consents with respect to any
security or by a director of the Company.
2.3 SUBSIDIARIES. The Company does not presently own or control,
directly or indirectly, any interest in any other corporation, association,
or other business entity.
2.4 AUTHORIZATION. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement and the Investors'
Rights Agreement, the performance of all obligations of the Company hereunder
and thereunder and the authorization, issuance (or reservation for issuance),
sale and delivery of the Series A Preferred Stock being sold hereunder and
the Common Stock issuable upon conversion of the Series A Preferred Stock has
been taken or will be taken prior to the Closing, and this Agreement and the
Investors' Rights Agreement constitute valid and legally binding obligations
of the Company, enforceable in accordance with their respective terms, except
(i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium, and other laws of general application affecting enforcement of
creditors' rights generally, (ii) as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies, and (iii) to the extent the indemnification provisions contained in
the Investors' Rights Agreement may be limited by applicable federal or state
securities laws.
2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK.
(a) The Series A Preferred Stock which is being purchased by
the Investors hereunder, when issued, sold and delivered in accordance with
the terms hereof for the consideration expressed herein, will be duly and
validly issued, fully paid and nonassessable and, based in part upon the
representations of the Investors in this
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Agreement, will be issued in compliance with all applicable federal and state
securities laws and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and the Investors' Rights
Agreement and under applicable stock and federal securities law. The Common
Stock issuable upon conversion of the Series A Preferred Stock purchased
under this Agreement has been duly and validly reserved for issuance and,
upon issuance in accordance with the terms of the Restated Certificate of
Incorporation, shall be duly and validly issued, fully paid and
nonassessable, and issued in compliance with all applicable securities laws
and will be free of restrictions on transfer other than restrictions on
transfer under this Agreement and the Investors' Rights Agreement and under
applicable stock and federal securities law, as presently in effect, of the
United States and each of the states whose securities laws govern the
issuance of any of the Series A Preferred Stock hereunder.
(b) The outstanding shares of Common Stock are all duly and
validly authorized and issued, fully paid and nonassessable, and were issued
in compliance with all applicable federal and state securities laws.
2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local or provincial governmental authority
on the part of the Company is required in connection with the consummation of
the transactions contemplated by this Agreement, except for the filing
pursuant to Section 25102(f) of the California Corporate Securities Law of
1968, as amended, and the rules thereunder, which filing will be effected
within 15 days of the sale of the Series A Preferred Stock hereunder.
2.7 RETURNS AND COMPLAINTS. The Company has received no customer
complaints concerning its products and/or services, nor has it had any of its
products returned by a purchaser thereof, other than minor, nonrecurring
warranty problems.
2.8 LITIGATION. There is no action, suit, proceeding or
investigation pending or currently threatened against the Company which
questions the validity of this Agreement and the Investors' Rights Agreement
or the right of the Company to enter into any of them, or to consummate the
transactions contemplated hereby or thereby, or which might result, either
individually or in the aggregate, in any material adverse changes in the
assets, condition, affairs or prospects of the Company, financially or
otherwise, or any change in the current equity ownership of the Company. The
foregoing includes, without limitation, actions pending or threatened
involving the prior employment of any of the Company's employees, their use
in connection with the Company's business of any information or techniques
allegedly proprietary to any of their former employers, or their obligations
under any agreements with prior employers. The Company is not a party or
subject to the provisions of any order, writ, injunction, judgment or decree
of any court or government agency or instrumentality. There is no action,
suit, proceeding or investigation by the Company currently pending or which
the Company intends to initiate.
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2.9 PROPRIETARY INFORMATION AGREEMENTS. Each employee, officer
and consultant of the Company has executed a Proprietary Information and
Inventions Agreement in the form provided to special counsel to the
Investors. The Company, after reasonable investigation, is not aware that
any of its employees, officers or consultant are in violation thereof, and
the Company will use its best efforts to prevent any such violation.
2.10 PATENTS AND TRADEMARKS. The Company has sufficient title and
ownership of all patents, trademarks, service marks, trade names, copyrights,
trade secrets, information, proprietary rights and processes necessary for
its business as now conducted and as proposed to be conducted without any
conflict with or infringement of the rights of others. There are no
outstanding options, licenses, or agreements of any kind relating to the
foregoing, nor is the Company bound by or a party to any options, licenses or
agreements of any kind with respect to the patents, trademarks, service
marks, trade names, copyrights, trade secrets, licenses, information,
proprietary rights and processes of any other person or entity. The Company
has not received any communications alleging that the Company has violated
or, by conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity. The Company is not aware
that any of its employees is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or
subject to any judgment, decree or order of any court or administrative
agency, that would interfere with the use of his best efforts to promote the
interests of the Company or that would conflict with the Company's business
as proposed to be conducted. Neither the execution nor delivery of this
Agreement and the Investors' Rights Agreement, nor the carrying on of the
Company's business by the employees of the Company, nor the conduct of the
Company's business as proposed, will, to the Company's knowledge, conflict
with or result in a breach of the terms, conditions or provisions of, or
constitute a default under, any contract, covenant or instrument under which
any of such employees is now obligated. The Company does not believe it is
or will be necessary to utilize any inventions of any of its employees (or
people it currently intends to hire) made prior to their employment by the
Company.
2.11 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation or default of any provisions of its Restated Certificate of
Incorporation or Bylaws or of any instrument, judgment, order, writ, decree
or contract to which it is a party or by which it is bound or, to its
knowledge, of any provision of federal or state statute, rule or regulation
applicable to the Company. The execution, delivery and performance of this
Agreement, the Investors' Rights Agreement or any Ancillary Agreements and
the consummation of the transactions contemplated hereby and thereby will not
result in any such violation or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
such provision, instrument, judgment, order, writ, decree or contract or an
event which results in the creation of any lien, charge or encumbrance upon
any assets of the Company or the suspension, revocation, impairment,
forfeiture, or nonrenewal of any material permit,
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<PAGE>
license, authorization, or approval applicable to the Company, its business
or operations or any of its assets or properties.
2.12 AGREEMENTS; ACTION.
(a) Except for agreements explicitly contemplated hereby and
by the Investors' Rights Agreement, there are no agreements, understandings
or proposed transactions between the Company and any of its officers,
directors, affiliates, or any affiliate thereof.
(b) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees to
which the Company is a party or by which it is bound which may involve (i)
obligations (contingent or otherwise) of, or payments to the Company in
excess of, $10,000, or (ii) the license of any patent, copyright, trade
secret or other proprietary right to or from the Company or (iii) provisions
restricting or affecting the development, manufacture or distribution of the
Company's products or services, or (iv) indemnification by the Company with
respect to infringement of proprietary rights.
(c) The Company has not (i) declared or paid any dividends,
or authorized or made any distribution upon or with respect to any class or
series of its capital stock, (ii) incurred any indebtedness for money
borrowed or any other liabilities individually in excess of $10,000 or, in
the case of indebtedness and/or liabilities individually less than $10,000,
in excess of $25,000 in the aggregate, (iii) made any loans or advances to
any person, other than ordinary advances for travel expenses, or (iv) sold,
exchanged or otherwise disposed of any of its assets or rights, other than
the sale of its inventory in the ordinary course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including
persons or entities the Company has reason to believe are affiliated
therewith) shall be aggregated for the purpose of meeting the individual
minimum dollar amounts of such subsections.
(e) The Company is not a party to and is not bound by any
contract, agreement or instrument, or subject to any restriction under its
Restated Certificate of Incorporation or Bylaws, which adversely affects its
business as now conducted or as proposed to be conducted, its properties or
its financial condition.
(f) The Company has not engaged in the past three (3) months
in any discussion (i) with any representative of any corporation or
corporations regarding the consolidation or merger of the Company with or
into any such corporation or corporations, (ii) with any corporation,
partnership, association or other business entity or any individual regarding
the sale, conveyance or disposition of all or substantially all of the assets
of the Company of a transaction or series of related transactions in which
more than fifty percent (50%) of the voting power of the Company is disposed
of, or
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(iii) regarding any other form of acquisition, liquidation, dissolution or
winding up of the Company.
(g) As of the First Closing, the Company has not incurred any
expenses and has no liabilities individually in excess of $10,000 or, in the
case of expenses and/or liabilities individually less than $10,000, in excess
of $25,000 in the aggregate.
2.13 RELATED-PARTY TRANSACTIONS. No employee, officer, or director
of the Company or member of his or her immediate family is indebted to the
Company, nor is the Company indebted (or committed to make loans or extend or
guarantee credit) to any of them. To the best of the Company's knowledge,
none of such persons has any direct or indirect ownership interest in any
firm or corporation with which the Company is affiliated or with which the
Company has a business relationship, or any firm or corporation that competes
with the Company, except that employees, officers, or directors of the
Company and members of their immediate families may own stock in publicly
traded companies that may compete with the Company. No member of the
immediate family of any officer or director of the Company is directly or
indirectly interested in any material contract with the Company.
2.14 PERMITS. The Company has all franchises, permits, licenses,
and any similar authority necessary for the conduct of its business as now
being conducted by it, the lack of which could materially and adversely
affect the business, properties, prospects, or financial condition of the
Company and believes it can obtain, without undue burden or expense, any
similar authority for the conduct of its business as planned to be conducted.
The Company is not in default in any material respect under any of such
franchises, permits, licenses, or other similar authority.
2.15 ENVIRONMENTAL AND SAFETY LAWS. To the best of its knowledge,
the Company is not in violation of any applicable statute, law, or regulation
relating to the environment or occupational health and safety, and to the
best of its knowledge, no material expenditures are or will be required in
order to comply with any such existing statute, law, or regulation.
2.16 MANUFACTURING AND MARKETING RIGHTS. The Company has not
granted rights to manufacture, produce, assemble, license, market, or sell
its products to any other person and is not bound by any agreement that
affects the Company's exclusive right to develop, manufacture, assemble,
distribute, market, or sell its products.
2.17 DISCLOSURE. The Company has fully provided each Investor with
all the information which such Investor has requested for deciding whether to
purchase the Series A Preferred Stock and all information which the Company
believes is reasonably necessary to enable such Investor to make such
decision. Neither this Agreement, the Investors' Rights Agreement, nor any
other statements or certificates made or delivered in connection herewith or
therewith contains any untrue statement of a material fact or
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<PAGE>
omits to state a material fact necessary to make the statements herein or
therein not misleading.
2.18 REGISTRATION RIGHTS. Except as provided in the Investors'
Rights Agreement, the Company has not granted or agreed to grant any
registration rights, including piggyback rights, to any person or entity.
2.19 CORPORATE DOCUMENTS. Except for amendments necessary to
satisfy representations and warranties or conditions contained herein (the
form of which amendments has been approved by the Investors), the Restated
Certificate of Incorporation and Bylaws of the Company are in the form
previously provided to special counsel for the Investors.
2.20 TITLE TO PROPERTY AND ASSETS. The Company owns its property
and assets free and clear of all mortgages, liens, loans and encumbrances,
except such encumbrances and liens which arise in the ordinary course of
business and do not materially impair the Company's ownership or use of such
property or assets. With respect to the property and assets it leases, the
Company is in compliance with such leases and, to the best of its knowledge,
holds a valid leasehold interest free of any liens, claims or encumbrances.
2.21 EMPLOYEE BENEFIT PLANS. The Company does not have any
Employee Benefit Plan as defined in the Employee Retirement Income Security
Act of 1974.
2.22 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed
all tax returns and reports as required by law. These returns and reports
are true and correct in all material respects. The Company has paid all
taxes and other assessments due, except those contested by it in good faith
which are listed in the Schedule of Exceptions. The provision for taxes of
the Company as shown in the Financial Statements is adequate for taxes due or
accrued as of the date thereof. The Company has not elected pursuant to the
Internal Revenue Code of 1986, as amended ("Code'), to be treated as a
Subchapter S corporation or a collapsible corporation pursuant to Section
341(f) or Section 1362(a) of the Code, nor has it made any other elections
pursuant to the Code (other than elections which relate solely to methods of
accounting, depreciation or amortization) which would have a material effect
on the Company, its financial condition, its business as presently conducted
or proposed to be conducted or any of its properties or material assets.
2.23 INSURANCE. The Company has in full force and effect fire and
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its
properties that might be damaged or destroyed.
2.24 MINUTE BOOKS. The minute books of the Company provided to the
Investors contain a complete summary of all meetings of directors and
stockholders since
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the time of incorporation and reflect all transactions referred to in such
minutes accurately in all material respects.
2.25 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or
subject to (and none of its assets or properties is bound by or subject to)
any written or oral, express or implied, contract, commitment or arrangement
with any labor union, and no labor union has requested or, to the knowledge
of the Company, has sought to represent any of the employees, representatives
or agents of the Company. There is no strike or other labor dispute
involving the Company pending, or to the knowledge of the Company threatened,
which could have a material adverse effect on the assets, properties,
financial condition, operating results, or business of the Company (as such
business is presently conducted and as it is proposed to be conducted), nor
is the Company aware of any labor organization activity involving its
employees. The Company is not aware that any officer or key employee, or
that any group of key employees, intends to terminate their employment with
the Company, nor does the Company have a present intention to terminate the
employment of any of the foregoing. Subject to general principles related to
wrongful termination of employees, the employment of each officer and
employee of the Company is terminable at the will of the Company.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. Each Investor
hereby represents and warrants that:
3.1 AUTHORIZATION. This Agreement constitutes its valid and
legally binding obligation, enforceable in accordance with its terms except
(i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium, and other laws of general application affecting enforcement of
creditors' rights generally, (ii) as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies, and (iii) to the extent the indemnification provisions contained in
the Investors' Rights Agreement may be limited by applicable Federal or state
securities laws.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made
with each Investor in reliance upon such Investor's representation to the
Company, which by such Investor's execution of this Agreement such Investor
hereby confirms, that the Series A Preferred Stock to be received by such
Investor and the Common Stock issuable upon conversion thereof (collectively,
the "Securities') will be acquired for investment for such Investor's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that such Investor has no present
intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, each Investor further
represents that such Investor does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of
the Securities. Each Investor represents that it has full power and
authority to enter into this Agreement.
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3.3 DISCLOSURE OF INFORMATION. It believes it has received all
the information it considers necessary or appropriate for deciding whether to
purchase the Series A Preferred Stock. Each Investor further represents that
it has had an opportunity to ask questions and receive answers from the
Company regarding the terms and conditions of the offering of the Series A
Preferred Stock. The foregoing, however, does not limit or modify the
representations and warranties of the Company in Section 2 of this Agreement
or the right of the Investors to rely thereon.
3.4 INVESTMENT EXPERIENCE. Each Investor is an investor in
securities of companies in the development stage and acknowledges that it is
able to fend for itself, can bear the economic risk of its investment and has
such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment in the Series A
Preferred Stock. If other than an individual, Investor also represents it
has not been organized for the purpose of acquiring the Series A Preferred
Stock.
3.5 ACCREDITED INVESTOR. Each Investor is an "accredited
investor' within the meaning of SEC Rule 501 of Regulation D, as presently
in effect.
3.6 RESTRICTED SECURITIES. It understands that the shares of
Series A Preferred Stock it is purchasing are characterized as "restricted
securities' under the federal securities laws inasmuch as they are being
acquired from the Company in a transaction not involving a public offering
and that under such laws and applicable regulations such securities may be
resold without registration under the Securities Act of 1933, as amended (the
"Act'), only in certain limited circumstances. In this connection, each
Investor represents that it is familiar with SEC Rule 144, as presently in
effect, and understands the resale limitations imposed thereby and by the Act.
3.7 FURTHER LIMITATIONS ON DISPOSITION. Without in any way
limiting the representations set forth above, each Investor further agrees
not to make any disposition of all or any portion of the Series A Preferred
Stock (or the Common Stock issuable upon the conversion thereof) unless and
until the transferee has agreed in writing for the benefit of the Company to
be bound by this Section 3 and 7, provided and to the extent such sections
are then applicable and Investors' Rights Agreement and:
(a) There is then in effect a Registration Statement under
the Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii)
if reasonably requested by the Company, such Investor shall have furnished
the Company with an opinion of counsel, reasonably satisfactory to the
Company, that such disposition will not require registration of such shares
under the Act. It is agreed that the Company will not require
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opinions of counsel for transactions made pursuant to Rule 144 except in
unusual circumstances.
(c) Notwithstanding the provisions of paragraphs (a) and (b)
above, no such registration statement or opinion of counsel shall be
necessary for a transfer by an Investor which is a partnership to a partner
of such partnership or a retired partner of such partnership who retires
after the date hereof, or to the estate of any such partner or retired
partner or the transfer by gift, will or intestate succession of any partner
to his spouse or to the siblings, lineal descendants or ancestors of such
partner or his spouse, if the transferee agrees in writing to be subject to
the terms hereof to the same extent as if he were an original Investor
hereunder.
3.8 LEGENDS. It is understood that the certificates evidencing
the Series A Preferred Stock (and the Common Stock issuable upon conversion
thereof) may bear one or all of the following legends:
(a) "These securities have not been registered under the
Securities Act of 1933. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with
respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or unless
sold pursuant to Rule 144 of such Act.'
(b) Any legend required by the laws of the State of
California, including any legend required by the California Department of
Corporations and Sections 417 and 418 of the Code.
4. CALIFORNIA COMMISSIONER OF CORPORATIONS.
4.1 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH
ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105
OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS
AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED,
UNLESS THE SALE IS SO EXEMPT.
5. CONDITIONS OF INVESTOR'S OBLIGATIONS AT FIRST CLOSING. The
obligations of each Investor under subsection 1.1 of this Agreement are
subject to the fulfillment on or before the First Closing of each of the
following conditions, the waiver of which shall not be effective against any
Investor who does not consent thereto:
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5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Section 2 shall be true on and as of
the First Closing with the same effect as though such representations and
warranties had been made on and as of the date of First Closing.
5.2 PERFORMANCE. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement
that are required to be performed or complied with by it on or before First
Closing.
5.3 COMPLIANCE CERTIFICATE. The President of the Company shall
deliver to each Investor at the First Closing a certificate certifying that
the conditions specified in Sections 5.1 and 5.2 have been fulfilled and
stating that there shall have been no adverse change in the business,
affairs, operations, properties, assets or condition of the Company since the
date of this Agreement.
5.4 QUALIFICATIONS. The Commissioner of Corporations of the State
of California shall have issued a permit qualifying the offer and sale of the
Series A Preferred Stock and the underlying Common Stock to the Investors
pursuant to this Agreement, or such offer and sale shall be exempt from such
qualification under the California Corporate Securities Law of 1968, as
amended. Any other authorizations, approvals, or permits, if any, of any
governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of
the securities pursuant to this Agreement shall be duly obtained and
effective as of the Closing.
5.5 PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the First
Closing and all documents incident thereto shall be reasonably satisfactory
in form and substance to Investors' special counsel, and they shall have
received all such counterpart original and certified or other copies of such
documents as they may reasonably request.
5.6 BOARD OF DIRECTORS. The directors of the Company as of the First
Closing shall be Catherine Hapka, Kevin Compton, Keith Geeslin, William
Stensrud and John Walecka.
5.7 INVESTORS' RIGHTS AGREEMENT. The Company and each Investor
shall have entered into the Investors' Rights Agreement in the form attached
as EXHIBIT B.
5.8 VOTING AGREEMENT. The Company and each Investor shall have
entered into the Voting Agreement in the form attached as EXHIBIT C.
6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE FIRST CLOSING. The
obligations of the Company to each Investor under this Agreement are subject
to the fulfillment on or before the First Closing of each of the following
conditions by that Investor:
-12-
<PAGE>
6.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Investor contained in Section 3 shall be true on and as of
the First Closing with the same effect as though such representations and
warranties had been made on and as of the First Closing.
6.2 CALIFORNIA QUALIFICATION. The Commissioner of Corporations of
the State of California shall have issued a permit qualifying the offer and
sale to the Investor of the Series A Preferred Stock and the Common Stock
issuable upon the conversion thereof or such offer and sale shall be exempt
from such qualification under the California Corporate Securities Law of
1968, as amended.
7. CONDITIONS OF INVESTOR'S OBLIGATIONS AT SECOND CLOSING. The
obligations of each Investor under subsection 1.1 of this Agreement are
subject to the fulfillment on or before the Second Closing of each of the
following conditions, the waiver of which shall not be effective against any
Investor who does not consent thereto:
7.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Sections 2.1, 2.4, 2.5 and 2.6 shall
be true on and as of the Second Closing with the same effect as though such
representations and warranties had been made on and as of the date of Second
Closing.
7.2 PERFORMANCE. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement
that are required to be performed or complied with by it on or before Second
Closing.
7.3 QUALIFICATIONS. The Commissioner of Corporations of the State
of California shall have issued a permit qualifying the offer and sale of the
Series A Preferred Stock and the underlying Common Stock to the Investors
pursuant to this Agreement, or such offer and sale shall be exempt from such
qualification under the California Corporate Securities Law of 1968, as
amended.
8. CONDITIONS OF INVESTOR'S OBLIGATIONS AT THIRD CLOSING. The
obligations of each Investor under subsection 1.1 of this Agreement are
subject to the fulfillment on or before the Third Closing of each of the
following conditions, the waiver of which shall not be effective against any
Investor who does not consent thereto:
8.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Sections 2.1, 2.4, 2.5 and 2.6 shall
be true on and as of Third Closing with the same effect as though such
representations and warranties had been made on and as of the date of Third
Closing.
8.2 PERFORMANCE. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement
that are required to be performed or complied with by it on or before Third
Closing.
-13-
<PAGE>
8.3 QUALIFICATIONS. The Commissioner of Corporations of the State
of California shall have issued a permit qualifying the offer and sale of the
Series A Preferred Stock and the underlying Common Stock to the Investors
pursuant to this Agreement, or such offer and sale shall be exempt from such
qualification under the California Corporate Securities Law of 1968, as
amended.
9. CONDITIONS OF INVESTOR'S OBLIGATIONS AT FOURTH CLOSING. The
obligations of each Investor under subsection 1.1 of this Agreement are
subject to the fulfillment on or before the Fourth Closing of each of the
following conditions, the waiver of which shall not be effective against any
Investor who does not consent thereto:
9.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Sections 2.1, 2.4, 2.5 and 2.6 shall
be true on and as of Fourth Closing with the same effect as though such
representations and warranties had been made on and as of the date of Fourth
Closing.
9.2 PERFORMANCE. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement
that are required to be performed or complied with by it on or before Fourth
Closing.
9.3 QUALIFICATIONS. The Commissioner of Corporations of the State
of California shall have issued a permit qualifying the offer and sale of the
Series A Preferred Stock and the underlying Common Stock to the Investors
pursuant to this Agreement, or such offer and sale shall be exempt from such
qualification under the California Corporate Securities Law of 1968, as
amended.
9.4 APPROVAL. The Company's Board of Directors and the holders of
a majority of the Common Stock issued or issuable upon conversion of the
Series A Preferred Stock issued or issuable pursuant to the Series A
Agreement shall have approved the Fourth Closing.
10. MISCELLANEOUS.
10.1 SURVIVAL OF WARRANTIES. The warranties, representations and
covenants of the Company and Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors or the Company.
10.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and
be binding upon the respective successors and assigns of the parties
(including transferees of any shares of Series A Preferred Stock sold
hereunder or any Common Stock issued upon conversion thereof). Nothing in
this Agreement, express or implied, is intended to confer upon any party
other than the parties hereto or their respective successors and assigns any
rights,
-14-
<PAGE>
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
10.3 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
10.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.5 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
10.6 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other
address as such party may designate by ten (10) days' advance written notice
to the other parties.
10.7 FINDER'S FEE. Each party represents that it neither is nor
will be obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the
Company from any liability for any commission or compensation in the nature
of a finders' fee (and the costs and expenses of defending against such
liability or asserted liability) for which the Investor or any of its
officers, partners, employees, or representatives is responsible.
The Company agrees to indemnify and hold harmless each
Investor from any liability for any commission or compensation in the nature
of a finders' fee (and the costs and expenses of defending against such
liability or asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
10.8 EXPENSES. Irrespective of whether the Closing is effected,
the Company shall pay all costs and expenses that it incurs with respect to
the negotiation, execution, delivery and performance of this Agreement. If
the Closing is effected, the Company shall, at the Closing, reimburse the
reasonable fees and expenses of special counsel for the Investors. If any
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement or the Restated Certificate of Incorporation, the prevailing
party shall be entitled to reasonable attorney's fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled.
10.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
-15-
<PAGE>
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders
of 55% or more of the Common Stock issued or issuable upon conversion of the
Series A Preferred Stock issued or issuable pursuant to this Agreement. Any
amendment or waiver effected in accordance with this paragraph shall be
binding upon each holder of any securities purchased under this Agreement at
the time outstanding (including securities into which such securities are
convertible), each future holder of all such securities, and the Company.
10.10 SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
10.11 AGGREGATION OF STOCK. All shares of the Preferred Stock held
or acquired by affiliated entities or persons shall be aggregated together
for the purpose of determining the availability of any rights under this
Agreement.
10.12 ENTIRE AGREEMENT. This Agreement and the documents referred
to herein constitute the entire agreement among the parties and no party
shall be liable or bound to any other party in any manner by any warranties,
representations, or covenants except as specifically set forth herein or
therein.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-16-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
ACCELERATED CONNECTIONS, INC.
By: /s/ CATHERINE M. HAPKA
-----------------------------------
Catherine Hapka, President
Address: 4947 S. FILLMORE CT.
-----------------------------------
ENGLEWOOD, CO 80110
-----------------------------------
INVESTOR:
ENTERPRISE PARTNERS III, L.P.
By: /s/ William R. Stensrud
-----------------------------------
Its: General Partner
-----------------------------------
Address: 7979 Ivanhoe Ave., Suite 550
----------------------------------------
La Jolla, CA 92037
----------------------------------------
ENTERPRISE PARTNERS III ASSOCIATES,
L.P.
By: /s/ William R. Stensrud
-----------------------------------
Its: General Partner
-----------------------------------
Address: 7979 Ivanhoe Ave., Suite 550
----------------------------------------
La Jolla, CA 92037
----------------------------------------
ENTERPRISE PARTNERS IV, L.P.
By: /s/ William R. Stensrud
-----------------------------------
Its: General Partner
-----------------------------------
Address: 7979 Ivanhoe Ave., Suite 550
----------------------------------------
La Jolla, CA 92037
----------------------------------------
[SIGNATURE PAGE TO THE STOCK PURCHASE AGREEMENT]
<PAGE>
BRENTWOOD ASSOCIATES VII, L.P.
By: Brentwood VII Ventures, L.P.
its General Partner
By: /s/ (illegible)
-----------------------------------
Its:
-----------------------------------
Address:
----------------------------------------
----------------------------------------
BRENTWOOD AFFILIATE FUND, L.P.
By: Brentwood VII Ventures, L.P.
its General Partner
By: /s/ (illegible)
-----------------------------------
Its:
-----------------------------------
Address:
----------------------------------------
----------------------------------------
KLEINER PERKINS CAUFIELD & BYERS VIII
By: /s/ (illegible)
-----------------------------------
Its: General Partner
-----------------------------------
Address: 2750 Sand Hill Rd.
----------------------------------------
Menlo Park, CA 94025
----------------------------------------
KPCB VIII INFORMATION SCIENCES ZAIBATSU
FUND II
By: /s/ (illegible)
-----------------------------------
Its: General Partner
-----------------------------------
Address: 2750 Sand Hill Rd.
----------------------------------------
Menlo Park, CA 94025
----------------------------------------
[SIGNATURE PAGE TO THE STOCK PURCHASE AGREEMENT]
<PAGE>
SPROUT CAPITAL VII, L.P.
By: DLJ Capital Corporation
Managing General Partner
By: /s/ Keith B. Geeslin
-----------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road, Bld. 4, Suite 270
----------------------------------------
Menlo Park, CA 94025
----------------------------------------
THE SPROUT CEO FUND, L.P.
By: DLJ Capital Corporation
Its General Partner
By: /s/ Keith B. Geeslin
-----------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road, Bld. 4, Suite 270
----------------------------------------
Menlo Park, CA 94025
----------------------------------------
DLJ CAPITAL CORPORATION
By: /s/ Keith B. Geeslin
-----------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road, Bld. 4, Suite 270
----------------------------------------
Menlo Park, CA 94025
----------------------------------------
[SIGNATURE PAGE TO THE STOCK PURCHASE AGREEMENT]
<PAGE>
DLJ FIRST ESC L.L.C.
By: DLJ LBO Plans Management
Corporation
Its: Manager
By: /s/ Keith B. Geeslin
------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road, Bld. 4, Suite 270
----------------------------------------
Menlo Park, CA 94025
----------------------------------------
EPLEY INVESTORS II, LLC
By: /s/ Thomas E. Epley
-----------------------------------
Its:
-----------------------------------
Address: 8001 Bardmoor Pl, #103K
----------------------------------------
Largo, FL 33777
----------------------------------------
STANFORD UNIVERSITY
By: /s/ Carol Gilmer
-----------------------------------
Its: Carol Gilmer, Assistant Secretary
-----------------------------------
Address: THE BOARD OF TRUSTEES OF THE
----------------------------------
LELAND STANFORD JUNIOR
----------------------------------
UNIVERSITY
----------------------------------
[SIGNATURE PAGE TO THE STOCK PURCHASE AGREEMENT]
<PAGE>
SCHEDULE A
Schedule of Investors
<TABLE>
<CAPTION>
PURCHASE SERIES A STOCK
SERIES A STOCK PRICE PAID TO BE ISSUED TOTAL SERIES
CURRENTLY HELD AT CLOSING AT CLOSING A STOCK
FIRST CLOSING
<S> <C> <C> <C> <C>
Enterprise Partners III, L.P. 184,000 $ 1,104,000 1,104,000 1,380,000
Enterprise Partners III Associates, L.P. 16,000 $ 96,000 96,000 120,000
Enterprise Partners IV, L.P. 100,000 -- -- --
Brentwood Associates VII, L.P. -- $ 1,060,000 1,060,000 1,060,000
Brentwood Affiliates Fund, L.P. -- $ 60,000 60,000 60,000
Kleiner Perkins Caufield & Byers VIII -- $ 1,462,500 1,462,500 1,462,500
KPCB VIII Information Sciences -- $ 37,500 37,500 37,500
Zaibatsu Fund II
DLJ Capital Corporation -- $ 30,000 30,000 30,000
DLJ First ESC L.L.C. -- $ 150,000 150,000 150,000
Sprout Capital VII, L.P. -- $ 1,304,843 1,304,843 1,304,843
The Sprout CEO Fund, L.P. -- $ 15,157 15,157 15,157
Epley Investors II, LLC -- $ 125,000 125,000 125,000
Stanford University -- $ 15,000 15,000 15,000
------- ----------- --------- ---------
FIRST CLOSING TOTAL 300,000 $ 5,460,000 5,460,000 5,760,000
------- ----------- --------- ---------
------- ----------- --------- ---------
SECOND CLOSING
Brentwood Associates VII, L.P. -- $ 380,000 380,000 380,000
SECOND CLOSING TOTAL -- $ 380,000 380,000 380,000
------- ----------- --------- ---------
------- ----------- --------- ---------
FIRST & SECOND
CLOSING TOTAL -- $ 5,840,000 5,840,000 6,140,000
------- ----------- --------- ---------
------- ----------- --------- ---------
FRIENDS AND FAMILY
CLOSING
Other Purchasers -- $ 105,000 105,000 105,000
THIRD CLOSING
Enterprise Partners III, L.P. -- $ 1,380,000 1,380,000 1,380,000
Enterprise Partners III Associates, L.P. -- $ 120,000 120,000 120,000
Brentwood Associates VII, L.P. -- $ 1,440,000 1,440,000 1,440,000
Brentwood Affiliates Fund, L.P. -- $ 60,000 60,000 60,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PURCHASE SERIES A STOCK
SERIES A STOCK PRICE PAID TO BE ISSUED TOTAL SERIES
CURRENTLY HELD AT CLOSING AT CLOSING A STOCK
<S> <C> <C> <C> <C>
Kleiner Perkins Caufield & Byers VIII -- $ 1,462,500 1,462,500 1,462,500
KPCB VIII Information Sciences -- $ 37,500 37,500 37,500
Zaibatsu Fund II
DLJ Capital Corporation -- $ 30,000 30,000 30,000
DLJ First ESC L.L.C. -- $ 150,000 150,000 150,000
Sprout Capital VII, L.P. -- $ 1,304,843 1,304,843 1,304,843
The Sprout CEO Fund, L.P. -- $ 15,157 15,157 15,157
Epley Investors II, LLC -- $ 125,000 125,000 125,000
Other Purchasers -- $ 105,000 105,000 105,000
Stanford University -- $ 15,000 15,000 15,000
------- ----------- --------- ---------
THIRD CLOSING TOTAL -- $ 6,245,000 6,245,000 6,245,000
------- ----------- --------- ---------
------- ----------- --------- ---------
FIRST, SECOND & THIRD 300,000 $12,190,000 12,190,000 12,490,000
CLOSING TOTAL ------- ----------- --------- ---------
------- ----------- --------- ---------
FOURTH CLOSING
Enterprise Partners III, L.P. -- $ 920,000 920,000 920,000
Enterprise Partners III Associates, L.P. -- $ 80,000 80,000 80,000
Brentwood Associates VII, L.P. -- $ 960,000 960,000 960,000
Brentwood Affiliates Fund, L.P. $ 40,000 40,000 40,000
Kleiner Perkins Caufield & Byers VIII -- $ 975,000 975,000 975,000
KPCB VIII Information Sciences -- $ 25,000 25,000 25,000
Zaibatsu Fund II
DLJ Capital Corporation -- $ 20,000 20,000 70,000
DLJ First ESC L.L.C. -- $ 100,000 100,000 100,000
Sprout Capital VII, L.P. -- $ 869,900 869,900 869,900
The Sprout CEO Fund, L.P. -- $ 10,100 10,100 15,157
Epley Investors II, LLC -- $ 83,333 83,333 83,333
------- ----------- --------- ---------
FOURTH CLOSING TOTAL 300,000 $ 4,083,333 4,083,000 4,083,333
------- ----------- --------- ---------
------- ----------- --------- ---------
FIRST, SECOND, THIRD & 300,000 $16,273,333 16,273,333 16,573,333
FOURTH CLOSING TOTAL ------- ----------- --------- ---------
------- ----------- --------- ---------
</TABLE>
<PAGE>
SCHEDULE B
Schedule of Common Holders
<TABLE>
<CAPTION>
Number of Shares
<S> <C>
Enterprise Partners III, L.P. 552,451
Enterprise Partners III Associates, L.P. 48,039
Enterprise Partners IV, L.P. 300,245
-------
900,735
-------
-------
</TABLE>
<PAGE>
EXHIBIT A
RESTATED CERTIFICATE OF INCORPORATION
[see attached]
A-1
<PAGE>
EXHIBIT B
INVESTORS' RIGHTS AGREEMENT
[see attached]
B-1
<PAGE>
EXHIBIT C
VOTING AGREEMENT
[see attached]
C-1
<PAGE>
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE PAGE 1
______________________________
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED
CERTIFICATE OF "ACCELERATED CONNECTIONS, INC.", FILED IN THIS OFFICE ON THE
THIRD DAY OF JULY, A.D. 1997, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT COUNTY
RECORDER OF DEEDS FOR RECORDING.
/s/ Edward J. Freel
---------------------------------------
[SEAL] EDWARD J. FREEL, SECRETARY OF STATE
2723205 8100 AUTHENTICATION: 8544545
971222163 DATE: 07-03-97
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 07/03/1997
971222163 - 2723205
RESTATED CERTIFICATE OF INCORPORATION
OF ACCELERATED CONNECTIONS, INC.,
a Delaware Corporation
Accelerated Connections, Inc., a corporation organized and existing
under the laws of the state of Delaware, hereby certifies as follows:
1. The name of the corporation is Accelerated Connections, Inc. The
corporation was originally incorporated under the name "Accelerated
Connections, Inc." The date the corporation filed its original Certificate
of Incorporation with the Secretary of State was February 27, 1997.
2. This Restated Certificate of Incorporation restates and amends the
provisions of the original Certificate of Incorporation of this corporation
as heretofore in effect and was duly adopted by the corporation's Board of
Directors in accordance with Sections 241 and 245 of the General Corporation
Law of the State of Delaware.
3. The text of the Certificate of Incorporation is hereby restated to
read as herein set forth in full:
ARTICLE I
The name of this corporation is Accelerated Connections, Inc.
ARTICLE II
The address of the registered office of the corporation in the State of
Delaware is 30 Old Rudnick Lane, City of Dover, County of Kent 19901. The
name of its registered agent at such address is CorpAmerica, Inc.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
A. CLASSES OF STOCK. This corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total
<PAGE>
number of shares which the corporation is authorized to issue is Thirty-Nine
Million Seven Hundred Sixty-Four Thousand Seven Hundred Six (39,764,706)
shares. Twenty-Two Million Seven Hundred Sixty-Four Thousand Seven Hundred
Six (22,764,706) shares shall be Common Stock, $0.001 par value per share and
Seventeen Million (17,000,000) shares shall be Preferred Stock, $0.001 par
value per share. Upon the amendment of this Article IV, each one (1)
outstanding share of Common Stock is reverse split and divided into (i)
0.60049 shares of Common Stock and (ii) 0.20 shares of Series A Preferred
Stock.
B. RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The
Preferred Stock authorized by this Restated Certificate of Incorporation may
be issued from time to time in series. The rights, preferences, privileges,
and restrictions granted to and imposed on the Series A Preferred Stock,
which series shall consist of 17,000,000 shares, are as set forth below in
this Article IV(B). The Board of Directors is hereby authorized to fix or
alter the rights, preferences, privileges and restrictions granted to or
imposed upon additional series of Preferred Stock, and the number of shares
constituting any such series and the designation thereof, or of any of them.
Subject to compliance with applicable protective voting rights which have
been or may be granted to the Preferred Stock or series thereof in
Certificates of Determination or the corporation's Certificate of
Incorporation ("Protective Provisions"), but notwithstanding any other rights
of the Preferred Stock or any series thereof, the rights, privileges,
preferences and restrictions of any such additional series may be
subordinated to, PARI PASSU with (including, without limitation, inclusion in
provisions with respect to liquidation and acquisition preferences,
redemption and/or approval of matters by vote or written consent), or senior
to any of those of any present or future class or series of Preferred or
Common Stock. Subject to compliance with applicable Protective Provisions,
the Board of Directors is also authorized to increase or decrease the number
of shares of any series (other than the Series A Preferred Stock), prior or
subsequent to the issue of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series
shall be so decreased, the shares constituting such decrease shall resume the
status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
1. DIVIDEND PROVISIONS.
(a) Subject to the rights of series of Preferred Stock which
may from time to time come into existence, the holders of shares of Series A
Preferred Stock shall be entitled to receive dividends, out of any assets
legally available therefor, prior and in preference to any declaration or
payment of any dividend (payable other than in Common Stock or other
securities and rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock of this
corporation) on the Common Stock of this corporation, at the rate of $0.08
per share per annum or, if greater (as determined on a per annum basis and an
as converted basis for the Series A Preferred Stock), an amount equal to that
paid on any other outstanding shares of this corporation, payable quarterly
when, as and if declared by the Board of Directors. Such dividends shall not
be cumulative.
-2-
<PAGE>
(b) In the event this corporation shall declare a
distribution payable in securities of other persons, evidences of
indebtedness issued by this corporation or other persons, assets (excluding
cash dividends) or options or rights to purchase any such securities or
evidences of indebtedness, then, in each case the holders of the Series A
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though the holders of the Series A Preferred Stock were the
holders of the number of shares of Common Stock of this corporation into
which their respective shares of Series A Preferred Stock are convertible as
of the record date fixed for the determination of the holders of Common Stock
of this corporation entitled to receive such distribution.
2. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding
up of this corporation, either voluntary or involuntary, subject to the
rights of series of Preferred Stock which may from time to time come into
existence, the holders of Series A Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets of
this corporation to the holders of Common Stock by reason of their ownership
thereof, an amount per share equal to the sum of (i) $1.00 for each
outstanding share of Series A Preferred Stock (the "Original Series A Issue
Price") and (ii) an amount equal to declared but unpaid dividends on such
share. If upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Series A Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then, subject to the rights of series of Preferred
Stock which may from time to time come into existence, the entire assets and
funds of the corporation legally available for distribution shall be
distributed ratably among the holders of the Series A Preferred Stock in
proportion to the amount of such stock owned by each such holder.
(b) After the distributions described in subsection (a) above
have been paid, subject to the rights of series of Preferred Stock which may
from time to time come into existence, the remaining assets of the
corporation available for distribution to stockholders shall be distributed
among the holders of Common Stock pro rata based on the number of shares of
Common Stock held by each.
(c) A consolidation or merger reorganization of this
corporation with or into any other corporation or corporations, or the
effectuation by the corporation of a transaction or series of related
transactions in which more than 50% of the voting power of the corporation is
disposed of, or a sale, conveyance or disposition of all or substantially all
of the assets of this corporation shall be deemed to be a liquidation within
the meaning of this Section 2; provided, however, that the sale and issuance
of shares of Series A Preferred Stock pursuant to that certain Series A
Preferred Stock Purchase Agreement dated on or about July 3, 1997 shall not
be deemed a liquidation under this Section 2.
-3-
<PAGE>
3. CONVERSION. The holders of the Series A Preferred Stock shall
have conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT.
i) Subject to subsection (c), each share of Series
A Preferred Stock shall be convertible, at the option of the holder thereof,
at any time after the date of issuance of such share at the office of this
corporation or any transfer agent for the Series A Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is
determined by dividing the Original Series A Issue Price by the Conversion
Price at the time in effect for such share. The initial Conversion Price per
share for shares of Series A Preferred Stock shall be the Original Series A
Issue Price; provided, however, that the Conversion Price for the Series A
Preferred Stock shall be subject to adjustment as set forth in subsection
3(c).
ii) Each share of Series A Preferred Stock shall
automatically be converted into shares of Common Stock at the Conversion
Price at the time in effect for such Series A Preferred Stock immediately
upon the earlier of (A) the consummation of the corporation's sale of its
Common Stock in a bona fide, firm commitment underwriting pursuant to a
registration statement under the Securities Act of 1933, as amended, the
public offering price of which was not less than $20,000,000 in the aggregate
or (B) the date upon which the corporation obtains the consent of the holders
of 66-2/3% of the then outstanding shares of Preferred Stock.
(b) MECHANICS OF CONVERSION. Before any holder of Series A
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at the office of this corporation or of any transfer agent for the
Series A Preferred Stock, and shall give written notice by mail, postage
prepaid, to this corporation at its principal corporate office, of the
election to convert the same and shall state therein the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. This corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the shares of
Series A Preferred Stock to be converted, and the person or persons entitled
to receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock as of such date. If the conversion is in connection with an
underwritten offer of securities registered pursuant to the Securities Act of
1933, the conversion may, at the option of any holder tendering Series A
Preferred Stock for conversion, be conditioned upon the closing with the
underwriter of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the Common Stock issuable upon such
conversion of the Series A Preferred Stock shall not be deemed to have
converted such Series A Preferred Stock until immediately prior to the
closing of such sale of securities.
-4-
<PAGE>
(c) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK. The
Conversion Price of the Series A Preferred Stock shall be subject to
adjustment from time to time as follows:
i) A. Upon each issuance by the corporation of
any Additional Stock (as defined below), after the date upon which any shares
of the Series A Preferred Stock were first issued (the "Purchase Date" with
respect to such series), without consideration or for a consideration per
share less than the Conversion Price for such series in effect immediately
prior to the issuance of such Additional Stock, the Conversion Price for such
series in effect immediately prior to each such issuance shall forthwith
(except as otherwise provided in this clause (i)) be adjusted to a price
determined by multiplying such Conversion Price by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance (including, without limitation, the number
of shares of Common Stock issuable upon the conversion of all outstanding
Preferred Stock and all other convertible securities and the exercise of all
outstanding options, warrants or other rights to purchase Common Stock or
other securities convertible into Common Stock) plus the number of shares of
Common Stock which the aggregate consideration received by the corporation
for such issuance would purchase at such Conversion Price; and the
denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issuance (including, without
limitation, the number of shares of Common Stock issuable upon the conversion
of all outstanding Preferred Stock and all other convertible securities and
the exercise of all outstanding options, warrants or other rights to purchase
Common Stock or other securities convertible into Common Stock) plus the
number of shares of such Additional Stock.
B. No adjustment of the Conversion Price for
the Series A Preferred Stock shall be made in an amount less than one cent
per share, provided that any adjustments which are not required to be made by
reason of this sentence shall be carried forward and shall be either taken
into account in any subsequent adjustment made prior to 3 years from the date
of the event giving rise to the adjustment being carried forward, or shall be
made at the end of 3 years from the date of the event giving rise to the
adjustment being carried forward. Except to the limited extent provided for
in subsections 3(c)(i)(E)(3) and 3(c)(i)(E)(4), no adjustment of such
Conversion Price pursuant to this subsection 3(c)(i) shall have the effect of
increasing the Conversion Price above the Conversion Price in effect
immediately prior to such adjustment.
C. In the case of the issuance of Common
Stock for cash, the consideration shall be deemed to be the amount of cash
paid therefor before deducting any reasonable discounts, commissions or other
expenses allowed, paid or incurred by this corporation for any underwriting
or otherwise in connection with the issuance and sale thereof.
D. In the case of the issuance of the Common
Stock for a consideration in whole or in part other than cash, the
consideration
-5-
<PAGE>
other than cash shall be deemed to be the fair value thereof as determined by
the Board of Directors irrespective of any accounting treatment.
E. In the case of the issuance (whether
before, on or after the applicable Purchase Date) of options to purchase or
rights to subscribe for Common Stock, securities by their terms convertible
into or exchangeable for Common Stock or options to purchase or rights to
subscribe for such convertible or exchangeable securities, the following
provisions shall apply for all purposes of this subsection 3(c)(i) and
subsection 3(c)(ii):
1. The aggregate maximum number of shares
of Common Stock deliverable upon exercise (assuming the satisfaction
of any conditions to exercisability, including without limitation, the
passage of time, but without taking into account potential
antidilution adjustments) of such options to purchase or rights to
subscribe for Common Stock shall be deemed to have been issued at the
time such options or rights were issued and for a consideration equal
to the consideration (determined in the manner provided in subsections
3(c)(i)(C) and (c)(i)(D)), if any, received by the corporation upon
the issuance of such options or rights plus the exercise price
provided in such options or rights (without taking into account
potential antidilution adjustments) for the Common Stock covered
thereby.
2. The aggregate maximum number of shares
of Common Stock deliverable upon conversion of or in exchange
(assuming the satisfaction of any conditions to convertibility or
exchangeability, including, without limitation, the passage of time,
but without taking into account potential antidilution adjustments)
for any such convertible or exchangeable securities or upon the
exercise of options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such
securities were issued or such options or rights were issued and for a
consideration equal to the consideration, if any, received by the
corporation for any such securities and related options or rights
(excluding any cash received on account of accrued interest or accrued
dividends), plus the additional consideration, if any, to be received
by the corporation (without taking into account potential antidilution
adjustments) upon the conversion or exchange of such securities or the
exercise of any related options or rights (the consideration in each
case to be determined in the manner provided in subsections 3(c)(i)(C)
and (c)(i)(D)).
3. In the event of any change in the number
of shares of Common Stock deliverable or in the consideration payable
to this corporation upon exercise of such options or rights or upon
conversion of or in exchange for such convertible or exchangeable
-6-
<PAGE>
securities, including, but not limited to, a change resulting from the
antidilution provisions thereof, the Conversion Price of the Series A
Preferred Stock, to the extent in any way affected by or computed
using such options, rights or securities, shall be recomputed to
reflect such change, but no further adjustment shall be made for the
actual issuance of Common Stock or any payment of such consideration
upon the exercise of any such options or rights or the conversion or
exchange of such securities.
4. Upon the expiration of any such options
or rights, the termination of any such rights to convert or exchange
or the expiration of any options or rights related to such convertible
or exchangeable securities, the Conversion Price of the Series A
Preferred Stock, to the extent in any way affected by or computed
using such options, rights or securities or options or rights related
to such securities, shall be recomputed to reflect the issuance of
only the number of shares of Common Stock (and convertible or
exchangeable securities which remain in effect) actually issued upon
the exercise of such options or rights, upon the conversion or
exchange of such securities or upon the exercise of the options or
rights related to such securities.
5. The number of shares of Common Stock
deemed issued and the consideration deemed paid therefor pursuant to
subsections 3(c)(i)(E)(1) and (2) shall be appropriately adjusted to
reflect any change, termination or expiration of the type described in
either subsection 3(c)(i)(E)(3) or (4).
ii) "Additional Stock" shall mean any shares of
Common Stock issued (or deemed to have been issued pursuant to subsection
3(c)(i)(E)) by this corporation after the Purchase Date other than
A. Common Stock issued pursuant to a transaction
described in subsection 3(c)(iii) hereof,
B. shares of Common Stock issuable or issued to
employees, consultants or directors of this corporation directly or
pursuant to a stock option plan or restricted stock plan approved by
the Board of Directors (with at least three (3) of the Board
representatives of the Series A Preferred approving such plan) of this
corporation, or
C. shares of Common Stock issued upon conversion
of the Series A Preferred Stock, or
D. shares of Common Stock issued or issuable (I)
in a public offering before or in connection with which all
outstanding shares of Series A Preferred Stock will be converted to
Common Stock or (II) upon exercise of warrants or rights granted to
underwriters in connection with such a public offering, or
-7-
<PAGE>
E. shares of Common Stock issued or issuable to
persons or entities with which the corporation has business
relationships provided such issuances are for other than primarily
equity financing purposes (with at least three (3) of the Board
representatives of the Series A Preferred voting in favor).
iii) In the event the corporation should at any time
or from time to time after the Purchase Date fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common
Stock or the determination of holders of Common Stock entitled to receive a
dividend or other distribution payable in additional shares of Common Stock
or other securities or rights convertible into, or entitling the holder
thereof to receive directly or indirectly, additional shares of Common Stock
(hereinafter referred to as "Common Stock Equivalents") without payment of
any consideration by such holder for the additional shares of Common Stock or
the Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, as of such record date
(or the date of such dividend distribution, split or subdivision if no record
date is fixed), the Conversion Price of the Series A Preferred Stock shall be
appropriately decreased so that the number of shares of Common Stock issuable
on conversion of each share of such series shall be increased in proportion
to such increase of the aggregate of shares of Common Stock outstanding and
those issuable with respect to such Common Stock Equivalents with the number
of shares issuable with respect to Common Stock Equivalents determined from
time to time in the manner provided for deemed issuances in subsection
3(c)(i)(E).
iv) If the number of shares of Common Stock
outstanding at any time after the Purchase Date is decreased by a combination
of the outstanding shares of Common Stock, then, following the record date of
such combination, the Conversion Price for the Series A Preferred Stock shall
be appropriately increased so that the number of shares of Common Stock
issuable on conversion of each share of such series shall be decreased in
proportion to such decrease in outstanding shares.
(d) OTHER DISTRIBUTIONS. In the event this corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by this corporation or other persons, assets (excluding
cash dividends) or options or rights not referred to in subsection 3(c)(iii),
then, in each such case for the purpose of this subsection 3(d), the holders
of the Series A Preferred Stock shall be entitled to a proportionate share of
any such distribution as though they were the holders of the number of shares
of Common Stock of the corporation into which their shares of Series A
Preferred Stock are convertible as of the record date fixed for the
determination of the holders of Common Stock of the corporation entitled to
receive such distribution.
(e) RECAPITALIZATIONS. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a
subdivision, combination or merger or sale of assets transaction provided for
elsewhere in this Section 3) provision shall be made so that the holders of
the Series A Preferred Stock shall thereafter be entitled to receive upon
conversion of the Series A Preferred Stock the number of shares
-8-
<PAGE>
of stock or other securities or property of the Company or otherwise, to
which a holder of Common Stock deliverable upon conversion would have been
entitled on such recapitalization. In any such case, appropriate adjustment
shall be made in the application of the provisions of this Section 3 with
respect to the rights of the holders of the Series A Preferred Stock after
the recapitalization to the end that the provisions of this Section 3
(including adjustment of the Conversion Price then in effect and the number
of shares purchasable upon conversion of the Series A Preferred Stock) shall
be applicable after that event as nearly equivalent as may be practicable.
(f) NO IMPAIRMENT. This corporation will not, by amendment
of its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by this corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 3 and in the
taking of all such action as may be necessary or appropriate in order to
protect the Conversion Rights of the holders of the Series A Preferred Stock
against impairment.
(g) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
i) No fractional shares shall be issued upon
conversion of the Series A Preferred Stock, and the number of shares of
Common Stock to be issued shall be rounded to the nearest whole share.
Whether or not fractional shares are issuable upon such conversion shall be
determined on the basis of the total number of shares of Series A Preferred
Stock the holder is at the time converting into Common Stock and the number
of shares of Common Stock issuable upon such aggregate conversion.
ii) Upon the occurrence of each adjustment or
readjustment of the Conversion Price of Series A Preferred Stock pursuant to
this Section 3, this corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare
and furnish to each holder of Series A Preferred Stock a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon
which such adjustment or readjustment is based. This corporation shall, upon
the written request at any time of any holder of Series A Preferred Stock,
furnish or cause to be furnished to such holder a like certificate setting
forth (A) such adjustment and readjustment, (B) the Conversion Price at the
time in effect, and (C) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the
conversion of a share of Series A Preferred Stock.
(h) NOTICES OF RECORD DATE. In the event of any taking by
this corporation of a record of the holders of any class of securities for
the purpose of determining the holders thereof who are entitled to receive
any dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class
or any other securities or property, or to receive
-9-
<PAGE>
any other right, this corporation shall mail to each holder of Series A
Preferred Stock, at least 20 days prior to the date specified therein, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character
of such dividend, distribution or right.
(i) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. This
corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock solely for the purpose of
effecting the conversion of the shares of the Series A Preferred Stock such
number of its shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of the Series A Preferred
Stock; and if at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series A Preferred Stock, in addition to such other
remedies as shall be available to the holder of such Preferred Stock, this
corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such
purposes.
(j) NOTICES. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series A Preferred Stock
shall be deemed given if deposited in the United States mail, postage
prepaid, and addressed to each holder of record at his address appearing on
the books of this corporation.
4. VOTING RIGHTS. The holder of each share of Series A Preferred
Stock shall have the right to one vote for each share of Common Stock into
which such Series A Preferred Stock could then be converted (with any
fractional share determined on an aggregate conversion basis being rounded to
the nearest whole share), and with respect to such vote, such holder shall
have full voting rights and powers equal to the voting rights and powers of
the holders of Common Stock, and shall be entitled, notwithstanding any
provision hereof, to notice of any stockholders' meeting in accordance with
the by-laws of this corporation, and shall be entitled to vote, together with
holders of Common Stock, with respect to any question upon which holders of
Common Stock have the right to vote.
5. PROTECTIVE PROVISIONS. Subject to the rights of series of
Preferred Stock which may from time to time come into existence, so long as
shares of Series A Preferred Stock are outstanding, this corporation shall
not without first obtaining the approval (by vote or written consent, as
provided by law) of the holders of at least 55% or more of the then
outstanding shares of Series A Preferred Stock:
(a) sell, convey, or otherwise dispose of or encumber all or
substantially all of its property or business or merge into or consolidate
with any other corporation (other than a wholly owned subsidiary corporation)
or effect any transaction or series of related transactions in which more
than 50% of the voting power of the corporation is disposed of; or
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<PAGE>
(b) create any new class or series of stock or any other
securities convertible into equity securities of the corporation having a
preference over, or being on a parity with, the Series A Preferred Stock with
respect to voting, dividends or upon liquidation.
6. STATUS OF CONVERTED STOCK. In the event any shares of Series
A Preferred Stock shall be converted pursuant to Section 3 hereof, the shares
so converted shall be cancelled and shall not be issuable by the corporation.
The Certificate of Incorporation of this corporation shall be appropriately
amended to effect the corresponding reduction in the corporation's authorized
capital stock.
C. COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the prior rights of holders of
all classes of stock at the time outstanding having prior rights as to
dividends, the holders of the Common Stock shall be entitled to receive, when
and as declared by the Board of Directors, out of any assets of the
corporation legally available therefor, such dividends as may be declared
from time to time by the Board of Directors.
2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or
winding up of the corporation, the assets of the corporation shall be
distributed as provided in Section 2 of Division (B) of this Article IV
hereof.
3. REDEMPTION. The Common Stock is not redeemable.
4. VOTING RIGHTS. The holder of each share of Common Stock shall
have the right to one vote, and shall be entitled to notice of any
stockholders' meeting in accordance with the By-laws of this corporation, and
shall be entitled to vote upon such matters and in such manner as may be
provided by law.
ARTICLE V
A. EXCULPATION. A director of the corporation shall to the fullest
extent permitted by the Delaware General Corporation Law not be personally
liable to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law or (iv) for any transaction from which the
director derived any improper personal benefit. If the Delaware General
Corporation Law is hereafter amended to further reduce or to authorize, with
the approval of the corporation's stockholders, further reductions in the
liability of the corporation's directors for breach of fiduciary duty, then a
director of the corporation shall not be liable for any such breach to the
fullest extent permitted by the Delaware General Corporation Law as so
amended.
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<PAGE>
B. INDEMNIFICATION. To the extent permitted by applicable law, this
corporation is also authorized to provide indemnification of (and advancement
of expenses to) such agents (and any other persons to which Delaware law
permits this corporation to provide indemnification) through bylaw
provisions, agreements with such agents or other persons, vote of
stockholders or disinterested directors or otherwise, in excess of the
indemnification and advancement otherwise permitted by Section 145 of the
Delaware General Corporation Law, subject only to limits created by
applicable Delaware law (statutory or non-statutory), with respect to actions
for breach of duty to the corporation, its stockholders, and others.
C. EFFECT OF REPEAL OR MODIFICATION. Any repeal or modification of
any of the foregoing provisions of this Article V shall not adversely affect
any right or protection of a director, officer or agent of the corporation
(or any other person to which Delaware law permits this corporation to
provide indemnification) existing at the time of, or increase the liability
of any director, officer or agent of the corporation (or other person) with
respect to any acts or omissions of such director, officer or agent (or other
person) occurring prior to, such repeal or modification.
ARTICLE VI
The corporation shall have perpetual existence.
ARTICLE VII
Except as otherwise provided in this Restated Certificate of
Incorporation, in furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, repeal,
alter, amend and rescind any or all of the Bylaws of the corporation.
ARTICLE VIII
Elections of directors need not be by written ballot except and to the
extent provided in the Bylaws of the corporation.
ARTICLE IX
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
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<PAGE>
ARTICLE X
The corporation shall not be subject to the provisions of Section 203 of
the Delaware General Corporation Law.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been executed as of this 2 day of July, 1997.
ACCELERATED CONNECTIONS, INC.
By: /s/ Catherine M. Hapka
----------------------------------------
Catherine Hapka, President
[SIGNATURE PAGE TO
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION]
<PAGE>
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE PAGE 1
______________________________
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF CORRECTED RESTATED
CERTIFICATE OF "ACCELERATED CONNECTIONS, INC.", FILED IN THIS OFFICE ON THE
TWENTY-FOURTH DAY OF JULY, A.D. 1997, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT COUNTY
RECORDER OF DEEDS FOR RECORDING.
/s/ Edward J. Freel
-------------------------------------------
[SEAL] EDWARD J. FREEL, SECRETARY OF STATE
2723205 8100 AUTHENTICATION: 8575332
971246986 DATE: 07-24-97
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 07/24/1997
971246986 - 2723205
CERTIFICATE OF CORRECTION OF
RESTATED CERTIFICATE OF INCORPORATION
OF ACCELERATED CONNECTIONS, INC.
Accelerated Connections, Inc., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware.
DOES HEREBY CERTIFY:
1. The name of the corporation is Accelerated Connections, Inc.
2. That the Restated Certificate of Incorporation ("Certificate") was
filed with the Secretary of State of Delaware on July 3, 1997 and that said
Certificate requires correction, as permitted by Section 103 of the General
Corporation Law of the State of Delaware.
3. ARTICLE IV, Section B.5(c) of the Certificate was inadvertently
omitted and, as corrected, said Section shall be added and read as follows:
"(c) authorize additional shares of Series A Preferred Stock."
4. Sections A and B of ARTICLE V of the Certificate misstated the
Corporation's exculpation and indemnification policies and, as corrected,
said Sections shall be and read as follows:
"A. EXCULPATION. A director of the corporation shall not be
personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174
of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived any improper personal
benefit. If the Delaware General Corporation Law is hereafter
amended to further reduce or to authorize, with the approval of
the corporation's stockholders, further reductions in the
liability of the corporation's directors for breach of fiduciary
duty,
<PAGE>
then a director of the corporation shall not be liable for
any such breach to the fullest extent permitted by the Delaware
General Corporation Law as so amended.
B. INDEMNIFICATION. To the extent permitted by applicable
law, this corporation shall provide indemnification of (and
advancement of expenses to) such agents (and any other persons to
which Delaware law permits this corporation to provide
indemnification) through bylaw provisions, agreements with such
agents or other persons, vote of stockholders or disinterested
directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the Delaware
General Corporation Law, subject only to limits created by
applicable Delaware law (statutory or non-statutory), with respect
to actions for breach of duty to the corporation, its
stockholders, and others.
IN WITNESS WHEREOF, said Accelerated Connections, Inc. has caused this
Certificate of Correction to be signed by an authorized officer on this 7th day
of July, 1997.
/s/ Eric A. Geis
--------------------------------------------
Eric Geis, Executive Vice-President
<PAGE>
ACCELERATED CONNECTIONS, INC.
INVESTORS' RIGHTS AGREEMENT
July 3, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
1. Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Request for Registration . . . . . . . . . . . . . . . . . . . . . 2
1.3 Company Registration . . . . . . . . . . . . . . . . . . . . . . . 3
1.4 Obligations of the Company . . . . . . . . . . . . . . . . . . . . 3
1.5 Furnish Information. . . . . . . . . . . . . . . . . . . . . . . . 4
1.6 Expenses of Demand Registration. . . . . . . . . . . . . . . . . . 5
1.7 Expenses of Company Registration . . . . . . . . . . . . . . . . . 5
1.8 Underwriting Requirements. . . . . . . . . . . . . . . . . . . . . 5
1.9 Delay of Registration. . . . . . . . . . . . . . . . . . . . . . . 6
1.10 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.11 Reports Under Securities Exchange Act of 1934. . . . . . . . . . . 8
1.12 Form S-3 Registration. . . . . . . . . . . . . . . . . . . . . . . 9
1.13 Assignment of Registration Rights. . . . . . . . . . . . . . . . .10
1.14 Limitations on Subsequent Registration Rights. . . . . . . . . . .10
1.15 "Market Stand-Off" Agreement . . . . . . . . . . . . . . . . . . .10
1.16 Termination of Registration Rights . . . . . . . . . . . . . . . .11
2. Covenants of the Company. . . . . . . . . . . . . . . . . . . . . . . . .11
2.1 Delivery of Financial Statements . . . . . . . . . . . . . . . . .11
2.2 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
2.3 Termination of Information and Inspection Covenants. . . . . . . .12
2.4 Right of First Offer . . . . . . . . . . . . . . . . . . . . . . .12
2.5 Employee Stock Pool. . . . . . . . . . . . . . . . . . . . . . . .14
3. Covenants of the Investors. . . . . . . . . . . . . . . . . . . . . . . .14
3.1 Certain Corporate Transactions . . . . . . . . . . . . . . . . . .14
3.2 Standstill . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
3.3 Additional Preferred Investors . . . . . . . . . . . . . . . . . .14
4. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
4.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . .14
4.2 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . .15
4.3 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . .15
4.4 Titles and Subtitles . . . . . . . . . . . . . . . . . . . . . . .15
4.5 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
4.6 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
4.7 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . .15
4.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . .15
4.9 Aggregation of Stock . . . . . . . . . . . . . . . . . . . . . . .15
4.10 Entire Agreement; Amendment; Waiver. . . . . . . . . . . . . . . .15
</TABLE>
(i)
<PAGE>
INVESTORS' RIGHTS AGREEMENT
THIS INVESTORS' RIGHTS AGREEMENT is made as of the 3rd day of July,
1997, by and between Accelerated Connections, Inc., a Delaware corporation (the
"Company"), and the investors listed on SCHEDULE A hereto, each of which is
herein referred to as an "Investor."
RECITALS
WHEREAS, the Company and the Investors are parties to the Series A
Preferred Stock Purchase Agreement of even date herewith (the "Series A
Agreement");
WHEREAS, in order to induce the Company to enter into the Series A
Agreement and to induce the Investors to invest funds in the Company pursuant to
the Series A Agreement, the Investors and the Company hereby agree that this
Agreement shall govern the rights of the Investor to cause the Company to
register shares of Common Stock issuable to the Investors and certain other
matters as set forth herein;
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. REGISTRATION RIGHTS. The Company covenants and agrees as
follows:
1.1 DEFINITIONS. For purposes of this Section 1:
(a) The term "Act" means the Securities Act of 1933,
as amended.
(b) The term "register", "registered," and
"registration" refer to a registration effected by preparing and filing a
registration statement or similar document in compliance with the Act, and the
declaration or ordering of effectiveness of such registration statement or
document;
(c) The term "Registrable Securities" means (1) the
Common Stock issuable or issued upon conversion of all outstanding shares of the
Series A Preferred Stock issued or issuable pursuant to the Series A Agreement
or issued to an Investor prior to execution of the Series A Agreement (the
"Series A Preferred Stock"), (2) the 900,735 shares of Common Stock held by
Enterprise Partners as of the date of this Agreement, and (3) any Common Stock
of the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, such
Series A Preferred Stock or Common Stock, excluding in all cases, however, any
Registrable Securities sold by a person in a transaction in which his rights
under this Section 1 are not assigned;
<PAGE>
(d) The number of shares of "Registrable Securities
then outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities.
(e) The term "Holder" means any person owning or
having the right to acquire Registrable Securities or any assignee thereof in
accordance with Section 1.13 hereof; and
(f) The term "Form S-3" means such form under the
Act as in effect on the date hereof or any registration form under the Act
subsequently adopted by the Securities and Exchange Commission ("SEC") which
permits inclusion or incorporation of substantial information by reference to
other documents filed by the Company with the SEC.
1.2 REQUEST FOR REGISTRATION.
(a) If the Company shall receive at any time after
the earlier of (i) July __, 2001, or (ii) six (6) months after the effective
date of the first registration statement for a public offering of securities of
the Company (other than a registration statement relating either to the sale of
securities to employees of the Company pursuant to a stock option, stock
purchase or similar plan or a SEC Rule 145 transaction), a written request from
the Holders of 60% or more of the Registrable Securities then outstanding that
the Company file a registration statement under the Act covering the
registration of at least twenty percent (20%) of the Registrable Securities then
outstanding (or a lesser percent if the anticipated aggregate offering price,
net of underwriting discounts and commissions, would exceed $20,000,000), then
the Company shall, within ten (10) days of the receipt thereof, give written
notice of such request to all Holders and shall, subject to the limitations of
subsection 1.2(b), effect as soon as practicable, and in any event shall use its
best efforts to effect within 60 days of the receipt of such request, the
registration under the Act of all Registrable Securities which the Holders
request to be registered within twenty (20) days of the mailing of such notice
by the Company in accordance with paragraph 4.5.
(b) If the Holders initiating the registration
request hereunder ("Initiating Holders") intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to this Section 1.2
and the Company shall include such information in the written notice referred to
in subsection 1.2(a). The underwriter will be selected by a majority in
interest of the Initiating Holders and shall be reasonably acceptable to the
Company. In such event, the right of any Holder to include his Registrable
Securities in such registration shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall (together with the
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<PAGE>
Company as provided in subsection 1.4(e)) enter into an underwriting
agreement in customary form with the underwriter or underwriters selected for
such underwriting by a majority in interest of the Initiating Holders.
Notwithstanding any other provision of this Section 1.2, if the underwriter
advises the Initiating Holders in writing that marketing factors require a
limitation of the number of shares to be underwritten, then the Initiating
Holders shall so advise all Holders of Registrable Securities which would
otherwise be underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the underwriting shall be
allocated among all Holders thereof, including the Initiating Holders, in
proportion (as nearly as practicable) to the amount of Registrable Securities
of the Company owned by each Holder; provided, however, that the number of
shares of Registrable Securities to be included in such underwriting shall
not be reduced unless all other securities are first entirely excluded from
the underwriting.
(c) The Company is obligated to effect only two (2)
such registrations pursuant to this Section 1.2.
(d) Notwithstanding the foregoing, if the Company
shall furnish to Holders requesting a registration statement pursuant to this
Section 1.2, a certificate signed by the President of the Company stating that
in the good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its shareholders for such registration
statement to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer taking action
with respect to such filing for a period of not more than 120 days after receipt
of the request of the Initiating Holders; provided, however, that the Company
may not utilize this right more than once in any twelve month period.
1.3 COMPANY REGISTRATION. If (but without any obligation to
do so) the Company proposes to register (including for this purpose a
registration effected by the Company for shareholders other than the Holders)
any of its stock or other securities under the Act in connection with the public
offering of such securities solely for cash (other than a registration relating
solely to the sale of securities to participants in a Company stock plan, or a
registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), the Company shall, at such
time, promptly give each Holder written notice of such registration. Upon the
written request of each Holder given within twenty (20) days after mailing of
such notice by the Company in accordance with Section 3.5, the Company shall,
subject to the provisions of Section 1.8, cause to be registered under the Act
all of the Registrable Securities that each such Holder has requested to be
registered.
1.4 OBLIGATIONS OF THE COMPANY. Whenever required under
this Section 1 to effect the registration of any Registrable Securities, the
Company shall, as expeditiously as reasonably possible:
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<PAGE>
(a) Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective, and, upon the request
of the Holders of a majority of the Registrable Securities registered
thereunder, keep such registration statement effective for up to one hundred
twenty (120) days.
(b) Prepare and file with the SEC such amendments
and supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Act with respect to the disposition of all securities
covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of
a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public
offering, enter into and perform its obligations under an underwriting
agreement, in usual and customary form, with the managing underwriter of such
offering. Each Holder participating in such underwriting shall also enter into
and perform its obligations under such an agreement.
(f) Notify each Holder of Registrable Securities
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
1.5 FURNISH INFORMATION.
(a) It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities.
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<PAGE>
(b) The Company shall have no obligation with
respect to any registration requested pursuant to Section 1.2 or Section 1.12
if, due to the operation of subsection 1.5(a), the number of shares or the
anticipated aggregate offering price of the Registrable Securities to be
included in the registration does not equal or exceed the number of shares or
the anticipated aggregate offering price required to originally trigger the
Company's obligation to initiate such registration as specified in subsection
1.2(a) or subsection 1.12(b)(2), whichever is applicable.
1.6 EXPENSES OF DEMAND REGISTRATION. All expenses other
than underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company, and the
reasonable fees and disbursements of one counsel for the selling Holders shall
be borne by the Company; provided, however, that the Company shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to Section 1.2 if the registration request is subsequently withdrawn at the
request of the Holders of a majority of the Registrable Securities to be
registered (in which case all Participating Holders shall bear such expenses),
unless the Holders of a majority of the Registrable Securities agree to forfeit
their right to one demand registration pursuant to Section 1.2; provided
further, however, that if at the time of such withdrawal, the Holders have
learned of a material adverse change in the condition, business, or prospects of
the Company from that known to the Holders at the time of their request and have
withdrawn the request with reasonable promptness following disclosure by the
Company of such material adverse change, then the Holders shall not be required
to pay any of such expenses and shall retain their rights pursuant to
Section 1.2.
1.7 EXPENSES OF COMPANY REGISTRATION. The Company shall
bear and pay all expenses incurred in connection with any registration, filing
or qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.3 for each Holder (which right may be assigned as provided
in Section 1.13), including (without limitation) all registration, filing, and
qualification fees, printers and accounting fees relating or apportionable
thereto, but excluding underwriting discounts and commissions relating to
Registrable Securities.
1.8 UNDERWRITING REQUIREMENTS. In connection with any
offering involving an underwriting of shares of the Company's capital stock, the
Company shall not be required under Section 1.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not,
jeopardize the success of the offering by the Company. If the total amount of
securities, including Registrable Securities, requested by shareholders to be
included in such offering exceeds the amount of securities sold other than by
the Company that the underwriters determine in their sole discretion is
compatible with the success of the offering, then the Company shall be required
to include in the offering
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<PAGE>
only that number of such securities, including Registrable Securities, which
the underwriters determine in their sole discretion will not jeopardize the
success of the offering (the securities so included to be apportioned pro
rata among the selling shareholders according to the total amount of
securities entitled to be included therein owned by each selling Shareholder
or in such other proportions as shall mutually be agreed to by such selling
shareholders) but in no event shall (i) the amount of securities of the
selling Holders included in the offering be reduced below thirty percent
(30%) of the total amount of securities included in such offering, unless
such offering is the initial public offering of the Company's securities in
which case the selling shareholders may be excluded if the underwriters make
the determination described above or (ii) notwithstanding (i) above, any
shares being sold by a shareholder exercising a demand registration right
similar to that granted in Section 1.2 be excluded from such offering. For
purposes of the preceding parenthetical concerning apportionment, for any
selling shareholder which is a holder of Registrable Securities and which is
a partnership or corporation, the partners, retired partners and shareholders
of such holder, or the estates and family members of any such partners and
retired partners and any trusts for the benefit of any of the foregoing
persons shall be deemed to be a single "selling shareholder", and any
pro-rata reduction with respect to such "selling shareholder" shall be based
upon the aggregate amount of shares carrying registration rights owned by all
entities and individuals included in such "selling shareholder", as defined
in this sentence.
1.9 DELAY OF REGISTRATION. No Holder shall have any right
to obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.
1.10 INDEMNIFICATION. In the event any Registrable
Securities are included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the partners or officers, directors and
shareholders of each Holder, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Act or the Securities Exchange Act of 1934, as amended (the
"1934 Act"), against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Act, or the 1934 Act,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by the Company of the Act, the 1934 Act, or any rule or
regulation promulgated under the Act, or the 1934 Act; and the Company will pay
to each such Holder, underwriter or controlling person any legal or other
expenses reasonably incurred by them in connection with investigating or
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<PAGE>
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this subsection 1.10(a) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the Company be
liable in any such case for any such loss, claim, damage, liability, or action
to the extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by any such Holder, underwriter or
controlling person.
(b) To the extent permitted by law, each selling
Holder will indemnify and hold harmless the Company, each of its directors, each
of its officers who has signed the registration statement, each person, if any,
who controls the Company within the meaning of the Act, any underwriter, any
other Holder selling securities in such registration statement and any
controlling person of any such underwriter or other Holder, against any losses,
claims, damages, or liabilities (joint or several) to which any of the foregoing
persons may become subject, under the Act, or the 1934 Act insofar as such
losses, claims, damages, or liabilities (or actions in respect thereto) arise
out of or are based upon any Violation, in each case to the extent (and only to
the extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such registration; and each such Holder will pay any legal or other
expenses reasonably incurred by any person intended to be indemnified pursuant
to this subsection 1.10(b), in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this subsection 1.10(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; provided, that, in no event shall any
indemnity under this subsection 1.10(b) exceed the gross proceeds from the
offering received by such Holder.
(c) Promptly after receipt by an indemnified party
under this Section 1.10 of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1.10,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying
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<PAGE>
party of any liability to the indemnified party under this Section 1.10, but
the omission so to deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.10.
(d) If the indemnification provided for in this
Section 1.10 is held by a court of competent jurisdiction to be unavailable to
an indemnified party with respect to any loss, liability, claim, damage, or
expense referred to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party hereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such loss, liability,
claim, damage, or expense in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the statements or omissions that resulted
in such loss, liability, claim, damage, or expense as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and of
the indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent
that the provisions on indemnification and contribution contained in the
underwriting agreement entered into in connection with the underwritten public
offering are in conflict with the foregoing provisions, the provisions in the
underwriting agreement shall control.
(f) The obligations of the Company and Holders under
this Section 1.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.
1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a
view to making available to the Holders the benefits of Rule 144 promulgated
under the Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as
those terms are understood and defined in SEC Rule 144, at all times after
ninety (90) days after the effective date of the first registration statement
filed by the Company for the offering of its securities to the general public;
(b) file with the SEC in a timely manner all reports
and other documents required of the Company under the Act and the 1934 Act; and
(c) furnish to any Holder, so long as the Holder
owns any Registrable Securities, forthwith upon request (i) a written statement
by the Company that it has complied with the reporting requirements of SEC Rule
144 (at any time after
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<PAGE>
ninety (90) days after the effective date of the first registration statement
filed by the Company), the Act and the 1934 Act (at any time after it has
become subject to such reporting requirements), or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3 (at any time
after it so qualifies), (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
1.12 FORM S-3 REGISTRATION. In case the Company shall
receive from the Holders of forty percent (40%) or more of the Registrable
Securities a written request or requests that the Company effect a registration
on Form S-3 and any related qualification or compliance with respect to all or a
part of the Registrable Securities owned by such Holder or Holders, the Company
will:
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other Holders;
and
(b) as soon as practicable, effect such registration
and all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
Holder or Holders joining in such request as are specified in a written request
given within 15 days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this section 1.12: (1) if
Form S-3 is not available for such offering by the Holders; (2) if the Holders,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than $5,000,000; (3) if the
Company shall furnish to the Holders a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
shareholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than 120 days after receipt of
the request of the Holder or Holders under this Section 1.12; provided, however,
that the Company shall not utilize this right more than once in any twelve month
period; (4) if the Company has, within the twelve (12) month period preceding
the date of such request, already effected two registrations on Form S-3 for the
Holders pursuant to this Section 1.12; or (5) in any particular jurisdiction in
which the Company would be required to qualify to do business or to execute a
general consent to service of process in effecting such registration,
qualification or compliance.
(c) Subject to the foregoing, the Company shall file
a registration statement covering the Registrable Securities and other
securities so requested to be
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<PAGE>
registered as soon as practicable after receipt of the request or requests of
the Holders. All expenses incurred in connection with a registration
requested pursuant to Section 1.12, including (without limitation) all
registration, filing, qualification, printer's and accounting fees and the
reasonable fees and disbursements of counsel for the selling Holder or
Holders and counsel for the Company, shall be borne pro rata by the Holder or
Holders participating in the Form S-3 Registration. Registrations effected
pursuant to this Section 1.12 shall not be counted as demands for
registration or registrations effected pursuant to Sections 1.2 or 1.3,
respectively.
1.13 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to
cause the Company to register Registrable Securities pursuant to this Section
1 may be assigned (but only with all related obligations) by a Holder to a
transferee or assignee of such securities who, after such assignment or
transfer, holds at least 1,000,000 shares of Registrable Securities (subject
to appropriate adjustment for stock splits, stock dividends, combinations and
other recapitalizations), provided the Company is, within a reasonable time
after such transfer, furnished with written notice of the name and address of
such transferee or assignee and the securities with respect to which such
registration rights are being assigned; and provided, further, that such
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the Act. For the purposes of determining the number of
shares of Registrable Securities held by a transferee or assignee, the
holdings of transferees and assignees of a partnership who are partners or
retired partners of such partnership (including spouses and ancestors, lineal
descendants and siblings of such partners or spouses who acquire Registrable
Securities by gift, will or intestate succession) shall be aggregated
together and with the partnership; provided that all assignees and
transferees who would not qualify individually for assignment of registration
rights shall have a single attorney-in-fact for the purpose of exercising any
rights, receiving notices or taking any action under this Section 1.
1.14 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and
after the date of this Agreement, the Company shall not, without the prior
written consent of the Holders of 60% or more of the outstanding Registrable
Securities, enter into any agreement with any holder or prospective holder of
any securities of the Company which would allow such holder or prospective
holder (a) to include such securities in any registration filed under Section
1.2 hereof, unless under the terms of such agreement, such holder or prospective
holder may include such securities in any such registration only to the extent
that the inclusion of his securities will not reduce the amount of the
Registrable Securities of the Holders which is included or (b) to make a demand
registration which could result in such registration statement being declared
effective prior to the earlier of either of the dates set forth in subsection
1.2(a) or within one hundred twenty (120) days of the effective date of any
registration effected pursuant to Section 1.2.
1.15 "MARKET STAND-OFF" AGREEMENT. Each Investor hereby
agrees that, during the period of duration (such period not to exceed 180 days)
specified by the Company and an underwriter of common stock or other securities
of the Company,
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following the effective date of a registration statement of the Company filed
under the Act, it shall not, to the extent requested by the Company and such
underwriter, directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase
or otherwise transfer or dispose of (other than to donees who agree to be
similarly bound) any securities of the Company held by it at any time during
such period except common stock included in such registration; provided,
however, that:
(a) such agreement shall be applicable only to the
first two such registration statements of the Company which cover common stock
(or other securities) to be sold on its behalf to the public in an underwritten
offering; and
(b) all officers and directors of the Company and
all other persons with registration rights (whether or not pursuant to this
Agreement) enter into similar agreements.
In order to enforce the foregoing covenant, the Company
may impose stop-transfer instructions with respect to the Registrable Securities
of each Investor (and the shares or securities of every other person subject to
the foregoing restriction) until the end of such period.
1.16 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be
entitled to exercise any right provided for in this Section 1 after five (5)
years following the consummation of the sale of securities pursuant to a
registration statement filed by the Company under the Act in connection with the
initial firm commitment underwritten offering of its securities to the general
public.
2. COVENANTS OF THE COMPANY.
2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall
deliver to each Investor:
(a) as soon as practicable, but in any event within
ninety (90) days after the end of each fiscal year of the Company, an income
statement for such fiscal year, a balance sheet of the Company and statement of
shareholder's equity as of the end of such year, and a schedule as to the
sources and applications of funds for such year, such year-end financial reports
to be in reasonable detail, prepared in accordance with generally accepted
accounting principles ("gaap"), and audited and certified by independent public
accountants of nationally recognized standing selected by the Company;
(b) as soon as practicable, but in any event within
forty-five (45) days after the end of each of the first three (3) quarters of
each fiscal year of the Company, an unaudited profit or loss statement, schedule
as to the sources and application of funds for such fiscal quarter and an
unaudited balance sheet as of the end of such fiscal quarter.
-11-
<PAGE>
(c) within thirty (30) days of the end of each
month, an unaudited income statement and schedule as to the sources and
application of funds and balance sheet for and as of the end of such month, in
reasonable detail; and
(d) as soon as practicable, but in any event thirty
(30) days prior to the end of each fiscal year, a budget for the next fiscal
year, prepared on a monthly basis, including balance sheets and sources and
applications of funds statements for such months and, as soon as prepared, any
other budgets or revised budgets prepared by the Company.
2.2 INSPECTION. The Company shall permit each Investor, at
such Investor's expense, to visit and inspect the Company's properties, to
examine its books of account and records and to discuss the Company's affairs,
finances and accounts with its officers, all at such reasonable times as may be
requested by the Investor; provided, however, that the Company shall not be
obligated pursuant to this Section 2.2 to provide access to any information
which it reasonably considers to be a trade secret or similar confidential
information.
2.3 TERMINATION OF INFORMATION AND INSPECTION COVENANTS.
The covenants set forth in subsections 2.1(c) and (d) and Section 2.2 shall
terminate as to Investors and be of no further force or effect when the sale of
securities pursuant to a registration statement filed by the Company under the
Act in connection with the firm commitment underwritten offering of its
securities raising at least $20,000,000 to the general public is consummated or
when the Company first becomes subject to the periodic reporting requirements of
Sections 12(g) or 15(d) of the 1934 Act, whichever event shall first occur.
2.4 RIGHT OF FIRST OFFER. Subject to the terms and
conditions specified in this paragraph 2.4, the Company hereby grants to each
Major Investor (as hereinafter defined) a right of first offer with respect to
future sales by the Company of its Shares (as hereinafter defined). For
purposes of this Section 2.4, a Major Investor shall mean (i) any Investor who
holds at least 50% of such Investor's originally acquired shares of Series A
Preferred Stock issued pursuant to the Series A Agreement and (ii) any person
who acquires at least 10% of the Series A Preferred Stock (or the common stock
issued upon conversion thereof) issued pursuant to the Series A Agreement. For
purposes of this Section 2.4, Investor includes any general or limited partners
and affiliates of an Investor. An Investor shall be entitled to apportion the
right of first offer hereby granted it among itself and its partners and
affiliates in such proportions as it deems appropriate.
Each time the Company proposes to offer any shares of, or
securities convertible into or exercisable for any shares of, any class of its
capital stock ("Shares"), the Company shall first make an offering of such
Shares to each Major Investor in accordance with the following provisions:
-12-
<PAGE>
(a) The Company shall deliver a notice by certified
mail ("Notice") to the Major Investors stating (i) its bona fide intention to
offer such Shares, (ii) the number of such Shares to be offered, and (iii) the
price and terms, if any, upon which it proposes to offer such Shares.
(b) Within 20 calendar days after receipt of the
Notice, the Major Investor may elect to purchase or obtain, at the price and on
the terms specified in the Notice, up to that portion of such Shares which
equals the proportion that the number of shares of common stock issued and held,
or issuable upon conversion of the Series A Preferred Stock then held, by such
Major Investor bears to the total number of shares of common stock of the
Company then outstanding (assuming full conversion and exercise of all
convertible or exercisable securities) as of the date of the Notice. The
Company shall promptly, in writing, inform each Major Investor which purchases
all the shares available to it ("Fully-Exercising Investor") of any other Major
Investor's failure to do likewise. During the ten-day period commencing after
receipt of such information, each Fully-Exercising Investor shall be entitled to
obtain that portion of the Shares for which Major Investors were entitled to
subscribe but which were not subscribed for by the Major Investors which is
equal to the proportion that the number of shares of common stock issued and
held, or issuable upon conversion of Series A Preferred Stock then held, by such
Fully-Exercising Investor bears to the total number of shares of common stock
issued and held, or issuable upon conversion of the Series A Preferred Stock
then held, by all Fully-Exercising Investors who wish to purchase some of the
unsubscribed shares.
(c) If all Shares referred to in the Notice are not
elected to be obtained as provided in subsection 2.4(b) hereof, the Company may,
during the 60-day period following the expiration of the period provided in
subsection 2.4(b) hereof, offer the remaining unsubscribed portion of such
Shares to any person or persons at a price not less than, and upon terms no more
favorable to the offeree than those specified in the Notice. If the Company
does not enter into an agreement for the sale of the Shares within such period,
or if such agreement is not consummated within 60 days of the execution thereof,
the right provided hereunder shall be deemed to be revived and such Shares shall
not be offered unless first reoffered to the Major Investors in accordance
herewith.
(d) The right of first offer in this paragraph 2.4
shall not be applicable (i) to the issuance or sale of common stock (or options
therefor) to employees, consultants or directors of the Company directly or
pursuant to a stock option plan or restricted stock plan approved by the Board
of Directors of the Company (with at least three (3) of the Board
representatives of the Major Investors voting in favor), (ii) to or after
consummation of a bona fide, firmly underwritten public offering of shares of
common stock, registered under the Act pursuant to a registration statement on
Form S-1, at an offering price of at least $20,000,000 in the aggregate,
(iii) the issuance of securities pursuant to the conversion or exercise of
convertible or exercisable securities, (iv) the issuance of securities in
connection with a bona fide business acquisition of or by the Company, whether
by merger, consolidation, sale of assets, sale
-13-
<PAGE>
or exchange of stock or otherwise or (v) the issuance of stock, warrants or
other securities or rights to persons or entities with which the Company has
business relationships provided such issuances are for other than primarily
equity financing purposes (with at least three (3) of the Board
representatives of the Major Investors voting in favor).
2.5 EMPLOYEE STOCK POOL. Any increase to the Company's
Employee Stock Pool shall be aproved by at least three (3) of the Board
representatives of the Major Investors.
3. COVENANTS OF THE INVESTORS.
3.1 CERTAIN CORPORATE TRANSACTIONS. In the event that
the Board of Directors of the Company and holders of a majority of the Common
Stock issuable or issued upon conversion of the Series A Preferred Stock of
the Company vote in favor of a Corporate Transaction (as defined below), each
Investor hereby agrees not to take any action inconsistent with the
pooling-of-interests accounting treatment to the extent applicable to such
Corporate Transaction, as reasonably deemed necessary by the Company's Board
of Directors, including without limitation exercising any dissenter's rights
any such Investor may have or selling or purchasing any Company securities
where prohibited under the then applicable pooling-of-interests accounting
rules. For purposes of this Section 3.1, Corporate Transaction shall mean
the acquisition of the Company by another entity by means of any transaction
or series of related transactions (including, without limitation, any
reorganization, merger or consolidation) that results in the transfer of
fifty percent (50%) or more of the outstanding voting power of the Company.
3.2 STANDSTILL. Except as set forth in the Series A
Agreement, each Investor agrees not to purchase any additional shares of, or
securities convertible into or exercisable or exchangeable for any shares of,
any class of capital stock of the Company unless approved in advance by the
Board of Directors of the Company.
3.3 ADDITIONAL PREFERRED INVESTORS. Each Investor agrees to
permit other new preferred stock investors in the Company which are approved by
the Board of Directors to participate on a pari passu basis in the rights of
first offer, registration rights, information and access rights and the
protective provision rights held by the Investors set forth herein and in the
Restated Certificate of Incorporation.
4. MISCELLANEOUS.
4.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties
(including transferees of any shares of Registrable Securities). Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
-14-
<PAGE>
4.2 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
4.3 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4.4 TITLES AND SUBTITLES. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
4.5 NOTICES. Unless otherwise provided, any notice required
or permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
4.6 EXPENSES. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled.
4.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may
be amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
60% or more of the Registrable Securities then outstanding. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
holder of any Registrable Securities then outstanding, each future holder of all
such Registrable Securities, and the Company.
4.8 SEVERABILITY. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
4.9 AGGREGATION OF STOCK. All shares of Registrable
Securities held or acquired by affiliated entities or persons shall be
aggregated together for the purpose of determining the availability of any
rights under this Agreement.
4.10 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement
(including the Exhibits hereto, if any) constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ACCELERATED CONNECTIONS, INC.
By: /s/ Catherine M. Hapka
--------------------------------------
Catherine Hapka, President
Address: 4947 S. Fillmore Ct.
------------------------------------------------
Englewood, CO 80110
------------------------------------------------
INVESTOR:
ENTERPRISE PARTNERS III, L.P.
By: /s/ William R. Stensrud
--------------------------------------
Its: General Partner
--------------------------------------
Address: 7979 Ivanhoe Ave., Suite 550
------------------------------------------------
La Jolla, CA 92037
------------------------------------------------
ENTERPRISE PARTNERS III ASSOCIATES, L.P.
By: /s/ William R. Stensrud
--------------------------------------
Its: General Partner
--------------------------------------
Address: 7979 Ivanhoe Ave., Suite 550
------------------------------------------------
La Jolla, CA 92037
------------------------------------------------
ENTERPRISE PARTNERS IV, L.P.
By: /s/ William R. Stensrud
--------------------------------------
Its: General Partner
--------------------------------------
Address: 7979 Ivanhoe Ave., Suite 550
------------------------------------------------
La Jolla, CA 92037
------------------------------------------------
[SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT]
<PAGE>
BRENTWOOD ASSOCIATES VII, L.P.
By: Brentwood VII Ventures, L.P.
its General Partner
By: /s/ (illegible)
--------------------------------------
Its:
--------------------------------------
Address:
------------------------------------------------
------------------------------------------------
BRENTWOOD AFFILIATE FUND, L.P.
By: Brentwood VII Ventures, L.P.
its General Partner
By: /s/ (illegible)
--------------------------------------
Its:
--------------------------------------
Address:
------------------------------------------------
------------------------------------------------
KLEINER PERKINS CAUFIELD & BYERS VIII
By: /s/ (illegible)
--------------------------------------
Its: General Partner
--------------------------------------
Address: 2750 Sand Hill Rd.
------------------------------------------------
Menlo Park, CA 94025
------------------------------------------------
KPCB VIII INFORMATION SCIENCES
ZAIBATSU FUND II
By: /s/ (illegible)
--------------------------------------
Its: General Partner
--------------------------------------
Address: 2750 Sand Hill Rd.
------------------------------------------------
Menlo Park, CA 94025
------------------------------------------------
[SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT]
<PAGE>
SPROUT CAPITAL VII, L.P.
By: DLJ Capital Corporation
Managing General Partner
By: /s/ Keith B. Geeslin
--------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road, Bld. 4, Suite 270
------------------------------------------------
Menlo Park, CA 94025
------------------------------------------------
THE SPROUT CEO FUND, L.P.
By: DLJ Capital Corporation
Its General Partner
By: /s/ Keith B. Geeslin
--------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road, Bld. 4, Suite 270
------------------------------------------------
Menlo Park, CA 94025
------------------------------------------------
DLJ CAPITAL CORPORATION
By: /s/ Keith B. Geeslin
--------------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road, Bld. 4, Suite 270
------------------------------------------------
Menlo Park, CA 94025
------------------------------------------------
[SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT]
<PAGE>
DLJ FIRST ESC L.L.C.
By: DLJ LBO Plans Management Corporation
Its: Manager
By: /s/ Keith B. Geeslin
--------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road, Bld. 4, Suite 270
------------------------------------------------
Menlo Park, CA 94025
------------------------------------------------
EPLEY INVESTORS II, LLC
By: /s/ Thomas E. Epley
--------------------------------------
Its:
--------------------------------------
Address: 8001 Bardmoor Pl, #103K
------------------------------------------------
Largo, FL 33777
------------------------------------------------
STANFORD UNIVERSITY
By: /s/ Carol Gilmer
--------------------------------------
Its: Carol Gilmer, Assistant Secretary
--------------------------------------
Address: THE BOARD OF TRUSTEES OF THE
------------------------------------------------
LELAND STANFORD JUNIOR UNIVERSITY
------------------------------------------------
[SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT]
<PAGE>
SCHEDULE A
----------
INVESTOR
Enterprise Partners III, L.P.
Enterprise Partners III Associates, L.P.
Enterprise Partners IV, L.P.
Brentwood Associates VII, L.P.
Brentwood Associates Fund, L.P.
Kleiner Perkins Caufield & Byers VIII
KPCB VIII Information Sciences Zaibatsu Fund II
Sprout Capital VII, L.P.
The Sprout CEO Fund, L.P.
DLJ Capital Corporation
DLJ First ESC L.L.C.
Epley Investment Partners
Stanford Engineering Venture Fund
<PAGE>
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "Agreement") is made as of the 3rd day of June,
1997, by and among Accelerated Connections, Inc., a Delaware corporation (the
"Company") and the parties listed on the Schedule of Investors attached hereto
as SCHEDULE A (the "Series A Investors").
RECITALS
A. The Series A Investors desire to purchase from the Company and/or
already hold shares of the Company's Series A Preferred Stock (the "Series A
Shares"), and the Company desires to sell such Series A Shares (not currently
held) to the Series A Investors;
B. The parties desire that each of the following Series A Investors has
requested that it be given the right to designate one (1) nominee to serve as
one of the directors: The Sprout Group funds (collectively, "Sprout");
Enterprise Partners funds (collectively, "Enterprise"), Kleiner Perkins Caufield
& Byers funds (collectively, "KPCB") and Brentwood Associates funds
(collectively, "Brentwood") (collectively, the "Series A Directors");
C. As a condition of its sale and issuance of the Series A Shares, the
Company has requested that it be given the right to designate its Chief
Executive Officer as a nominee to serve as one of the directors (the "Company
Director");
D. The Series A Investors and the Company acknowledge that they are
entering into this Voting Agreement in consideration of the purchase of the
Series A Shares by the Series A Investors pursuant to that certain Series A
Preferred Stock Purchase Agreement dated as of the date hereof (the "Purchase
Agreement").
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. SERIES A DIRECTORS. During the term of this Agreement, each of the
Series A Investors agrees to vote all of its Series A Shares now or hereafter
owned by it as follows:
(a) for so long as Sprout holds at least 1,000,000 Series A Shares,
(i) to elect the nominee of Sprout (the "Sprout Nominee") as one of the Series A
Directors and (ii) if requested by Sprout, to remove the incumbent Sprout
Nominee and elect a new Sprout Nominee as one of the Series A Directors or to
fill a vacancy created by death of such Sprout Nominee or otherwise.
(b) for so long as Enterprise holds at least 1,000,000 Series A
Shares, (i) to elect the nominee of Enterprise (the "Enterprise Nominee") as one
of the Series A
<PAGE>
Directors and (ii) if requested by Enterprise, to remove the incumbent
Enterprise Nominee and elect a new Enterprise Nominee as one of the Series A
Directors or to fill a vacancy created by death of such Enterprise Nominee or
otherwise.
(c) for so long as KPCB holds at least 1,000,000 Series A Shares,
(i) to elect the nominee of KPCB (the "KPCB Nominee") as one of the Series A
Directors and (ii) if requested by KPCB, to remove the incumbent KPCB Nominee
and elect a new KPCB Nominee as one of the Series A Directors or to fill a
vacancy created by death of such KPCB Nominee or otherwise.
(d) for so long as Brentwood holds at least 1,000,000 Series A
Shares, (i) to elect the nominee of Brentwood (the "Brentwood Nominee") as one
of the Series A Directors and (ii) if requested by Brentwood, to remove the
incumbent Brentwood Nominee and elect a new Brentwood Nominee as one of the
Series A Directors or to fill a vacancy created by death of such Brentwood
Nominee or otherwise.
(e) Each Series A Investor shall designate its respective Nominee in
writing to the Company prior to each election of directors of the Company. The
Company shall promptly notify each of the Series A Investors of the choice of
such Nominee. Any vacancy occurring because of the death, resignation, removal
or disqualification of a Nominee shall be filled according to this Section 1.
2. COMPANY DIRECTOR. During the term of this Agreement, each of the
Series A Investors agrees to vote all of its Series A Shares now or hereafter
owned by it to elect the Company's Chief Executive Officer as the Company
Director.
3. OUTSIDE DIRECTOR. The holders of Series A Preferred Stock and the
holders of Common Stock shall vote together as a single class to elect the
independent outside Board representative.
4. SUCCESSORS IN INTEREST.
(a) The provisions of this Agreement shall be binding upon the
successors in interest to any of the Series A Shares. The Company shall not
permit the transfer of any of the Series A Shares on its books or issue new
certificates representing any shares of such securities unless and until the
person(s) to whom such shares are to be transferred shall have executed a
written agreement, substantially in the form of this Agreement, pursuant to
which such person becomes a party to this Agreement, and agrees to be bound by
all the provisions hereof as if such person was a party hereunder.
(b) Each certificate representing any of the Series A Shares shall
bear a legend reading as follows:
"The shares evidenced hereby are subject to the terms
of a Voting Agreement (a copy of which may be obtained
without charge from the issuer), and by accepting any
interest in such shares the person accepting such interest
shall be
-2-
<PAGE>
deemed to agree to and shall become bound by all the provisions
of such Voting Agreement."
5. TERMINATION. This Agreement shall terminate upon the date the Company
consummates an underwritten public offering of its Common Stock under the
Securities Act of 1933, as amended.
6. AMENDMENTS AND WAIVERS. Any term hereof may be amended and the
observance of any term hereof may be waived (either generally or in a particular
instance and either retroactively or prospectively) only with the written
consent of (a) the Company and (b) the Series A Investors, or their assigns,
holding not less than 55% of the Series A Shares then outstanding. Any
amendment or waiver so effected shall be binding upon the Company and all Series
A Investors subject to the terms of this Agreement, whether or not such party,
assignee, or other stockholder entered into or approved such amendment or
waiver.
7. STOCK SPLITS, STOCK DIVIDENDS, ETC. In the event of any stock split,
stock dividend, recapitalization, reorganization, or the like, any securities
issued with respect to the Series A Shares shall become subject to this
Agreement and shall be endorsed with the legend set forth in Section 3(b)
hereof.
8. ENFORCEABILITY/SEVERABILITY. The parties hereto agree that each
provision of this Agreement shall be interpreted in such a manner as to be
effective and valid under applicable law. If any provision of this Agreement
shall nevertheless be held to be prohibited by or invalid under applicable law,
(a) such provision shall be effective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement, and (b) the parties shall, to the extent
permissible by applicable law, amend this Agreement, or enter into a voting
trust agreement under which the Series A Shares shall be transferred to the
voting trust created thereby, so as to make effective and enforceable the intent
of this Agreement.
9. GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California as applied to contracts among
California residents entered into and to be performed entirely within
California.
10. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided in
this Agreement, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors and assigns of the parties hereto.
12. NOTICES. All notices, requests and other communications to the
Company or any of the Investors hereunder shall be in writing, shall refer
specifically to this Agreement and shall be personally delivered or sent by
facsimile transmission, overnight delivery with a nationally recognized
overnight delivery service or by registered or
-3-
<PAGE>
certified mail, return receipt requested, postage prepaid, in each case to
the respective address specified in the preamble hereof with respect to the
Company and in the Schedule of Investors attached as SCHEDULE A hereto with
respect to the Series A Investors (or such other address as may be specified
in writing to the other parties hereto). Any notice or communication given
in conformity with this Section 11 shall be deemed to be effective when
received by the addressee, if delivered by hand or facsimile transmission,
one (1) business day after deposit with a nationally recognized overnight
delivery service and three (3) days after mailing by first class U.S. Mail.
13. EQUITABLE REMEDIES. The Company and the Series A Investors
acknowledge and agree that the legal remedies available to the Company and the
Series A Investors in the event any party violates the covenants and agreements
made in this Agreement would be inadequate and that the Company and each of the
Series A Investors shall be entitled, without posting any bond or other
security, to temporary, preliminary, and permanent injunctive relief, specific
performance and other equitable remedies in the event of such a violation, in
addition to any other remedies which the Company or any of the Series A
Investors may have at law or in equity.
14. FURTHER ASSURANCES. Each of the parties hereto shall execute and
deliver all additional documents and instruments and shall do any and all acts
and things reasonably requested in connection with the performance of the
obligations undertaken in this Agreement and/or otherwise to effectuate in good
faith the intent of the parties.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year hereinabove first written.
THE COMPANY:
ACCELERATED CONNECTIONS, INC.
By: /s/ Catherine M. Hapka
-----------------------------------------
Catherine M. Hapka,
President and Chief Executive Officer
THE SERIES A INVESTORS:
SPROUT CAPITAL VII, L.P.
By: DLJ Capital Corporation
Managing General Partner
By: /s/ Keith B. Geeslin
------------------------------------
Keith Geeslin, Attorney-in-Fact
THE SPROUT CEO FUND, L.P.
By: DLJ Capital Corporation
Its General Partner
By: /s/ Keith B. Geeslin
------------------------------------
Keith Geeslin, Attorney-in-Fact
DLJ CAPITAL CORPORATION
By: /s/ Keith B. Geeslin
-----------------------------------------
Keith Geeslin, Attorney-in-Fact
[COUNTERPART SIGNATURE PAGE TO VOTING AGREEMENT]
<PAGE>
DLJ FIRST ESC L.L.C.
By: DLJ LBO Plans Management Corporation
Its: Manager
By: /s/ Keith B. Geeslin
------------------------------------
Keith Geeslin, Attorney-in-Fact
ENTERPRISE PARTNERS III, L.P.
By: /s/ W. R. Stensrud
-----------------------------------------
Its: General Partner
----------------------------------------
ENTERPRISE PARTNERS III
ASSOCIATES, L.P.
By: /s/ W. R. Stensrud
-----------------------------------------
Its: General Partner
----------------------------------------
ENTERPRISE PARTNERS IV, L.P.
By: /s/ W. R. Stensrud
-----------------------------------------
Its: General Partner
----------------------------------------
KLEINER PERKINS CAUFIELD & BYERS VIII
By: /s/ (illegible)
-----------------------------------------
Its: General Partner
----------------------------------------
2750 Sand Hill Rd.
Menlo Park, CA 94025
[COUNTERPART SIGNATURE PAGE TO VOTING AGREEMENT]
<PAGE>
KPCB VIII INFORMATION SCIENCES
ZAIBATSU FUND II
By: /s/ (illegible)
-----------------------------------------
Its: General Partner
----------------------------------------
Address: 2750 Sand Hill Rd.
Menlo Park, CA 94025
BRENTWOOD ASSOCIATES VII, L.P.
By: Brentwood VII Ventures, L.P
its General Partner
By: /s/ (illegible)
-----------------------------------------
Its:
----------------------------------------
BRENTWOOD AFFILIATES FUND
By: Brentwood VII Ventures, L.P
its General Partner
By: /s/ (illegible)
-----------------------------------------
Its:
----------------------------------------
EPLEY INVESTORS II, LLC
By: /s/ Thomas E. Epley
-----------------------------------------
Its:
-----------------------------------------
Address: 800A Bardmoor Pl, #103K
Largo, FL 33777
[COUNTERPART SIGNATURE PAGE TO VOTING AGREEMENT]
<PAGE>
SCHEDULE A
SCHEDULE OF SERIES A INVESTORS
Name and Address of Series A Investors
--------------------------------------
The Sprout Group
3000 Sand Hill Road
Building 4, Suite 270
Menlo Park, CA 94025
Attn: Keith Geeslin
Fax: (415) 854-8779
Enterprise Partners
7979 Ivanhoe Avenue, Suite 550
La Jolla, CA 92037
Attn: William Stensrud
Fax: (619) 454-2489
Kleiner Perkins Caufield & Byers
2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Kevin Compton
Fax: (415) 233-0300
Brentwood Associates
3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, CA 94025
Attn: John Walecka
Fax: (415) 854-9513
Epley Investors II, LLC
c/o Paradyne
8545 126th Avenue, North
Largo, FL 33773
Attn: Tom Epley
Fax: (813) 530-2210
<PAGE>
SUBSEQUENT CLOSING PURCHASE AGREEMENT
(FRIENDS AND FAMILY)
THIS SUBSEQUENT CLOSING PURCHASE AGREEMENT is made as of December 23, 1997
by and between Rhythms NetConnections Inc., a Delaware corporation (the
"Company") and the investors listed on SCHEDULE A hereto each of which is
referred to as an "Investor."
RECITALS
A. The Company and certain investors are parties to that certain
Series A Preferred Stock Purchase Agreement dated July 3, 1997 (the "Purchase
Agreement") pursuant to which shares of Series A Preferred Stock were allocated
to the "Friends and Family" investors approved by the Board of Directors.
B. The Company has approved the Investors for such allocation and
desires to have the Investors purchase 210,000 shares of Series A Preferred
Stock, and the Investors desire to make such investment.
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. SALE AND ISSUANCE OF SERIES A PREFERRED STOCK. Each Investor
agrees, severally, to purchase from the Company, and the Company agrees to sell
and issue to each Investor that the number of shares of Series A Preferred Stock
and in the aggregate principal amounts as set forth opposite each Investor's
name on SCHEDULE A hereto at the purchase price set forth thereon.
2. SUBSEQUENT CLOSING. Such purchase and sale shall take place on
December 23, 1997 at 10:00 a.m., at the offices of Brobeck, Phleger & Harrison
LLP, 550 West "C" Street, Suite 1200, San Diego, California, or at such time and
place as the Company and a majority in interest of the Investors agree (the
"Subsequent Closing"). At the Subsequent Closing, the Company will deliver to
each Investor a certificate representing the Series A Preferred Stock which such
Investor is purchasing. At the Subsequent Closing, each Investor will deliver
to the Company payment of the purchase price as set forth on SCHEDULE A. Such
purchase shall be payable by Investor either by delivery to Company by Investor
of a check in the amount of the purchase price payable to the Company's order or
by wire transfer of funds in such amount to the Company's designated bank
account.
3. COMPANY REPRESENTATIONS. Except as set forth on the Schedule of
Exceptions, which exceptions shall be deemed to be representations and
warranties as if made hereunder, as of the Subsequent Closing Date the Company
makes the representations and warranties to each Investor set forth in Section 2
of the Purchase Agreement.
<PAGE>
4. INVESTOR REPRESENTATIONS. As of the Subsequent Closing Date,
each Investor makes the representations and warranties to the Company set forth
in Section 3 of the Purchase Agreement, which are hereby incorporated by
reference.
5. RIGHTS OF SHARES. This Subsequent Closing shall be deemed to
have been made under the Purchase Agreement, and the shares of Series A
Preferred Stock purchased hereunder shall receive the same rights and be subject
to the same obligations under the Purchase Agreement and that certain Investors'
Rights Agreement dated July 3, 1997, as the shares of the Series A Preferred
Stock purchased under the Purchase Agreement, except as expressly set forth in
such agreements.
6. REPRESENTATION. By executing this Agreement, each Investor
acknowledges and agrees that Brobeck, Phleger & Harrison LLP represents the
Company solely and that such Investor has had an opportunity to consult with its
own attorney in connection with this Agreement.
7. MISCELLANEOUS. Unless otherwise defined herein, capitalized
terms have the meaning ascribed to them in the Purchase Agreement. This
Agreement may be executed in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
RHYTHMS NETCONNECTIONS INC., a Delaware
corporation
By: /s/ Catherine M. Hapka
----------------------------------------------
Catherine Hapka, President
Address: 7737 South Revere Parkway
Englewood, Colorado 80112-3931
INVESTORS:
BLUMENFELD & COHEN
By: /s/ Jeff Blumenfeld
----------------------------------------------
Its: Partner
---------------------------------------------
Address: 1615 M Street, N.W., Suite 700
Washington, D.C. 20036
/s/ Eileen Shapiro
--------------------------------------------------
Eileen Shapiro
Address: 987 Memorial Drive, Apt. 672
Cambridge, MA 02138
/s/ Joel Portugal
--------------------------------------------------
Joel Portugal
Address: 30 East 72nd Street
New York, NY 10021
[SIGNATURE PAGE TO SUBSEQUENT CLOSING PURCHASE AGREEMENT]
<PAGE>
/s/ John H. Ware
--------------------------------------------------
John H. Ware
Address: c/o Spencer Stuart
3000 Sand Hill Road
Bldg. 2, Suite 175
Menlo Park, California 94025
/s/ Brad A. Stirn
--------------------------------------------------
Brad A. Stirn
Address: c/o Spencer Stuart
3000 Sand Hill Road
Bldg. 2, Suite 175
Menlo Park, California 94025
/s/ Stephen R. Strain
--------------------------------------------------
Stephen R. Strain
Address: c/o Spencer Stuart
3000 Sand Hill Road
Bldg. 2, Suite 175
Menlo Park, California 94025
/s/ Richard S. Gostyla
--------------------------------------------------
Richard S. Gostyla
Address: c/o Spencer Stuart
3000 Sand Hill Road
Bldg. 2, Suite 175
Menlo Park, California 94025
/s/ Nayla Rizk
--------------------------------------------------
Nayla M. Rizk
Address: c/o Spencer Stuart
3000 Sand Hill Road
Bldg. 2, Suite 175
Menlo Park, California 94025
[SIGNATURE PAGE TO SUBSEQUENT CLOSING PURCHASE AGREEMENT]
<PAGE>
/s/ Jane E. Carmera
--------------------------------------------------
Jane E. Carmena
Address: c/o Spencer Stuart
3000 Sand Hill Road
Bldg. 2, Suite 175
Menlo Park, California 94025
/s/ Jeff Blumenfeld
--------------------------------------------------
Jeff Blumenfeld
Address: 1615 M Street, N.W., Suite 700
Washington, D.C. 20036
BROBECK, PHLEGER & HARRISON LLP
By: /s/ Craig S. Andrews
----------------------------------------------
Its: General Partner
---------------------------------------------
Address: Spear Street Tower
One Market Street
San Francisco, California 94104
/s/ Craig S. Andrews
--------------------------------------------------
Craig S. Andrews
Address: Brobeck, Phleger & Harrison LLP
550 West "C" Street, Suite 1300
San Diego, California 92101
--------------------------------------------------
John A. Denniston
Address: Brobeck, Phleger & Harrison LLP
550 West "C" Street, Suite 1300
San Diego, California 92101
[SIGNATURE PAGE TO SUBSEQUENT CLOSING PURCHASE AGREEMENT]
<PAGE>
UMB AS TRUSTEE FOR BROBECK, PHLEGER & HARRISON
RETIREMENT SAVINGS TRUST FBO JOHN A. DENNISTON
By: /s/ (illegible)
----------------------------------------------
Its: Assistant Vice President
---------------------------------------------
Address: 1010 Grand Avenue
Kansas City, MO 64106
/s/ Martin C. Nichols
--------------------------------------------------
Martin C. Nichols
Address: Brobeck, Phleger & Harrison LLP
550 West "C" Street, Suite 1300
San Diego, California 92101
[SIGNATURE PAGE TO SUBSEQUENT CLOSING PURCHASE AGREEMENT]
<PAGE>
/s/ Glenn B. Manishin
--------------------------------------------------
Glenn B. Manishin
Address: c/o Blumenfeld & Cohen
1615 M Street, N.W., Suite 700
Washington, D.C. 20036
/s/ Gary M. Cohen
--------------------------------------------------
Gary M. Cohen
Address: c/o Blumenfeld & Cohen
1615 M Street, N.W., Suite 700
Washington, D.C. 20036
[SIGNATURE PAGE TO SUBSEQUENT CLOSING PURCHASE AGREEMENT]
<PAGE>
SCHEDULE A
SUBSEQUENT FRIENDS AND FAMILY CLOSING SCHEDULE OF INVESTORS
<TABLE>
<CAPTION>
Name Number of Shares Purchase Price
- ------------------------------------ --------------------- -----------------
<S> <C> <C>
Blumenfeld & Cohen Group
Glenn B. Manishin 15,000 $ 15,000
Gary M. Cohen 49,167 $ 49,167
Jeffrey Blumenfeld 20,833 $ 20,833
Eileen Shapiro 10,000 $ 10,000
Joel Portugal 10,000 $ 10,000
Spencer Stuart Group
John H. Ware 3,334 $ 3,334
Brad A. Stirn 3,333 $ 3,333
Stephen R. Strain 3,333 $ 3,333
Richard S. Gostyla 3,333 $ 3,333
Nayla M. Rizk 3,333 $ 3,333
Jane E. Carmena 3,334 $ 3,334
Jeff Blumenfeld 55,000 $ 55,000
Brobeck Group
Brobeck, Phleger & Harrison LLP 7,500 $ 7,500
Craig S. Andrews 7,500 $ 7,500
UMB as Trustee for Brobeck, Phleger 7,500 $ 7,500
& Harrison Retirement Savings Trust
FBO John A. Denniston
Martin C. Nichols 7,500 $ 7,500
TOTAL: 210,000 $210,000
------- --------
------- --------
</TABLE>
<PAGE>
RHYTHMS NETCONNECTIONS INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
MARCH 12, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Purchase and Sale of Stock. . . . . . . . . . . . . . . . . . . . . . 1
1.1 Sale and Issuance of Preferred Stock . . . . . . . . . . . . . 1
1.2 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Subsequent Sale of Series B Preferred Stock. . . . . . . . . . 1
2. Representations and Warranties of the Company . . . . . . . . . . . . 2
2.1 Organization, Good Standing and Qualification. . . . . . . . . 2
2.2 Capitalization and Voting Rights . . . . . . . . . . . . . . . 2
2.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.4 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . 3
2.5 Valid Issuance of Preferred and Common Stock . . . . . . . . . 3
2.6 Governmental Consents. . . . . . . . . . . . . . . . . . . . . 3
2.7 Returns and Complaints . . . . . . . . . . . . . . . . . . . . 4
2.8 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.9 Proprietary Information Agreements . . . . . . . . . . . . . . 4
2.10 Patents and Trademarks . . . . . . . . . . . . . . . . . . . . 4
2.11 Compliance with Other Instruments. . . . . . . . . . . . . . . 5
2.12 Agreements; Action . . . . . . . . . . . . . . . . . . . . . . 5
2.13 Related-Party Transactions . . . . . . . . . . . . . . . . . . 6
2.14 Permits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.15 Environmental and Safety Laws. . . . . . . . . . . . . . . . . 6
2.16 Manufacturing and Marketing Rights . . . . . . . . . . . . . . 6
2.17 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.18 Registration Rights. . . . . . . . . . . . . . . . . . . . . . 7
2.19 Corporate Documents. . . . . . . . . . . . . . . . . . . . . . 7
2.20 Title to Property and Assets . . . . . . . . . . . . . . . . . 7
2.21 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . 7
2.22 Financial Statements . . . . . . . . . . . . . . . . . . . . . 7
2.23 Tax Returns, Payments and Elections. . . . . . . . . . . . . . 7
2.24 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.25 Minute Books . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.26 Labor Agreements and Actions . . . . . . . . . . . . . . . . . 8
3. Representations and Warranties of the Investor. . . . . . . . . . . . 8
3.1 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . 8
3.2 Purchase Entirely for Own Account. . . . . . . . . . . . . . . 8
3.3 Disclosure of Information. . . . . . . . . . . . . . . . . . . 9
3.4 Investment Experience. . . . . . . . . . . . . . . . . . . . . 9
3.5 Accredited Investor. . . . . . . . . . . . . . . . . . . . . . 9
3.6 Restricted Securities. . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
4. Covenants of the Investor . . . . . . . . . . . . . . . . . . . . . . 9
4.1 Further Limitations on Disposition . . . . . . . . . . . . . . 9
4.2 Legends. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.3 Corporate Securities Law . . . . . . . . . . . . . . . . . . . 10
5. Conditions of Investor's Obligations at the Closing . . . . . . . . . 11
5.1 Representations and Warranties . . . . . . . . . . . . . . . . 11
5.2 Performance. . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.3 Compliance Certificate . . . . . . . . . . . . . . . . . . . . 11
5.4 Qualifications . . . . . . . . . . . . . . . . . . . . . . . . 11
5.5 Proceedings and Documents. . . . . . . . . . . . . . . . . . . 11
5.6 Opinion of Company Counsel . . . . . . . . . . . . . . . . . . 11
5.7 Board of Directors . . . . . . . . . . . . . . . . . . . . . . 11
5.8 Investors' Rights Agreement. . . . . . . . . . . . . . . . . . 11
5.9 Voting Agreement . . . . . . . . . . . . . . . . . . . . . . . 12
6. Conditions of the Company's Obligations at the Closing. . . . . . . . 12
6.1 Representations and Warranties . . . . . . . . . . . . . . . . 12
6.2 Qualifications . . . . . . . . . . . . . . . . . . . . . . . . 12
6.3 Performance. . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.4 Investors' Rights Agreement. . . . . . . . . . . . . . . . . . 12
6.5 Voting Trust Agreement . . . . . . . . . . . . . . . . . . . . 12
7. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.1 Survival of Warranties . . . . . . . . . . . . . . . . . . . . 12
7.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . 12
7.3 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . 13
7.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.5 Titles and Subtitles . . . . . . . . . . . . . . . . . . . . . 13
7.6 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.7 Finder's Fee . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.8 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.9 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . 13
7.10 Severability . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.11 Aggregation of Stock . . . . . . . . . . . . . . . . . . . . . 14
7.12 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
SCHEDULE A -- Schedule of Investors
SCHEDULE B -- Schedule of Series A Preferred Holders
SCHEDULE C -- Schedule of Common Holders
EXHIBIT A -- Restated Certificate of Incorporation
EXHIBIT B -- Amended and Restated Investors' Rights Agreement
EXHIBIT C -- Voting Trust Agreement
EXHIBIT D -- Amended and Restated Voting Agreement
(ii)
<PAGE>
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES B PREFERRED STOCK PURCHASE AGREEMENT is made as of the 12th day
of March 1998, by and between Rhythms NetConnections Inc., a Delaware
corporation (the "Company"), and the investors listed on Schedule A hereto, each
of which is herein referred to as an "Investor."
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK.
1.1 SALE AND ISSUANCE OF PREFERRED STOCK.
(a) RESTATED CERTIFICATE. The Company shall adopt and file with
the Secretary of State of Delaware before the Closing (as defined below) the
Restated Certificate of Incorporation in the form attached hereto as EXHIBIT A
(the "Restated Certificate").
(b) PURCHASE OF PREFERRED STOCK. Subject to the terms and
conditions of this Agreement, each Investor agrees, severally, to purchase at
the Closing (defined below) (or pursuant to Section 1.3) and the Company agrees
to sell and issue to each such Investor at the Closing (or pursuant to Section
1.3) that number of shares of the Company's Series B Preferred Stock set forth
opposite each such Investor's name on Schedule A hereto for the purchase price
set forth thereon.
1.2 CLOSING. The purchase and sale of the Series B Preferred Stock
shall take place at the offices of Brobeck, Phleger & Harrison LLP, 550 West "C"
Street, Suite 1200, San Diego California, at 10:00 a.m., on March 12, 1998, or
at such other time and place as the Company and Investors acquiring in the
aggregate more than half the shares of Series B Preferred Stock sold pursuant
hereto mutually agree upon orally or in writing (which time and place are
designated as the "Closing"). At the Closing the Company shall deliver to each
Investor a certificate representing the Series B Preferred Stock which such
Investor is purchasing at the Closing (as set forth on Schedule A) against
delivery to the Company by such Investor of a check or wire transfer in the
amount of the purchase price therefor payable to the Company's order.
1.3 SUBSEQUENT SALE OF SERIES B PREFERRED STOCK. In the event that
any Investor does not purchase all of the shares of Series B Preferred Stock set
forth opposite such Investor's name on Schedule A hereto at the Closing, the
Company may sell up to the balance of such authorized number of shares of Series
B Preferred Stock (not sold to such Investor at the Closing) to such Investor at
the purchase price set forth on Schedule A, provided the sale is executed not
later than two business days following the Closing. Any such Investor shall be
treated as an Investor for purposes of this Agreement, and the shares so
acquired shall be deemed to be sold hereunder.
<PAGE>
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to each Investor that, except as set forth on a
Schedule of Exceptions furnished each Investor, which exceptions shall be
deemed to be representations and warranties as if made hereunder:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure so to qualify would have a material adverse
effect on its business or properties.
2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the
Company consists, or will consist prior to the Closing, of:
(i) PREFERRED STOCK.
16,944,943 shares of Preferred Stock (the "Preferred Stock"), of which
12,900,000 have been designated Series A Preferred Stock of which 12,855,094 are
issued and outstanding (as set forth on Schedule B) and 4,044,943 shares of
which have been designated Series B Preferred Stock, all of which will be sold
pursuant to this Agreement. The rights, privileges and preferences of the
Series B Preferred Stock as of the Closing will be as stated in the Company's
Restated Certificate attached hereto as EXHIBIT A.
(ii) COMMON STOCK. 22,909,650 shares of common stock
("Common Stock"), of which 900,735 shares are issued and outstanding and are
owned by the persons, and in the numbers specified in Schedule C hereto. The
outstanding shares of common stock are all duly and validly authorized and
issued, fully paid and nonassessable, and were issued in accordance with the
registration or qualification provisions of the Securities Act of 1933, as
amended and any relevant state securities laws, or pursuant to valid exceptions
therefrom.
(iii) Except for (A) the conversion privileges of each of the
Series A Preferred Stock and the Series B Preferred Stock to be issued under
this Agreement and (B) the rights provided in paragraph 2.4 of the Amended and
Restated Investors' Rights Agreement (the "Investors' Rights Agreement") of even
date herewith in the form attached hereto as EXHIBIT B and (C) the Company's
reservation of 4,863,971 shares of Common Stock for issuance to employees,
directors and consultants pursuant to options granted, and to be granted in the
future, under a stock option plan, there are not outstanding any options,
warrants, rights (including conversion or preemptive rights) or agreements for
the purchase or acquisition from the Company of any shares of its capital stock.
The Company is not a party or subject to any agreement or understanding, and, to
the Company's knowledge, there is no agreement or understanding between any
persons and/or entities, which affects or relates to the voting or giving of
written consents with respect to any security or by a director of the Company.
-2-
<PAGE>
2.3 SUBSIDIARIES. The Company does not presently own or control,
directly or indirectly, any interest in any other corporation, association, or
other business entity.
2.4 AUTHORIZATION. All corporate action on the part of the Company,
its officers, directors and shareholders necessary for the authorization,
execution and delivery of this Agreement and the Investors' Rights Agreement,
the performance of all obligations of the Company hereunder and thereunder and
the authorization, issuance (or reservation for issuance), sale and delivery of
the Series B Preferred Stock being sold hereunder and the Common Stock issuable
upon conversion of the Series B Preferred Stock has been taken or will be taken
prior to the Closing, and this Agreement and the Investors' Rights Agreement
constitute valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally, (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief, or other equitable remedies, and (iii) to the extent the indemnification
provisions contained in the Investors' Rights Agreement may be limited by
applicable federal or state securities laws.
2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK.
(a) The Series B Preferred Stock which is being purchased by the
Investors hereunder, when issued, sold and delivered in accordance with the
terms hereof for the consideration expressed herein, will be duly and validly
issued, fully paid and nonassessable and, based in part upon the representations
of the Investors in this Agreement, will be issued in compliance with all
applicable federal and state securities laws and will be free of restrictions on
transfer other than restrictions on transfer under this Agreement and the
Investors' Rights Agreement and under applicable state and federal securities
law. The Common Stock issuable upon conversion of the Series B Preferred Stock
purchased under this Agreement has been duly and validly reserved for issuance
and, upon issuance in accordance with the terms of the Restated Certificate,
shall be duly and validly issued, fully paid and nonassessable, and issued in
compliance with all applicable securities laws and will be free of restrictions
on transfer other than restrictions on transfer under this Agreement and the
Investors' Rights Agreement and under applicable state and federal securities
law, as presently in effect, of the United States and each of the states whose
securities laws govern the issuance of any of the Securities (as defined in
Section 3.2) hereunder.
(b) The outstanding shares of Common Stock and Series A
Preferred Stock are all duly and validly authorized and issued, fully paid and
nonassessable, and were issued in compliance with all applicable federal and
state securities laws, with the Certificate of Incorporation and Bylaws of the
Company, and with all instruments, judgments, orders, writs, decrees, and
contracts to which the Company is a party or by which it is bound.
2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local or provincial governmental authority on
the part of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement, except for the
-3-
<PAGE>
filing pursuant to Section 25102(f) of the California Corporate Securities
Law of 1968, as amended, and the rules thereunder, which filing will be
effected within 15 days of the sale of the Series B Preferred Stock hereunder.
2.7 RETURNS AND COMPLAINTS. The Company has received no customer
complaints concerning its products and/or services, nor has it had any of its
products returned by a purchaser thereof.
2.8 LITIGATION. There is no action, suit, proceeding or
investigation pending or, to its knowledge, currently threatened against the
Company. The foregoing includes, without limitation, actions pending or
threatened involving the prior employment of any of the Company's employees,
their use in connection with the Company's business of any information or
techniques allegedly proprietary to any of their former employers, or their
obligations under any agreements with prior employers. The Company is not a
party or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality. There is no
action, suit, proceeding or investigation by the Company currently pending or
which the Company intends to initiate.
2.9 PROPRIETARY INFORMATION AGREEMENTS. Each employee, officer and
consultant of the Company has executed a Proprietary Information and Inventions
Agreement in the form provided to the Investors. The Company, after reasonable
investigation, is not aware that any of its employees, officers or consultants
are in violation thereof, and the Company will use its best efforts to prevent
any such violation.
2.10 PATENTS AND TRADEMARKS. (i) The Company has sufficient title and
ownership of all patents, trademarks, service marks, trade names, copyrights,
trade secrets, information, proprietary rights and processes necessary for its
business as now conducted and as proposed to be conducted without any conflict
with or infringement of the rights of others. There are no outstanding options,
licenses, or agreements of any kind relating to the foregoing, nor is the
Company bound by or a party to any options, licenses or agreements of any kind
with respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, proprietary rights and processes of any
other person or entity. The Company has not received any communications
alleging that the Company has violated or, by conducting its business as
proposed, would violate any of the patents, trademarks, service marks, trade
names, copyrights or trade secrets or other proprietary rights of any other
person or entity. The Company is not aware after due inquiry of its employees
that any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of his best efforts to promote the interests of the
Company or that would conflict with the Company's business as proposed to be
conducted. Neither the execution nor delivery of this Agreement and the
Investors' Rights Agreement, nor the carrying on of the Company's business by
the employees of the Company, nor the conduct of the Company's business as
proposed, will, to the Company's knowledge after due inquiry of its employees,
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any of such employees is now obligated. The Company does not believe it is or
will
-4-
<PAGE>
be necessary to utilize any inventions of any of its employees (or people
it currently intends to hire) made prior to their employment by the Company.
2.11 COMPLIANCE WITH OTHER INSTRUMENTS. (i) The Company is not in
violation or default of any provisions of its Certificate of Incorporation or
Bylaws or of any instrument, judgment, order, writ, decree or contract to which
it is a party or by which it is bound or, to its knowledge, of any provision of
federal or state statute, rule or regulation applicable to the Company. The
execution, delivery and performance of this Agreement, the Investors' Rights
Agreement or any ancillary agreements and the consummation of the transactions
contemplated hereby and thereby, and the issuance and sale of Securities (as
defined in Section 3.2), will not result in any such violation or be in conflict
with or constitute, with or without the passage of time and giving of notice,
either a default under any such provision, instrument, judgment, order, writ,
decree or contract or an event which results in the creation of any lien, charge
or encumbrance upon any assets of the Company or the Securities or the
suspension, revocation, impairment, forfeiture, or nonrenewal of any material
permit, license, authorization, or approval applicable to the Company, its
business or operations or any of its assets or properties; and (ii) there is no
judgment, order, writ or decree issued by a court of law that specifically names
the Company.
2.12 AGREEMENTS; ACTION.
(a) Except for agreements explicitly contemplated hereby and by
the Investors' Rights Agreement, there are no agreements, understandings or
proposed transactions between the Company and any of its officers, directors,
affiliates, or any affiliate thereof.
(b) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees to which
the Company is a party or by which it is bound which may involve (i) obligations
of the Company (contingent or otherwise) of, or payments to the Company of,
$10,000 or more, or (ii) the license of any patent, copyright, trade secret or
other proprietary right to or from the Company or (iii) provisions restricting
or affecting the development, manufacture or distribution of the Company's
products or services, or (iv) indemnification by the Company.
(c) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or any
other liabilities individually in excess of $10,000 or, in the case of
indebtedness and/or liabilities individually less than $10,000, in excess of
$25,000 in the aggregate, (iii) made any loans or advances to any person, other
than ordinary advances to employees for travel expenses, or (iv) sold, exchanged
or otherwise disposed of any of its assets or rights.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
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(e) The Company is not a party to and is not bound by any
contract, agreement or instrument, or subject to any restriction under its
Restated Certificate or Bylaws, which could adversely affect its business as
now conducted or as proposed to be conducted, its properties or its financial
condition.
(f) The Company has not engaged in the past three (3) months in
any discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations, (ii) with any corporation, partnership, association
or other business entity or any individual regarding the sale, conveyance or
disposition of all or substantially all of the assets of the Company in a
transaction or series of related transactions in which more than fifty percent
(50%) of the voting power of the Company is disposed of, or (iii) regarding any
other form of acquisition, liquidation, dissolution or winding up of the
Company.
(g) As of the Closing, the Company has not incurred any expenses
and has no liabilities individually in excess of $10,000 or, in the case of
expenses and/or liabilities individually less than $10,000, in excess of $25,000
in the aggregate.
2.13 RELATED-PARTY TRANSACTIONS. No employee, officer, or director of
the Company or member of his or her immediate family is indebted to the Company,
nor is the Company indebted (or committed to make loans or extend or guarantee
credit) to any of them. To the best of the Company's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation that competes with the Company, except
that employees, officers, or directors of the Company and members of their
immediate families may own stock in publicly traded companies that may compete
with the Company. No member of the immediate family of any officer or director
of the Company is directly or indirectly interested in any material contract
with the Company.
2.14 PERMITS. The Company has all franchises, permits, licenses, and
other similar authorities necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company and
believes it can obtain, without undue burden or expense, any similar authority
for the conduct of its business as planned to be conducted. The Company is not
in default in any material respect under any of such franchises, permits,
licenses, or other similar authority.
2.15 ENVIRONMENTAL AND SAFETY LAWS. The Company is not in violation
of any applicable statute, law, or regulation relating to the environment or
occupational health and safety, and to the best of its knowledge, no material
expenditures are or will be required in order to comply with any such existing
statute, law, or regulation.
2.16 MANUFACTURING AND MARKETING RIGHTS. The Company has not granted
rights to manufacture, produce, assemble, license, market, or sell its products
to any other person and is not bound by any agreement that affects the Company's
exclusive right to develop, manufacture, assemble, distribute, market, or sell
its products.
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<PAGE>
2.17 DISCLOSURE. The Company has fully provided each Investor with
all the information which such Investor has requested for deciding whether to
purchase the Series B Preferred Stock and all information which the Company
believes is reasonably necessary to enable such Investor to make such decision.
Neither this Agreement, the Investors' Rights Agreement, nor any other
statements or certificates made or delivered in connection herewith or therewith
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements herein or therein not misleading.
2.18 REGISTRATION RIGHTS. Except as provided in the Investors' Rights
Agreement, the Company has not granted or agreed to grant any registration
rights, including piggyback rights, to any person or entity.
2.19 CORPORATE DOCUMENTS. Except for amendments after the date of
this Agreement pursuant to the Restated Certificate and other amendments that
have been approved by the Investors, the Certificate of Incorporation and Bylaws
of the Company as currently in effect are in the form previously provided to the
Investors.
2.20 TITLE TO PROPERTY AND ASSETS. The Company owns its property and
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens which arose in the ordinary course of business and
do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets it leases, the Company is in
compliance with such leases and, to the best of its knowledge, holds a valid
leasehold interest free of any liens, claims or encumbrances.
2.21 EMPLOYEE BENEFIT PLANS. The Company does not have any Employee
Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.
2.22 FINANCIAL STATEMENTS. The Company has provided to the Investors
copies of its unaudited balance sheet and statement of operations at December
31, 1997 and for the period then ended (the "Financial Statements"). The
Financial Statements are true, complete and correct, present fairly the
financial condition of the Company and the results of operations as of the date
of such statements and have been prepared in accordance with generally accepted
accounting principles ("GAAP"), except that the unaudited Financial Statements
do not contain the footnotes required by GAAP. The Financial Statements
accurately set forth and describe the financial condition and operating results
of the Company as of the date, and for the period, indicated therein, subject to
normal year-end audit adjustments.
2.23 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed all
tax returns and reports required by law. These returns and reports are true and
correct in all material respects. The Company has paid all taxes and other
assessments due, except those contested by it in good faith which are listed in
the Schedule of Exceptions. The provision for taxes of the Company as shown in
the Financial Statements is adequate for taxes due or accrued as of the date
thereof. The Company has not elected pursuant to the Internal Revenue Code of
1986, as amended ("Code"), to be treated as a Subchapter S corporation or a
collapsible corporation pursuant to Section 341(f) or Section 1362(a) of the
Code, nor has it
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<PAGE>
made any other elections pursuant to the Code (other than elections which relate
solely to methods of accounting, depreciation or amortization) which would have
a material effect on the Company, its financial condition, its business as
presently conducted or proposed to be conducted or any of its properties or
material assets.
2.24 INSURANCE. The Company has in full force and effect fire and
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed. The Company has general liability insurance
with a limit of liability of no less than $2,000,000.
2.25 MINUTE BOOKS. The minute books of the Company provided to the
Investors contain a complete summary of all meetings of directors and
stockholders since the time of incorporation and reflect all transactions
referred to in such minutes accurately in all material respects.
2.26 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the knowledge of the
Company, has sought to represent any of the employees, representatives or agents
of the Company. There is no strike or other labor dispute involving the Company
pending, or to the knowledge of the Company threatened, which could have a
material adverse effect on the assets, properties, financial condition,
operating results, or business of the Company (as such business is presently
conducted and as it is proposed to be conducted), nor is the Company aware of
any labor organization activity involving its employees. The Company is not
aware that any officer or key employee, or that any group of key employees,
intends to terminate their employment with the Company, nor does the Company
have a present intention to terminate the employment of any of the foregoing.
Subject to general principles related to wrongful termination of employees, the
employment of each officer and employee of the Company is terminable at the will
of the Company.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. Each Investor hereby
represents and warrants to the Company that:
3.1 AUTHORIZATION. This Agreement constitutes its valid and legally
binding obligation, enforceable in accordance with its terms except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium, and
other laws of general application affecting enforcement of creditors' rights
generally, (ii) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies, and (iii) to the
extent the indemnification provisions contained in the Investors' Rights
Agreement may be limited by applicable Federal or state securities laws.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with
each Investor in reliance upon such Investor's representation to the Company
that the Series B Preferred Stock to be received by such Investor and the Common
Stock issuable upon
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<PAGE>
conversion thereof (collectively, the "Securities") will be acquired for
investment for such Investor's own account, not as a nominee or agent, and not
with a view to the resale or distribution of any part thereof, and that such
Investor has no present intention of selling, granting any participation in, or
otherwise distributing the same. Such Investor does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities. Such Investor has full power and authority to enter into this
Agreement.
3.3 DISCLOSURE OF INFORMATION. It believes it has received all the
information it considers necessary or appropriate for deciding whether to
purchase the Series B Preferred Stock. Such Investor has had an opportunity to
ask questions and receive answers from the Company regarding the terms and
conditions of the offering of the Series B Preferred Stock. The foregoing,
however, does not limit or modify the representations and warranties of the
Company in Section 2 of this Agreement or the right of the Investors to rely
thereon.
3.4 INVESTMENT EXPERIENCE. Such Investor acknowledges that it is
able to fend for itself, can bear the economic risk of its investment and has
such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment in the Series B
Preferred Stock. If other than an individual, it has not been organized for the
purpose of acquiring the Series B Preferred Stock.
3.5 ACCREDITED INVESTOR. Such Investor is an "accredited investor"
within the meaning of SEC Rule 501 of Regulation D, as presently in effect.
3.6 RESTRICTED SECURITIES. It understands that the shares of Series
B Preferred Stock it is purchasing are characterized as "restricted securities"
under the federal securities laws inasmuch as they are being acquired from the
Company in a transaction not involving a public offering and that under such
laws and applicable regulations such securities may be resold without
registration under the Securities Act of 1933, as amended (the "Act"), only in
certain limited circumstances. In this connection, such Investor is familiar
with SEC Rule 144, as presently in effect, and understands the resale
limitations imposed thereby and by the Act.
4. COVENANTS OF THE INVESTOR.
4.1 FURTHER LIMITATIONS ON DISPOSITION.
(a) Without in any way limiting the representations set forth
above, each Investor further agrees not to make any disposition of all or any
portion of the Securities unless and until the transferee has agreed in writing
for the benefit of the Company to be bound by this Section 4.1, provided and to
the extent such sections are then applicable, and the Investors' Rights
Agreement and:
(i) There is then in effect a Registration Statement under
the Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
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<PAGE>
(ii) (A) Such Investor shall have notified the Company of
the proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (B) if
reasonably requested by the Company, such Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such shares under the Act. It
is agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule 144 except in unusual circumstances.
(b) Notwithstanding the provisions of paragraph (a) above, (i)
no such Registration Statement or opinion of counsel shall be necessary for a
transfer by an Investor which is a partnership to a partner of such partnership
or a retired partner of such partnership who retires after the date hereof, or
to the estate of any such partner or retired partner or to the transfer by gift,
will or intestate succession of any partner to his spouse or to the siblings,
lineal descendants or ancestors of such partner or his spouse, if the transferee
agrees in writing to be subject to the terms hereof to the same extent as if he
were an original Investor hereunder, and (ii) no transferee shall be required,
as a condition to any transfer of Securities by an Investor, to agree to be
bound by this Section 4.1, if the transferee is acquiring such Securities
pursuant to a Registration Statement under the Act or in a transaction made
pursuant to Rule 144.
4.2 LEGENDS. It is understood that the certificates evidencing the
Securities (and the Common Stock issuable upon conversion thereof) may bear one
or all of the following legends:
(a) "These securities have not been registered under the
Securities Act of 1933. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with respect
to the securities under such Act or an opinion of counsel satisfactory to the
Company that such registration is not required or unless sold pursuant to Rule
144 of such Act."
(b) Any legend required by the laws of the State of California,
including any legend required by the California Department of Corporations and
Sections 417 and 418 of the Code.
4.3 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES
PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT
FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO
EXEMPT.
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<PAGE>
5. CONDITIONS OF INVESTOR'S OBLIGATIONS AT THE CLOSING. With respect to
the Closing, the obligations of each Investor under subsections 1.1 and 1.2 of
this Agreement are subject to the fulfillment on or before the Closing of each
of the following conditions, the waiver of which shall not be effective against
any Investor who does not consent thereto:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Section 2 shall be true on and as of the
date of the Closing with the same effect as though such representations and
warranties had been made on and as of the date of Closing.
5.2 PERFORMANCE. The Company and each other Investor shall have
performed and complied with all agreements, obligations and conditions contained
in this Agreement that are required to be performed or complied with by it on or
before the Closing.
5.3 COMPLIANCE CERTIFICATE. The President of the Company shall have
delivered to each Investor at the Closing a certificate certifying that the
conditions specified in Sections 5.1 and 5.2 have been fulfilled and stating
that there has been no adverse change in the business, affairs, operations,
properties, assets or condition of the Company since the date of this Agreement.
5.4 QUALIFICATIONS. The Commissioner of Corporations of the State of
California shall have issued a permit qualifying the offer and sale of the
Series B Preferred Stock and the underlying Common Stock to the Investors
pursuant to this Agreement, or such offer and sale shall be exempt from such
qualification under the California Corporate Securities Law of 1968, as amended.
Any other authorizations, approvals, or permits, if any, of any governmental
authority or regulatory body of the United States or of any state that are
required in connection with the lawful issuance and sale of the Series B
Preferred Stock pursuant to this Agreement, shall be duly obtained and effective
as of the Closing.
5.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to each Investor, and each Investor shall have received all such
counterpart original and certified or other copies of such documents as such
Investor may reasonably request.
5.6 OPINION OF COMPANY COUNSEL. Each Investor shall have received
from Brobeck, Phleger & Harrison LLP, counsel for the Company, an opinion, dated
the date of the Closing, in form and substance satisfactory to the Investors.
5.7 BOARD OF DIRECTORS. The Board of Directors of the Company as of
the Closing shall consist of Ken Harrison, Catherine Hapka, Kevin Compton,
William Stensrud, Keith Geeslin and John Walecka.
5.8 INVESTORS' RIGHTS AGREEMENT. The Company and each Investor shall
have entered into the Investors' Rights Agreement in the form attached as
EXHIBIT B.
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5.9 VOTING AGREEMENT. The Company and each Investor shall have
entered into the Voting Agreement in the form attached as EXHIBIT C.
6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSING. The
obligations of the Company to each Investor under this Agreement are subject to
the fulfillment on or before the Closing of each of the following conditions by
that Investor:
6.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Investor contained in Section 3 shall be true on and as of the
date of the Closing with the same effect as though such representations and
warranties had been made on and as of the Closing.
6.2 QUALIFICATIONS. The Commissioner of Corporations of the State of
California shall have issued a permit qualifying the offer and sale to the
Investor of the Series B Preferred Stock and the Common Stock issuable upon the
conversion thereof or such offer and sale shall be exempt from such
qualification under the California Corporate Securities Law of 1968, as amended.
Any other authorizations, approvals, or permits, if any, of any governmental
authority or regulatory body of the United States or of any state that are
required in connection with the lawful issuance and sale of the securities
pursuant to this Agreement shall be duly obtained and effective as of the
Closing.
6.3 PERFORMANCE. Each Investor shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.
6.4 INVESTORS' RIGHTS AGREEMENT. The Company and each Investor shall
have entered into the Investors' Rights Agreement in the form attached as
EXHIBIT B.
6.5 VOTING TRUST AGREEMENT. The Company and each Investor shall have
entered into the Voting Trust Agreement in the form attached as EXHIBIT C.
7. MISCELLANEOUS.
7.1 SURVIVAL OF WARRANTIES. The warranties, representations and
covenants of the Company and Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors or the Company.
7.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any shares of Securities sold hereunder or any Common Stock
issued upon conversion thereof). Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
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<PAGE>
7.3 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Delaware without regard to choice of law
principles.
7.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.5 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
7.6 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon receipt, and shall be addressed to the party to be
notified at the address indicated for such party on the signature page hereof,
or at such other address as such party may designate by ten (10) days' advance
written notice to the other parties.
7.7 FINDER'S FEE. Each party represents that it neither is nor will
be obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Investor or any of its officers, partners,
employees, or representatives is responsible.
The Company agrees to indemnify and hold harmless each Investor
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Company or any of its officers, employees or
representatives is responsible.
7.8 EXPENSES. Irrespective of whether the Closing is effected, the
Company shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If any
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement or the Restated Certificate, the prevailing party shall be
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
7.9 AMENDMENTS AND WAIVERS. Except for waivers of the Closing
Conditions in Section 5 any term of this Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the holders of 55% or more of the Common
Stock issued or issuable upon conversion of the Series B Preferred Stock issued
or issuable pursuant to this Agreement. Except for waivers of the closing
conditions in Section 5 (which waiver shall not be effective against any
individual Investor who does not consent thereto), any amendment or waiver
effected in accordance with this paragraph shall be binding upon each holder of
any Securities purchased under this
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<PAGE>
Agreement at the time outstanding (including securities into which such
Securities are convertible), each future holder of all such securities, and the
Company.
7.10 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
7.11 AGGREGATION OF STOCK. All shares of the Preferred Stock held or
acquired by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
7.12 ENTIRE AGREEMENT. This Agreement and the documents referred to
herein constitute the entire agreement among the parties and no party shall be
liable or bound to any other party in any manner by any warranties,
representations, or covenants except as specifically set forth herein or
therein.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
RHYTHMS NETCONNECTIONS INC.
By: /s/ Catherine M. Hapka
-----------------------------------------
Catherine Hapka, President
Address: 7737 South Revere Parkway
Englewood, CO 80112-3931
INVESTOR:
ENRON COMMUNICATIONS GROUP, INC.
By: /s/ K. L. Harrison
-----------------------------------------
Its:
-----------------------------------------
Address: 210 Southwest Morrison Street, Suite 400
Portland, OR 97204
ENTERPRISE PARTNERS III, L.P.
By: /S/ W. R. Stensrud
-----------------------------------------
Its: General Partner
-----------------------------------------
Address: 7979 Ivanhoe, Suite 550
La Jolla, CA 92037
Attn: William Stensrud
ENTERPRISE PARTNERS III ASSOCIATES, L.P.
By: /s/ W. R. Stensrud
-----------------------------------------
Its: General Partner
-----------------------------------------
Address: 7979 Ivanhoe, Suite 550
La Jolla, CA 92037
Attn: William Stensrud
[SIGNATURE PAGE TO THE STOCK PURCHASE AGREEMENT]
<PAGE>
BRENTWOOD ASSOCIATES VII, L.P.
By: BRENTWOOD VII VENTURES, L.P.
Its General Partner
By: /s/ John Walecka
-------------------------------------
Its: General Partner
--------------------------------------
Address: 3000 Sand Hill Road
Bldg. 1, Suite 260
Menlo Park, CA 94025
Attn: John Walecka
BRENTWOOD AFFILIATES FUND, L.P.
By: BRENTWOOD VII VENTURES, L.P.
Its General Partner
By: /s/ John Walecka
--------------------------------------
Its: General Partner
--------------------------------------
Address: 3000 Sand Hill Road
Bldg. 1, Suite 260
Menlo Park, CA 94025
Attn: John Walecka
KLEINER PERKINS CAUFIELD & BYERS VIII
By: /s/ Kevin R. Compton
-------------------------------------------
Its: General Partner
-------------------------------------------
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Kevin Compton
[SIGNATURE PAGE TO THE STOCK PURCHASE AGREEMENT]
<PAGE>
KPCB VIII FOUNDERS FUND
By: /s/ Kevin R. Compton
-------------------------------------------
Its: General Partner
-------------------------------------------
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Kevin Compton
KPCB INFORMATION SCIENCES ZAIBATSU FUND II
By: /s/ Kevin R. Compton
-------------------------------------------
Its: General Partner
-------------------------------------------
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Kevin Compton
SPROUT CAPITAL VII, L.P.
By: DLJ Capital Corporation
Managing General Partner
By: /S/ Keith B. Geeslin
--------------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Attn: Keith Geeslin
[SIGNATURE PAGE TO THE STOCK PURCHASE AGREEMENT]
<PAGE>
THE SPROUT CEO FUND, L.P.
By: DLJ Capital Corporation
Its General Partner
By: /s/ Keith B. Geeslin
--------------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Attn: Keith Geeslin
DLJ CAPITAL CORPORATION
By: /S/ Keith B. Geeslin
-------------------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Attn: Keith Geeslin
DLJ FIRST ESC L.L.C.
By: DLJ LBO Plans Management Corporation
Its: Manager
By: /S/ Keith B. Geeslin
---------------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Attn: Keith Geeslin
[SIGNATURE PAGE TO THE STOCK PURCHASE AGREEMENT]
<PAGE>
SCHEDULE A
Schedule of Investors
<TABLE>
<CAPTION>
PURCHASE NUMBER OF SHARES
PRICE PAID TO BE ISSUED
AT CLOSING AT CLOSING
<S> <C> <C>
Enron Communications Group, Inc. $10,000,000.00 2,247,191
Enterprise Partners III, L.P. $ 1,839,999.35 413,483
Enterprise Partners III Associates, $ 159,999.75 35,955
L.P.
Kleiner Perkins Caufield & Byers VIII $ 1,843,198.90 414,202
KPCB VIII Founders Fund $ 106,800.00 24,000
KPCB Information Sciences Zaibatsu $ 50,000.20 11,236
Fund II
Brentwood Associates VII, L.P. $ 1,920,001.45 431,461
Brentwood Affiliates Fund, L.P. $ 79,997.65 17,977
DLJ Capital Corporation $ 40,001.05 8,989
DLJ First ESC L.L.C. $ 200,000.80 44,944
Sprout Capital VII, L.P. 1,739,798.70 390,966
The Sprout CEO Fund, L.P. $ 20,198.55 4,539
TOTAL $17,999,996.40 4,044,943
------------- ----------
------------- ----------
</TABLE>
<PAGE>
SCHEDULE B
Schedule of Series A Preferred Holders
<TABLE>
<CAPTION>
TOTAL SERIES
FIRST CLOSING (JULY 3, 1997) A STOCK
<S> <C>
Enterprise Partners III, L.P. 1,380,000
Enterprise Partners III Associates, L.P. 120,000
Enterprise Partners IV, L.P. --
Brentwood Associates VII, L.P. 1,060,000
Brentwood Affiliates Fund, L.P. 60,000
Kleiner Perkins Caufield & Byers VIII 1,462,500
KPCB VIII Information Sciences Zaibatsu Fund II 37,500
DLJ Capital Corporation 30,000
DLJ First ESC L.L.C. 150,000
Sprout Capital VII, L.P. 1,304,843
The Sprout CEO Fund, L.P. 15,157
Epley Investors II, LLC 125,000
Stanford University 15,000
---------
FIRST CLOSING TOTAL 5,760,000
---------
---------
SECOND CLOSING (JULY 29, 1997)
Brentwood Associates VII, L.P. 380,000
SECOND CLOSING TOTAL 380,000
---------
---------
FIRST & SECOND CLOSING TOTAL 6,140,000
---------
---------
FRIENDS AND FAMILY CLOSING (DECEMBER 23, 1997)
Other Purchasers 210,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TOTAL SERIES
THIRD CLOSING (DECEMBER 23, 1997) A STOCK
<S> <C>
Enterprise Partners III, L.P. 1,380,000
Enterprise Partners III Associates, L.P. 120,000
Brentwood Associates VII, L.P. 1,440,000
Brentwood Affiliates Fund, L.P. 60,000
Kleiner Perkins Caufield & Byers VIII 1,462,500
KPCB VIII Information Sciences Zaibatsu Fund II 37,500
DLJ Capital Corporation 30,000
DLJ First ESC L.L.C. 150,000
Sprout Capital VII, L.P. 1,304,843
The Sprout CEO Fund, L.P. 15,157
Epley Investors II, LLC 125,000
Stanford University 15,000
Catherine M. Hapka 365,094
----------
THIRD CLOSING TOTAL 6,505,094
----------
----------
FIRST, SECOND & THIRD CLOSING TOTAL
12,855,094
----------
----------
</TABLE>
<PAGE>
SCHEDULE C
Schedule of Common Holders
<TABLE>
<CAPTION>
Number of Shares
<S> <C>
Enterprise Partners III, L.P. 552,451
Enterprise Partners III Associates, L.P. 48,039
Enterprise Partners IV, L.P. 300,245
-------
900,735
-------
-------
</TABLE>
<PAGE>
EXHIBIT A
RESTATED CERTIFICATE OF INCORPORATION
[see Exhibit 3.1]
A-1
<PAGE>
EXHIBIT B
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
[see Exhibit 10.4]
B-1
<PAGE>
EXHIBIT C
VOTING TRUST AGREEMENT
[see Exhibit 9.2]
C-1
<PAGE>
EXHIBIT D
AMENDED AND RESTATED VOTING AGREEMENT
[see Exhibit 9.3]
D-1
<PAGE>
RHYTHMS NETCONNECTIONS INC.
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
March 12, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Request for Registration. . . . . . . . . . . . . . . . . . . 2
1.3 Company Registration. . . . . . . . . . . . . . . . . . . . . 4
1.4 Obligations of the Company. . . . . . . . . . . . . . . . . . 5
1.5 Furnish Information . . . . . . . . . . . . . . . . . . . . . 5
1.6 Expenses of Demand Registration . . . . . . . . . . . . . . . 6
1.7 Expenses of Company Registration. . . . . . . . . . . . . . . 6
1.8 Underwriting Requirements . . . . . . . . . . . . . . . . . . 7
1.9 Delay of Registration . . . . . . . . . . . . . . . . . . . . 7
1.10 Indemnification . . . . . . . . . . . . . . . . . . . . . . . 7
1.11 Reports Under Securities Exchange Act of 1934 . . . . . . . . 9
1.12 Form S-3 Registration . . . . . . . . . . . . . . . . . . . . 10
1.13 Assignment of Registration Rights . . . . . . . . . . . . . . 11
1.14 Limitations on Subsequent Registration Rights . . . . . . . . 12
1.15 "Market Stand-Off" Agreement. . . . . . . . . . . . . . . . . 12
1.16 Termination of Registration Rights. . . . . . . . . . . . . . 12
2. Covenants of the Company. . . . . . . . . . . . . . . . . . . . . . . 13
2.1 Delivery of Financial Statements. . . . . . . . . . . . . . . 13
2.2 Inspection. . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.3 Termination of Information and Inspection Covenants . . . . . 13
2.4 Right of First Offer. . . . . . . . . . . . . . . . . . . . . 13
2.5 Employee Stock Pool.. . . . . . . . . . . . . . . . . . . . . 15
3. Covenants of the Investors. . . . . . . . . . . . . . . . . . . . . . 15
3.1 Certain Corporate Transactions. . . . . . . . . . . . . . . . 15
3.2 Standstill. . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.3 Additional Preferred Investors. . . . . . . . . . . . . . . . 16
4. Corporate Opportunity Matters . . . . . . . . . . . . . . . . . . . . 16
5. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.1 Successors and Assigns. . . . . . . . . . . . . . . . . . . . 17
5.2 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 17
5.3 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . 17
5.4 Titles and Subtitles. . . . . . . . . . . . . . . . . . . . . 17
5.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.6 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.7 Amendments and Waivers. . . . . . . . . . . . . . . . . . . . 17
5.8 Severability. . . . . . . . . . . . . . . . . . . . . . . . . 18
(i)
<PAGE>
5.9 Aggregation of Stock. . . . . . . . . . . . . . . . . . . . . 18
5.10 Entire Agreement; Amendment; Waiver . . . . . . . . . . . . . 18
</TABLE>
(ii)
<PAGE>
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT ("Agreement") is made
as of the 12th day of March, 1998, by and between Rhythms NetConnections Inc., a
Delaware corporation (the "Company"), and the investors listed on SCHEDULE A
hereto, each of which is herein referred to as an "Investor."
RECITALS
WHEREAS, the Company and certain of the Investors are parties to the Series
B Preferred Stock Purchase Agreement of even date herewith (the "Preferred Stock
Agreement");
WHEREAS, certain of the Investors are presently holders of the Company's
Series A Preferred Stock and pursuant thereto have entered into an Investors'
Rights Agreement with the Company dated July 3, 1997 (the "Original Rights
Agreement"); and
WHEREAS, in order to induce the Company to enter into the Preferred Stock
Agreement and to induce certain Investors to invest funds in the Company
pursuant to the Preferred Stock Agreement, all the Investors and the Company
wish to amend and restate the Original Rights Agreement so that this Agreement
will govern the rights of all the Investors to cause the Company to register
shares of the Company's common stock ("Common Stock") issuable to any Investors
upon conversion of their respective shares of the Company's preferred stock
("Preferred Stock"), and certain other matters as set forth in this Agreement.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. REGISTRATION RIGHTS. The Company covenants and agrees as follows:
1.1 DEFINITIONS. For purposes of this Section 1:
(a) The term "Act" means the Securities Act of 1933, as
amended.
(b) The term "register", "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Act, and the declaration or
ordering of effectiveness of such registration statement or document;
(c) The term "Registrable Securities" means (1) the Common
Stock issuable or issued upon conversion of the Series A Preferred Stock or
Series B Preferred Stock, (2) the 900,735 shares of Common Stock held by
Enterprise Partners as of the date of this Agreement, and (3) any Common Stock
of the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or
<PAGE>
other distribution with respect to, or in exchange for or in replacement of,
such Series A Preferred Stock, Series B Preferred Stock or Common Stock held by
Enterprise Partners, excluding in all cases, however, any Registrable Securities
sold by a person in a transaction in which his rights under this Section 1 are
not assigned;
(d) The number of shares of Registrable Securities then
outstanding and the Registrable Securities held by any person shall each be
determined by the number of shares of Common Stock outstanding which are, and
the number of shares of Common Stock issuable pursuant to then exercisable or
convertible securities which are, Registrable Securities;
(e) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 1.13 hereof; and
(f) The term "Form S-3" means such form under the Act as in
effect on the date hereof or any registration form under the Act subsequently
adopted by the Securities and Exchange Commission ("SEC") which permits
inclusion or incorporation of substantial information by reference to other
documents filed by the Company with the SEC.
1.2 REQUEST FOR REGISTRATION.
(a) If the Company shall receive at any time after the
earlier of (i) March 11, 2002, or (ii) six (6) months after the effective date
of the first registration statement for a public offering of securities of the
Company (other than a registration statement relating either to the sale of
securities to employees of the Company pursuant to a stock option, stock
purchase or similar plan or a SEC Rule 145 transaction), a written request from
the Holders of 60% or more of the Registrable Securities (the "Initiating
Holders") then outstanding that the Company file a registration statement under
the Act covering the registration of at least twenty percent (20%) of the
Registrable Securities then outstanding (or a lesser percent if the anticipated
aggregate offering price, net of underwriting discounts and commissions, would
exceed $20,000,000), then the Company shall, within ten (10) days of the receipt
thereof, give written notice of such request to all Holders and any other Holder
may also request the registration of Registrable Securities held by such Holder.
The Company shall, subject to the limitations of subsection 1.2(c), effect as
soon as practicable, and in any event shall use its best efforts to effect
within 60 days of the receipt of such request, the registration under the Act of
all Registrable Securities which the Holders request to be registered within
twenty (20) days of the mailing of such notice by the Company in accordance with
paragraph 4.5.
(b) If the Company shall receive at any time after the
earlier of (i) March 11, 2002, or (ii) six (6) months after the effective date
of the first registration statement for a public offering of securities of the
Company (other than a registration statement relating either to the sale of
securities to employees of the Company pursuant to a stock option, stock
purchase or similar plan or a SEC Rule 145 transaction), a written request
-2-
<PAGE>
from Enron Communications Group, Inc. or any assignee of the rights of Enron
Communications Group, Inc. pursuant to Section 1.13 ("Enron") that the Company
file a registration statement under the Act covering the registration of at
least twenty percent (20%) of the Registrable Securities then held by Enron (or
a lesser percent if the anticipated aggregate offering price, net of
underwriting discounts and commissions, would exceed $20,000,000), then the
Company shall, within ten (10) days of the receipt thereof, give written notice
of such request to all other Holders and any other Holder may also request the
registration of Registrable Securities held by such Holder. The Company shall,
subject to the limitations of subsection 1.2(d), effect as soon as practicable,
and in any event shall use its best efforts to effect within 60 days of the
receipt of such request, the registration under the Act of all Registrable
Securities which Enron and the Holders request to be registered within twenty
(20) days of the mailing of such notice by the Company in accordance with
paragraph 4.5.
(c) If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 1.2 and the Company shall include such information in the written
notice referred to in subsection 1.2(a). The underwriter will be selected by
Initiating Holders holding a majority of the Registrable Securities proposed to
be included in the registration and shall be reasonably acceptable to the
Company. In such event, the right of any Holder to include his Registrable
Securities in such registration shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall (together with the Company as provided in subsection
1.4(e)) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by the Initiating
Holders holding a majority of the Registrable Securities proposed to be included
in the registration. Notwithstanding any other provision of this Section 1.2,
if the underwriter advises the Initiating Holders in writing that marketing
factors require a limitation of the number of shares to be underwritten, then
the Initiating Holders shall so advise all Holders of Registrable Securities
which would otherwise be underwritten pursuant hereto, and the number of shares
of Registrable Securities that may be included in the underwriting shall be
allocated: (i) first, among all Holders thereof, including the Initiating
Holders, allocated among such Holders in proportion (as nearly as practicable)
to the amount of Registrable Securities of the Company proposed to be included
in the registration by each Holder; and (ii) second, to the extent of any
remaining shares that may be underwritten, to the holders of any other
securities.
(d) If Enron intends to distribute the Registrable Securities
covered by its request under subsection 1.2(b) by means of an underwriting, it
shall so advise the Company as a part of its request made pursuant to this
Section 1.2 and the Company shall include such information in the written notice
referred to in subsection 1.2(b). The underwriter will be selected by Enron and
shall be reasonably acceptable to the Company. In such event, the right of any
other Holder to include its Registrable Securities in such
-3-
<PAGE>
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by Enron and such Holder) to the
extent provided herein. Enron and all Holders proposing to distribute their
securities through such underwriting shall (together with the Company as
provided in subsection 1.4(e)) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by
Enron. Notwithstanding any other provision of this Section 1.2, if the
underwriter advises the Company in writing that marketing factors require a
limitation of the number of shares to be underwritten, then the Company shall so
advise all Holders of Registrable Securities which would otherwise be
underwritten pursuant hereto, and the number of shares of Registrable Securities
that may be included in the underwriting shall be allocated: (i) first, to
Enron or its assignee; (ii) second, to the extent of any remaining shares that
may be underwritten, among all other Holders thereof in proportion (as nearly as
practicable) to the amount of Registrable Securities of the Company proposed to
be included in the registration by each such Holder; and (iii) third, to the
extent of any remaining shares that may be underwritten, to the holders of any
other securities.
(e) The Company is obligated to effect only (i) two (2) such
registrations pursuant to subsection 1.2(a), and (ii) one (1) such registration
pursuant to subsection 1.2(b).
(f) Notwithstanding the foregoing, if the Company shall
furnish to either Holders requesting a registration statement pursuant to this
Section 1.2 or to Enron, a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its shareholders
for such registration statement to be filed and it is therefore essential to
defer the filing of such registration statement, the Company shall have the
right to defer taking action with respect to such filing for a period of not
more than 120 days after receipt of the request of the Initiating Holders or
Enron, as applicable; provided, however, that the Company may not utilize this
right more than twice in any twelve month period.
1.3 COMPANY REGISTRATION. If (but without any obligation under
this Agreement to do so) the Company proposes to register (including for this
purpose a registration effected by the Company for shareholders other than
pursuant to this Agreement) any of its stock or other securities under the Act
in connection with the public offering of such securities solely for cash (other
than a registration relating solely to the sale of securities to participants in
a Company stock plan, or a registration on any form which does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of the Registrable Securities), the
Company shall, at such time, promptly give each Holder written notice of such
registration. Upon the written request of any Holder given within twenty (20)
days after mailing of such notice by the Company in accordance with Section 4.5,
the Company shall, subject to the provisions of Section 1.8, cause to be
registered under the Act all of the Registrable Securities that such Holder has
requested to be registered.
-4-
<PAGE>
1.4 OBLIGATIONS OF THE COMPANY. Whenever required under this
Section 1 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to one hundred twenty (120) days.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
1.5 FURNISH INFORMATION.
(a) It shall be a condition precedent to the obligations of
the Company to take any action pursuant to this Section 1 with respect to the
Registrable Securities of any selling Holder that such Holder shall furnish to
the Company such information regarding itself, the Registrable Securities held
by it, and the intended method of
-5-
<PAGE>
disposition of such securities as shall be required to effect the registration
of such Holder's Registrable Securities.
(b) The Company shall have no obligation with respect to any
registration requested pursuant to Section 1.2 or Section 1.12 if, due to the
operation of subsection 1.5(a), the number of shares or the anticipated
aggregate offering price of the Registrable Securities to be included in the
registration does not equal or exceed the number of shares or the anticipated
aggregate offering price required to originally trigger the Company's obligation
to initiate such registration as specified in subsections 1.2(a) or 1.2(b) or
subsection 1.12(b)(2), whichever is applicable. Any registration that is
withdrawn without becoming effective pursuant to this Section 1.5 shall not be
counted as a registration for purposes of Section 1.2(e).
1.6 EXPENSES OF DEMAND REGISTRATION. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company, and the
reasonable fees and disbursements of one counsel for the selling Holders
(selected by Holders of a majority of Registrable Securities to be included in
the registration if under subsection 1.2(a) or by Enron if under subsection
1.2(b)) ("Holders' Counsel") shall be borne by the Company; provided, however,
that the Company shall not be required to pay for any expenses of any
registration proceeding begun pursuant to Section 1.2 if the registration
request is subsequently withdrawn at the request of the Holders of a majority of
the Registrable Securities to be registered if under subsection 1.2(a) or of
Enron if under subsection 1.2(b) (in which case all participating Holders shall
bear such expenses allocated among them in proportion to the amount of
Registrable Securities originally proposed to be registered), unless the Holders
of a majority of the Registrable Securities if under subsection 1.2(a) or Enron
if under subsection 1.2(b) agree to forfeit their or its right to one demand
registration pursuant to Section 1.2; provided further, however, that if at the
time of such withdrawal, the Holders or Enron, as applicable, have learned of a
material adverse change in the condition, business, or prospects of the Company
from that known to the Holders or Enron, as applicable, at the time of their or
its request and have withdrawn the request with reasonable promptness following
disclosure by the Company of such material adverse change, then the Company
shall pay such expenses and the Holders or Enron, as applicable, shall not be
required to pay any of such expenses and shall retain their or its rights
pursuant to Section 1.2.
1.7 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and
pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.3 for each Holder (which right may be assigned as provided
in Section 1.13), including (without limitation) all registration, filing, and
qualification fees, printers and accounting fees relating or apportionable
thereto, but excluding underwriting discounts and commissions relating to
Registrable Securities.
-6-
<PAGE>
1.8 UNDERWRITING REQUIREMENTS. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by the Company. If the total amount of
securities, including Registrable Securities, requested by shareholders to be
included in such offering exceeds the amount of securities sold other than by
the Company that the underwriters determine in their sole discretion is
compatible with the success of the offering, then the Company shall be required
to include in the offering only that number of such securities, including
Registrable Securities, which the underwriters determine in their sole
discretion will not jeopardize the success of the offering (the securities so
included to be apportioned pro rata among the selling shareholders according to
the total amount of securities entitled to be included therein owned by each
selling Shareholder or in such other proportions as shall mutually be agreed to
by such selling shareholders) but in no event shall (i) the amount of securities
of the selling Holders included in the offering be reduced below thirty percent
(30%) of the total amount of securities included in such offering, unless such
offering is the initial public offering of the Company's securities in which
case the selling shareholders may be excluded if the underwriters make the
determination described above or (ii) notwithstanding (i) above, any shares
being sold by a shareholder exercising a demand registration right similar to
that granted in Section 1.2 be excluded from such offering. For purposes of the
preceding parenthetical concerning apportionment, for any selling shareholder
which is a holder of Registrable Securities and which is a partnership or
corporation, the partners, retired partners and shareholders of such holder, or
the estates and family members of any such partners and retired partners and any
trusts for the benefit of any of the foregoing persons shall be deemed to be a
single "selling shareholder", and any pro-rata reduction with respect to such
"selling shareholder" shall be based upon the aggregate amount of shares
carrying registration rights owned by all entities and individuals included in
such "selling shareholder", as defined in this sentence.
1.9 DELAY OF REGISTRATION. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.
1.10 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the partners or officers, directors and
shareholders of each Holder, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Act or the Securities Exchange Act of 1934, as amended (the
"1934 Act"), against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Act, or the 1934 Act,
insofar as such
-7-
<PAGE>
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Act, the 1934 Act, or any rule or regulation
promulgated under the Act, or the 1934 Act; and the Company will pay to each
such Holder, underwriter or controlling person any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this subsection 1.10(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability, or action to the extent that
it arises out of or is based upon a Violation which occurs in reliance upon and
in conformity with written information furnished expressly for use in connection
with such registration by any such Holder, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, any underwriter, any other
Holder selling securities in such registration statement and any controlling
person of any such underwriter or other Holder, against any losses, claims,
damages, or liabilities (joint or several) to which any of the foregoing persons
may become subject, under the Act, or the 1934 Act insofar as such losses,
claims, damages, or liabilities (or actions in respect thereto) arise out of or
are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such registration; and each such Holder will pay any legal or other
expenses reasonably incurred by any person intended to be indemnified pursuant
to this subsection 1.10(b), in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this subsection 1.10(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; provided, that, in no event shall any
indemnity under this subsection 1.10(b) exceed the gross proceeds from the
offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.10, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires and has acknowledged its obligation to
indemnify the indemnified party with respect to such action, jointly with any
other
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<PAGE>
indemnifying party similarly noticed, to assume the defense thereof with counsel
mutually satisfactory to the parties; provided, however, that an indemnified
party (together with all other indemnified parties which may be represented
without conflict by one counsel) shall have the right to retain one separate
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
indemnified party under this Section 1.10 except to the extent that the
indemnifying party is prejudiced thereby in its ability to defend such action,
but the omission so to deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to any indemnified party otherwise
than under this Section 1.10.
(d) If the indemnification provided for in this Section 1.10
is held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this
Section 1.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1.
1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Act and any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of the Company to the public without registration or
pursuant to a registration on Form S-3, the Company agrees to:
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(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times after ninety (90)
days after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) file with the SEC in a timely manner all reports and
other documents required of the Company under the Act and the 1934 Act; and
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Act and the 1934 Act (at any
time after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
1.12 FORM S-3 REGISTRATION. In case the Company shall receive from
the Holders of forty percent (40%) or more of the Registrable Securities a
written request or requests that the Company effect a registration on Form S-3
and any related qualification or compliance with respect to all or a part of the
Registrable Securities owned by such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other Holders;
and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within 15 days after receipt of such written notice from the Company; provided,
however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this section 1.12: (1) if
Form S-3 is not available for such offering by the Holders; (2) if the Holders,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than $5,000,000; (3) if the
Company shall furnish to the Holders a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
shareholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration
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statement for a period of not more than 120 days after receipt of the request of
the Holder or Holders under this Section 1.12; provided, however, that the
Company shall not utilize this right more than once in any twelve month period;
(4) if the Company has, within the twelve (12) month period preceding the date
of such request, already effected two registrations on Form S-3 for the Holders
pursuant to this Section 1.12; or (5) in any particular jurisdiction in which
the Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All expenses incurred in connection with a
registration requested pursuant to Section 1.12, including (without limitation)
all registration, filing, qualification, printer's and accounting fees and the
reasonable fees and disbursements of Holders' Counsel and counsel for the
Company, shall be borne pro rata by the Holder or Holders participating in the
Form S-3 Registration. Registrations effected pursuant to this Section 1.12
shall not be counted as demands for registration or registrations effected
pursuant to Section 1.2.
1.13 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to subsection 1.2(a) may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of such securities who, after such assignment or transfer, holds at
least 1,000,000 shares of Registrable Securities (subject to appropriate
adjustment for stock splits, stock dividends, combinations and other
recapitalizations), provided the Company is, within a reasonable time after such
transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; and provided, further, that such
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the Act. The rights to cause the Company to register
Registrable Securities pursuant to subsection 1.2(b) may be assigned (but only
with all related obligations) by Enron to a transferee or assignee of such
securities who, after such assignment or transfer, holds at least 750,000 shares
of Registrable Securities (subject to appropriate adjustment for stock splits,
stock dividends, combinations and other recapitalizations), provided the Company
is, within a reasonable time after such transfer, furnished with written notice
of the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; and provided,
further, that such assignment shall be effective only if immediately following
such transfer the further disposition of such securities by the transferee or
assignee is restricted under the Act. For the purposes of determining the
number of shares of Registrable Securities held by a transferee or assignee, the
holdings of transferees and assignees of a partnership who are partners or
retired partners of such partnership (including spouses and ancestors, lineal
descendants and siblings of such partners or spouses who acquire Registrable
Securities by gift, will or intestate succession) shall be aggregated together
and with the partnership; provided that all assignees and transferees who would
not qualify individually for assignment of registration rights shall have a
single attorney-in-fact for the purpose of exercising any rights, receiving
notices or taking any action under this Section 1.
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1.14 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after
the date of this Agreement, the Company shall not, without the prior written
consent of the Holders of 60% or more of the outstanding Registrable Securities,
enter into any agreement with any holder or prospective holder of any securities
of the Company which would allow such holder or prospective holder (a) to
include such securities in any registration filed under Section 1.2 hereof,
unless under the terms of such agreement, such holder or prospective holder may
include such securities in any such registration only to the extent that the
inclusion of his securities will not reduce the amount of the Registrable
Securities of the Holders which is included or adversely affect the market for
the Registrable Securities that are included or (b) to make a demand
registration which could result in such registration statement being declared
effective prior to the earlier of either of the dates set forth in subsections
1.2(a) or 1.2(b) or within one hundred twenty (120) days of the effective date
of any registration effected pursuant to Section 1.2.
1.15 "MARKET STAND-OFF" AGREEMENT. Each Investor hereby agrees
that, during the period of duration (such period not to exceed 180 days)
specified by the Company and an underwriter of common stock or other securities
of the Company, following the effective date of a registration statement of the
Company filed under the Act, it shall not, to the extent requested by the
Company and such underwriter, directly or indirectly sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to donees or
commonly-controlled affiliates of the transferor who agree to be similarly
bound) any securities of the Company held by it at any time during such period
except common stock included in such registration; provided, however, that:
(a) such agreement shall be applicable only to the first two
such registration statements of the Company which cover common stock (or other
securities) to be sold on its behalf to the public in an underwritten offering;
and
(b) all officers and directors of the Company and all other
persons with registration rights (whether or not pursuant to this Agreement)
enter into similar agreements.
In order to enforce the foregoing covenant, the Company may
impose stop-transfer instructions with respect to the Registrable Securities of
each Investor (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
1.16 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be
entitled to exercise any right provided for in this Section 1 after five (5)
years following the consummation of the sale of securities pursuant to a
registration statement filed by the Company under the Act in connection with the
initial firm commitment underwritten offering of its securities to the general
public.
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2. COVENANTS OF THE COMPANY.
2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver to
each Investor holding at least 500,000 shares of Registrable Securities:
(a) as soon as practicable, but in any event within ninety
(90) days after the end of each fiscal year of the Company, an income statement
for such fiscal year, a balance sheet of the Company and statement of
shareholder's equity as of the end of such year, and a schedule as to the
sources and applications of funds for such year, such year-end financial reports
to be in reasonable detail, prepared in accordance with generally accepted
accounting principles ("gaap"), and audited and certified by independent public
accountants of nationally recognized standing selected by the Company;
(b) as soon as practicable, but in any event within
forty-five (45) days after the end of each of the first three (3) quarters of
each fiscal year of the Company, an unaudited profit or loss statement, schedule
as to the sources and application of funds for such fiscal quarter and an
unaudited balance sheet as of the end of such fiscal quarter.
(c) within thirty (30) days of the end of each month, an
unaudited income statement and schedule as to the sources and application of
funds and balance sheet for and as of the end of such month, in reasonable
detail; and
(d) as soon as practicable, but in any event thirty (30) days
prior to the end of each fiscal year, a budget for the next fiscal year,
prepared on a monthly basis, including balance sheets and sources and
applications of funds statements for such months and, as soon as prepared, any
other budgets or revised budgets prepared by the Company.
2.2 INSPECTION. The Company shall permit each Investor, at such
Investor's expense, to visit and inspect the Company's properties, to examine
its books of account and records and to discuss the Company's affairs, finances
and accounts with its officers, all at such reasonable times as may be requested
by the Investor; provided, however, that the Company shall not be obligated
pursuant to this Section 2.2 to provide access to any information which it
reasonably considers to be a trade secret or similar confidential information.
2.3 TERMINATION OF INFORMATION AND INSPECTION COVENANTS. The
covenants set forth in subsections 2.1(c) and (d) and Section 2.2 shall
terminate as to Investors and be of no further force or effect when the sale of
securities pursuant to a registration statement filed by the Company under the
Act in connection with the firm commitment underwritten offering of its
securities raising at least $20,000,000 to the general public is consummated or
when the Company first becomes subject to the periodic reporting requirements of
Sections 12(g) or 15(d) of the 1934 Act, whichever event shall first occur.
2.4 RIGHT OF FIRST OFFER. Subject to the terms and conditions
specified in this paragraph 2.4, the Company hereby grants to each Major
Investor (as hereinafter defined)
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a right of first offer with respect to future sales by the Company of its Shares
(as hereinafter defined). For purposes of this Section 2.4, a Major Investor
shall mean (i) any Investor who holds at least 50% of such Investor's originally
acquired shares of Series A Preferred Stock or Series B Preferred Stock issued
pursuant to (A) that certain Series A Preferred Stock Purchase Agreement dated
July 3, 1997 (the "Series A Agreement") or (B) the Preferred Stock Agreement, as
applicable, and (ii) any person who acquires at least (A) 10% of the Series A
Preferred Stock (or the common stock issued upon conversion thereof) issued
pursuant to the Series A Agreement or (B) 10% of the Series B Preferred Stock
(or the common stock issued upon conversion thereof) issued pursuant to the
Preferred Stock Agreement. For purposes of this Section 2.4, Investor includes
any general or limited partners and affiliates of an Investor. An Investor
shall be entitled to apportion the right of first offer hereby granted it among
itself and its partners and affiliates in such proportions as it deems
appropriate.
Each time the Company proposes to offer any shares of, or
securities convertible into or exercisable for any shares of, any class of its
capital stock ("Shares"), the Company shall first make an offering of such
Shares to each Major Investor in accordance with the following provisions:
(a) The Company shall deliver a notice by certified mail
("Notice") to the Major Investors stating (i) its bona fide intention to offer
such Shares, (ii) the number of such Shares to be offered, and (iii) the price
and terms, if any, upon which it proposes to offer such Shares.
(b) Within 20 calendar days after receipt of the Notice, the
Major Investor may elect to purchase or obtain, at the price and on the terms
specified in the Notice, up to that portion of such Shares which equals the
proportion that the number of shares of common stock issued and held, or
issuable upon conversion of the Series A Preferred Stock or Series B Preferred
Stock then held, by such Major Investor bears to the total number of shares of
common stock of the Company then outstanding (assuming full conversion and
exercise of all convertible or exercisable securities) as of the date of the
Notice. The Company shall promptly, in writing, inform each Major Investor
which purchases all the shares available to it ("Fully-Exercising Investor") of
any other Major Investor's failure to do likewise. During the ten-day period
commencing after receipt of such information, each Fully-Exercising Investor
shall be entitled to obtain that portion of the Shares for which Major Investors
were entitled to subscribe but which were not subscribed for by the Major
Investors which is equal to the proportion that the number of shares of common
stock issued and held, or issuable upon conversion of Series A Preferred Stock
or Series B Preferred Stock then held, by such Fully-Exercising Investor bears
to the total number of shares of common stock issued and held, or issuable upon
conversion of the Series A Preferred Stock or Series B Preferred Stock then
held, by all Fully-Exercising Investors who wish to purchase some of the
unsubscribed shares.
(c) If all Shares referred to in the Notice are not elected
to be obtained as provided in subsection 2.4(b) hereof, the Company may, during
the 60-day period following the expiration of the period provided in subsection
2.4(b) hereof, offer the
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remaining unsubscribed portion of such Shares to any person or persons at a
price not less than, and upon terms no more favorable to the offeree than those
specified in the Notice. If the Company does not enter into an agreement for
the sale of the Shares within such period, or if such agreement is not
consummated within 60 days of the execution thereof, the right provided
hereunder shall be deemed to be revived and such Shares shall not be offered
unless first reoffered to the Major Investors in accordance herewith.
(d) The right of first offer in this paragraph 2.4 shall not
be applicable (i) to the issuance or sale of common stock (or options therefor)
to employees, consultants or directors of the Company directly or pursuant to a
stock option plan or restricted stock plan approved by the Board of Directors of
the Company, (ii) to or after consummation of a bona fide, firmly underwritten
public offering of shares of common stock, registered under the Act pursuant to
a registration statement on Form S-1, at an offering price of at least
$20,000,000 in the aggregate, (iii) the issuance of securities pursuant to the
conversion or exercise of convertible or exercisable securities, (iv) the
issuance of securities in connection with a bona fide business acquisition of or
by the Company, whether by merger, consolidation, sale of assets, sale or
exchange of stock or otherwise or (v) the issuance of stock, warrants or other
securities or rights to persons or entities with which the Company has business
relationships provided such issuances are for other than primarily equity
financing purposes approved by the Board of Directors.
2.5 EMPLOYEE STOCK POOL. Any increase in the authorized number of
shares allocated to the Company's employee stock pool under the Company's 1997
Stock Option/Stock Issuance Plan shall be approved by the Board of Directors.
3. COVENANTS OF THE INVESTORS.
3.1 CERTAIN CORPORATE TRANSACTIONS. In the event that the Board of
Directors of the Company and holders of a majority of the Common Stock issuable
or issued upon conversion of the Series A Preferred Stock and Series B Preferred
Stock of the Company vote in favor of a Corporate Transaction (as defined
below), each Investor hereby agrees not to take any action inconsistent with the
pooling-of-interests accounting treatment to the extent applicable to such
Corporate Transaction, as reasonably deemed necessary by the Company's Board of
Directors, including without limitation exercising any dissenter's rights any
such Investor may have or selling or purchasing any Company securities where
prohibited under the then applicable pooling-of-interests accounting rules. For
purposes of this Section 3.1, Corporate Transaction shall mean the acquisition
of the Company by another entity by means of any transaction or series of
related transactions (including, without limitation, any reorganization, merger
or consolidation) that results in the transfer of fifty percent (50%) or more of
the outstanding voting power of the Company.
3.2 STANDSTILL. Except as set forth in the Series A Agreement and
in the Preferred Stock Agreement, each Investor agrees not to purchase any
additional shares of, or securities convertible into or exercisable or
exchangeable for any shares of, any class of
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capital stock of the Company unless approved in advance by the Board of
Directors of the Company.
3.3 ADDITIONAL PREFERRED INVESTORS. Each Investor agrees to permit
other new preferred stock investors in the Company which are approved by the
Board of Directors to participate on a pari passu basis in the rights of first
offer, registration rights, information and access rights and the protective
provision rights held by the Investors set forth herein and in the Restated
Certificate of Incorporation.
4. CORPORATE OPPORTUNITY MATTERS.
(a) Except as expressly provided in this Section 4, the Investors
other than Enron (the "Rhythms Stockholders") and the Company acknowledge and
agree that neither Enron nor any of its Affiliates shall be expressly or
implicitly restricted or proscribed pursuant to this Agreement, the relationship
that exists between Enron and the Rhythms Stockholders, the relationship between
Enron and the Company or otherwise, from engaging in any type of business
activity or owning an interest in any type of business entity, regardless of
whether such business activity is (or such business entity engages in businesses
that are) in direct or indirect competition with the businesses or activities of
the Company or of any of its Affiliates (as defined below) or any other person
or entity. Without limiting the foregoing and except as otherwise expressly
provided in this Section 4, the Rhythms Stockholders and the Company acknowledge
and agree that (i) neither the Rhythms Stockholders, the Company or its
Affiliates nor any other person or entity shall have any rights, by virtue of
this Agreement, the relationship that exists between Enron and the Rhythms
Stockholders, the relationship between Enron and the Company or otherwise, in
any business venture or business opportunity of Enron or any of its Affiliates,
and Enron and such Affiliates shall have no obligation to offer any interest in
any such business venture or business opportunity to the Rhythms Stockholders,
the Company, any Affiliate of the Company or any other person or entity, or
otherwise account to the Rhythms Stockholders, the Company, any Affiliate of the
Company or any other persons or entities in respect of any such business
ventures, (ii) the activities of Enron or any of its Affiliates that are in
direct or indirect competition with the activities of the Company or any of its
Affiliates are hereby approved by the Rhythms Stockholders and the Company, and
(iii) it shall be deemed not to be a breach of any fiduciary or other duties, if
any and whether express or implied, that may be owed by Enron or its Affiliates
to the Rhythms Stockholders or the Company for Enron to permit itself or one of
its Affiliates to engage in a business opportunity in preference or to the
exclusion of the Rhythms Stockholders, the Company, its Affiliates or any other
person or entity.
(b) For purposes of this Section 4, the term "Affiliate" shall mean
(i) a person or entity that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with
another person or entity or (ii) a person or entity that owns beneficially at
least 50% of the equity of such other person or entity; provided, however, that
when used to refer to Affiliates of the Company (as opposed to Affiliates of any
other person or entity, such as Enron), shall only mean persons or entities
controlled by the Company (rather than persons or entities under common control
with the
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Company), and when used to refer to Affiliates of Enron, shall exclude the
Company and its Affiliates. The term "control," including the correlative terms
"controlling," "controlled by" and "under common control with" shall mean
possession, directly or indirectly of the power to direct or cause the direction
of management or policies (whether through ownership of securities or any
partnership or other ownership interest, by contract or otherwise) of a person
or entity.
5. MISCELLANEOUS.
5.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any shares of Registrable Securities). Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
5.2 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of Delaware without regard to choice of
law principles.
5.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.4 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
5.5 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon receipt addressed to the party to be notified at the
address indicated for such party on the signature page hereof, or at such other
address as such party may designate by ten (10) days' advance written notice to
the other parties.
5.6 EXPENSES. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
5.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
60% or more of the Registrable Securities then outstanding. Any amendment or
waiver effected in accordance with this paragraph shall be
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binding upon each holder of any Registrable Securities then outstanding, each
future holder of all such Registrable Securities, and the Company.
5.8 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
5.9 AGGREGATION OF STOCK. All shares of Registrable Securities
held or acquired by affiliated entities or persons shall be aggregated together
for the purpose of determining the availability of any rights under this
Agreement.
5.10 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement (including
the Exhibits hereto, if any) constitutes the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
RHYTHMS NETCONNECTIONS INC.
By: /s/ Catherine M. Hapka
-----------------------------------------
Catherine Hapka, President
Address: 7737 South Revere Parkway
Englewood, CO 80112-3931
INVESTOR:
ENRON COMMUNICATIONS GROUP, INC.
By: /s/ K. L. Harrison
--------------------------------------
Its:
--------------------------------------
Address:
---------------------------------------------
---------------------------------------------
ENTERPRISE PARTNERS III, L.P.
By: /s/ W. R. Stensrud
--------------------------------------
Its: General Partner
--------------------------------------
Address: 7979 Ivanhoe, Suite 550
La Jolla, CA 92037
Attn: William Stensrud
ENTERPRISE PARTNERS III ASSOCIATES,
L.P.
By: /s/ W. R. Stensrud
--------------------------------------
Its: General Partner
--------------------------------------
Address: 7979 Ivanhoe, Suite 550
La Jolla, CA 92037
Attn: William Stensrud
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
ENTERPRISE PARTNERS IV, L.P.
By: /s/ W. R. Stensrud
--------------------------------------
Its: General Partner
--------------------------------------
Address: 7979 Ivanhoe, Suite 550
La Jolla, CA 92037
Attn: William Stensrud
BRENTWOOD ASSOCIATES VII, L.P.
By: BRENTWOOD VII VENTURES, L.P.
Its General Partner
By: /s/ John Walecka
---------------------------------
Its: General Partner
---------------------------------
Address: 3000 Sand Hill Road
Bldg. 1, Suite 260
Menlo Park, CA 94025
Attn: John Walecka
BRENTWOOD AFFILIATES FUND, L.P.
By: BRENTWOOD VII VENTURES, L.P.
Its General Partner
By: /s/ John Walecka
---------------------------------
Its: General Partner
---------------------------------
Address: 3000 Sand Hill Road
Bldg. 1, Suite 260
Menlo Park, CA 94025
Attn: John Walecka
[SIGNATURE PAGE TO THE AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
KLEINER PERKINS CAUFIELD & BYERS VIII
By: /s/ Kevin R. Compton
--------------------------------------
Its: General Partner
--------------------------------------
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Kevin Compton
KPCB VIII FOUNDERS FUND
By: /s/ Kevin R. Compton
--------------------------------------
Its: General Partner
--------------------------------------
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Kevin Compton
KPCB INFORMATION SCIENCES ZAIBATSU
FUND II
By: /s/ Kevin R. Compton
--------------------------------------
Its: General Partner
--------------------------------------
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Kevin Compton
SPROUT CAPITAL VII, L.P.
By: DLJ Capital Corporation
Managing General Partner
By: /s/ Keith B. Geeslin
----------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Attn: Keith Geeslin
[SIGNATURE PAGE TO THE AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
THE SPROUT CEO FUND, L.P.
By: DLJ Capital Corporation
Its General Partner
By: /s/ Keith B. Geeslin
----------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Attn: Keith Geeslin
DLJ CAPITAL CORPORATION
By: /s/ Keith B. Geeslin
-----------------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Attn: Keith Geeslin
DLJ FIRST ESC L.L.C.
By: DLJ LBO Plans Management Corporation
Its: Manager
By: /s/ Keith B. Geeslin
----------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Attn: Keith Geeslin
[SIGNATURE PAGE TO THE AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
EPLEY INVESTORS II, LLC
By:
----------------------------------------
Its:
----------------------------------------
Address:
---------------------------------------------
---------------------------------------------
STANFORD UNIVERSITY
By:
----------------------------------------
Its:
----------------------------------------
Address:
---------------------------------------------
---------------------------------------------
BLUMENFELD & COHEN
By: /s/ Jeff Blumenfeld
----------------------------------------
Its: Partner
----------------------------------------
Address: 1615 M Street, N.W., Suite 700
Washington, D.C. 20036
---------------------------------------------
Eileen Shapiro
Address: 987 Memorial Drive, Apt. 672
Cambridge, MA 02138
---------------------------------------------
Joel Portugal
Address: 30 East 72nd Street
New York, NY 10021
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
---------------------------------------------
John H. Ware
Address: c/o Spencer Stuart
3000 Sand Hill Road
Bldg. 2, Suite 175
Menlo Park, California 94025
---------------------------------------------
Brad A. Stirn
Address: c/o Spencer Stuart
3000 Sand Hill Road
Bldg. 2, Suite 175
Menlo Park, California 94025
---------------------------------------------
Steve R. Strain
Address: c/o Spencer Stuart
3000 Sand Hill Road
Bldg. 2, Suite 175
Menlo Park, California 94025
---------------------------------------------
Richard S. Gostyla
Address: c/o Spencer Stuart
3000 Sand Hill Road
Bldg. 2, Suite 175
Menlo Park, California 94025
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
---------------------------------------------
Nayla M. Rizk
Address: c/o Spencer Stuart
3000 Sand Hill Road
Bldg. 2, Suite 175
Menlo Park, California 94025
---------------------------------------------
Jane E. Carmena
Address: c/o Spencer Stuart
3000 Sand Hill Road
Bldg. 2, Suite 175
Menlo Park, California 94025
/s/ Jeff Blumenfeld
---------------------------------------------
Jeff Blumenfeld
Address: 1615 M Street, N.W., Suite 700
Washington, D.C. 20036
BROBECK, PHLEGER & HARRISON LLP
By:
----------------------------------------
Its:
----------------------------------------
Address: Spear Street Tower
One Market Street
San Francisco, California 94104
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
---------------------------------------------
Craig S. Andrews
Address: Brobeck, Phleger & Harrison LLP
550 West "C" Street, Suite 1300
San Diego, California 92101
UMB AS TRUSTEE FOR BROBECK,
PHLEGER & HARRISON RETIREMENT
SAVINGS TRUST FBO JOHN A. DENNISTON
By:
----------------------------------------
Its:
----------------------------------------
Address: 1010 Grand Avenue
Kansas City, MO 64106
---------------------------------------------
Martin C. Nichols
Address: Brobeck, Phleger & Harrison LLP
550 West "C" Street, Suite 1300
San Diego, California 92101
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
SCHEDULE A
INVESTOR
Enron Communications Group, Inc.
Enterprise Partners III, L.P.
Enterprise Partners III Associates, L.P.
Enterprise Partners IV, L.P.
Brentwood Associates VII, L.P.
Brentwood Associates Fund, L.P.
Kleiner Perkins Caufield & Byers VIII
KPCB VIII Founders Fund
KPCB Information Sciences Zaibatsu Fund II
Sprout Capital VII, L.P.
The Sprout CEO Fund, L.P.
DLJ Capital Corporation
DLJ First ESC L.L.C.
Epley Investors II, LLC
Stanford University
Catherine M. Hapka
Blumenfeld & Cohen
Eileen Shapiro
Joel Portugal
John H. Ware
Brad A. Stirn
Stephen R. Strain
Richard S. Gostyla
Nayla M. Rizk
Jane E. Carmena
Jeffrey Blumenfeld
Brobeck, Phleger & Harrison LLP
Craig S. Andrews
UMB as Trustee for Brobeck, Phleger & Harrison Retirement
Savings Trust FBO John A. Denniston
Martin C. Nichols
<PAGE>
ENTERPRISE
PARTNERS
VENTURE CAPITAL
June 10, 1997
Ms. Catherine M. Hapka
4947 S. Fillmore Court
Englewood, CO 80110
Dear Catherine:
It gives me great pleasure as an investor and Board Member in Accelerated
Connections, Inc. to offer you the job of President and CEO of the company.
This letter will serve to lay out the basic terms of your employment. The
effective date of your employment is June 9, 1997.
1. Position
Your position at Accelerated Connections, Inc. will be President, CEO
and Board of Directors member. Your responsibilities will be as
directed by the Board of Directors. You will be expected to devote
your full-time efforts to these responsibilities.
2. Salary
Your annual salary will be $300,000. You will be eligible for all
employee benefits which relate to executives of the company. Your
annual salary will be raised to $350,000 at the point when additional
equity or debt financing is raised at a pre-money valuation of
$35,000,000 or greater.
3. Bonus
Your first year bonus will be a guaranteed $100,000 payable quarterly.
Your second year bonus will be 50% of your base and payable upon
achievement of milestones proposed by you and accepted by the Board.
7979 IVANHOE AVENUE / SUITE 550 / LA JOLLA, CA 92037 / (619) 454-8833 /
(619) 454-2489 FAX
<PAGE>
June 10, 1997
Ms. Catherine M. Hapka
Page 2
4. Bonus Plan
During the first year of operations, you will he expected to put in
place a bonus plan for the executives of the Company.
5. Stock
You will have options for 8.0% of Accelerated Connections, Inc. at the
time of the initial investment. The options will be vested according
to the Company Stock Option Plan. In addition you will have the
option of purchasing up to 2% of the company in the form of Series A
Preferred Shares at $1.00 per share. In lieu of purchasing these
shares, you may elect to receive Series A Preferred Shares for $.80
per share by accepting shares in lieu of cash compensation for any
portion of your first year's salary and/or bonus.
6. Location
The Company headquarters will be located in Colorado.
7. Business Plan
It is recognized that there is no complete business plan for
Accelerated Connections, Inc. at this time. In order to manage
expectations, it is expected that you and your team will develop a
plan and present it to the Board in approximately 120 days after your
start date.
8. Common Stock Pool for Employees
We will increase the common shares reserved for the employee pool from
25% to 27%.
<PAGE>
June 10, 1997
Ms. Catherine M. Hapka
Page 3
9. Involuntary Termination
In the event that your employment with Accelerated Connections is
terminated involuntarily and without cause, you will receive a
severance payment equal to one year of your base pay payable in a lump
sum within 30 days of termination date.
Employment with Accelerated Connections, Inc. will not be for a specific
term and can be terminated by you or by the Company at any time for any
reason, with or without cause. Any contrary representations which may have
been made or which may be made to you are/will be superseded by this offer.
If you accept this offer, the terms described in this letter will be the
terms of your employment. Any additions to or modifications of these terms
must be in writing, approved by the Accelerated Connections, Inc. Board of
Directors and signed by you and another member of Accelerated Connections
Inc.'s Board of Directors. As an obligation consistent with this offer of
employment, you will be required to sign appropriate non-disclosure and
proprietary information agreements, copies of which will be provided to
you. The terms of this letter and your employment will be governed by the
laws of the State of Colorado.
In compliance with the Federal Immigration Reform Act, your employment
pursuant to this offer is contingent on your providing the legally required
proof of your identity and authorization to work in the United States.
Assuming this letter is acceptable to you, please sign a copy and return it
to me.
<PAGE>
June 10, 1997
Ms. Catherine M. Hapka
Page 4
I believe we all have an excellent opportunity with you as CEO of
Accelerated Connections, Inc. to build a world-shaking, RBOC beating,
industry-leading company. I am looking forward to working with you.
Sincerely,
/s/ W. R. Stensrud
William R. Stensrud
/s/ Catherine M. Hapka 6/12/97
----------------------------------- ------------------------------
Catherine M. Hapka Date
WRS/adf
<PAGE>
Mr. Jeffrey Blumenfeld
6614 32nd Street, N.W.
Washington, D.C. 20015
Re: Offer Letter
Dear Jeffrey:
It gives me great pleasure as President and CEO of Accelerated
Connections, Inc. ("the Company") to offer you employment with the Company.
This letter will serve to lay out the basic terms of your employment. The
effective date of your employment will be August 25, 1997.
1. Position
You will be Vice President and General Counsel at Accelerated
Connections, Inc. You will report directly to me. You will be
expected to devote all necessary time and effort to your duties
at Accelerated Connections, Inc., with a minimum time commitment
of three days, or 24 hours, per week. The Company may, from time
to time, require full time commitment from you. You and I will
need to agree upon a process to be utilized by which you will
substantiate the time you spend working on Company business.
<PAGE>
2. Salary
Your annual base salary will be $110,000. Given your continued
association with your law firm, we assume that you already have
medical, dental, and other employee welfare benefits.
3. Stock
Subject to approval by the Board of Directors, you will be
granted options to purchase 182,548 shares of Common Stock at an
exercise price of $0.10 per share. 25% of the options (i.e.,
45,637 shares) will vest on the first anniversary of the grant
date, which coincides with your effective date of employment, and
the remaining 75% will vest thereafter on a monthly basdis over
the succeeding three-year period, for a total vesting period of 4
years.
4. Location
The Company headquarters will be located in Colorado. You will
perform your duties on behalf of the Company from your offices in
Washington, D.C., but will travel to Colorado as requested by the
Company. You will be reimbursed for reasonable expenses incurred
in connection with such travel; however, hours spent travelling
will not count against the minimum time commitment described in
<PAGE>
paragraph 1, unless you are actually working on Company business
while in transit.
5. "Friends and Family" Agreement
In your capacity as a partner in the law firm of Blumenfeld &
Cohen, you have agreed to provide the Company with a permanent
one-third (33 1/3%) discount on all legal fees and services
provided to the Company by other persons affiliated with your
firm, in exchange for the Company's agreement to allow Blumenfeld
& Cohen to purchase 30,000 shares of Preferred Stock at an
exercise price of $1.00 per share. The Company's agreement to
permit your firm to purchase Preferred Stock, as detailed in this
paragraph, is subject to the approval of the Company's Board of
Directors.
Employment with Accelerated Connections, Inc. will not be for a
specified term and can be terminated by you or by the Company at any time and
for any reason, with or without cause, and with or without notice. Any contrary
representations which may have been made or which may be made to you are, or
will be, superseded by this offer. The "at will" nature of your employment
described in this offer letter shall constitute the entire agreement between you
and the Company concerning the duration of your employment and the circumstances
under which you or the Company may terminate the employment relationship.
Although your job duties, title, compensation
<PAGE>
and benefits may change over time, the "at will" term of your employment can
only be changed in a writing which is signed by you and by the President of the
Company. If you accept this offer, the terms described in this letter will be
the terms of your employment. This offer is contingent upon you executing the
Accelerated Connections Proprietary Information and Inventions Agreement and
Non-Competition Agreement, copies of which are attached hereto and incorporated
by reference. The terms of this letter and your employment will be governed by
the laws of the State of Colorado.
In compliance with the Federal Immigration Reform Act, your
employment pursuant to this offer is contingent upon your providing the legally
required proof of your identity and authorization to work in the United States.
Assuming this letter is acceptable to you, please sign a copy and
return it to me.
I believe we all have an excellent opportunity to build a major next
generation communications company. I'm delighted that you've decided to join
our team, and I am looking forward to working with you.
Sincerely,
/s/ Catherine M. Hapka
Catherine M. Hapka
Accepted:
/s/ Jeffrey Blumenfeld 8/10/97
- ----------------------- ------------------------
Jeffrey Blumenfeld Date
<PAGE>
July 14, 1997
Mr. James Greenberg
11020 West 122nd Street
Overland Park, Kansas 66213
Re: Offer Letter (Revision 2)
Dear Jim:
It gives me great pleasure as President and CEO of Accelerated
Connections, Inc. (the "Company") to offer you the job of Network Officer for
the Company. This letter will serve to lay out the basic terms of your
employment. The effective date of your employment is July 21, 1997.
1. Position
You will be the lead Network Officer at Accelerated Connections, Inc.
We will agree on a specific title after you join. You will report
directly to me, and be expected to devote your full-time efforts to
these responsibilities.
2. Salary
Your annual base salary will be $145,000. You will be eligible for
all employee benefits which relate to executives of the company.
<PAGE>
July 13, 1997
Mr. James Greenberg
Page 2
3. Bonus
You will be eligible for a first year bonus of up to 25% of your base
salary, payable upon achievement of milestones to be established by me
in conjunction with the Board of Directors.
4. Stock
Subject to approval by the Board of Directors, which will meet to
approve the stock option plan no later than August 31, 1997, you will
be granted options to purchase 228,184 shares of Common Stock at an
exercise price of $.10 per share. 25% of the options will vest on the
first anniversary of the grant date which coincides with your
effective date of employment, and the remaining 75% will vest
thereafter on a monthly basis over the succeeding 3 year period, for a
total vesting period of 4 years.
5. Relocation
The Company headquarters will be located in Colorado. You
will be expected to relocate to Denver. Accordingly, the Company will
pay you $50,000 to cover you and your family's relocation to Denver.
In addition, the Company will reimburse you for the difference between
the $280,000 (of which we understand to be the original purchase price
of your residence plus improvements) and the actual
<PAGE>
July 13, 1997
Mr. James Greenberg
Page 3
selling price of your residence, if the actual selling price of your
residence is less than $280,000. However, in no event shall the
reimbursement exceed $30,000. You will be required to repay the
Company for all payments and reimbursements related to your relocation
to Denver if you resign or are terminated "With Cause" (defined in
paragraph 6 below) on or before the first anniversary of your start
date, prorated by the number of months employed by the Company.
6. Involuntary Termination
In the event that your employment is terminated by the Company
"Without Cause" (defined below) within your first year of employment,
you will receive a severance payment equal to one year of your base
pay payable in twelve monthly installments beginning on the first day
of the calendar month immediately following your termination Without
Cause. A termination "With Cause" shall mean a termination for any of
the following reasons: (i) your failure to perform your duties (other
than due to accident, sickness or disability beyond your reasonable
control) after receipt of a written warning; (ii) engaging in
misconduct such as theft, assault, sexual harassment, etc.; (iii)
being convicted of a felony; (iv) committing an act of fraud against,
or the misappropriation of property belonging to, the Company; or (v)
breach
<PAGE>
July 13, 1997
Mr. James Greenberg
Page 4
of any confidentiality, proprietary information or non-competition
agreement between you and the Company. A termination for any other
reason shall be a termination "Without Cause."
Employment with Accelerated Connections, Inc. will not be for a
specified term and can be terminated by you or by the Company at any time for
any reason, with or without cause. Any contrary representations which may have
been made or which may be made to you are/will be superseded by this offer. If
you accept this offer, the terms described in this letter will be the terms of
your employment. This offer is contingent on you executing the Accelerated
Connections Proprietary Information and Inventions Agreement and Non-Competition
Agreement, copies of which are attached hereto and incorporated by reference.
The terms of this letter and your employment will be governed by the laws of the
State of Colorado.
In compliance with the Federal Immigration Reform Act, your employment
pursuant to this offer is contingent on your providing the legally required
proof of your identity and authorization to work in the United States.
<PAGE>
July 13, 1997
Mr. James Greenberg
Page 5
Assuming this letter is acceptable to you, please sign a copy and
return it to me.
I believe we all have an excellent opportunity to build a major next
generation communications company. I'm delighted that you've decided to join
our team, and I am looking forward to working with you.
Sincerely,
/s/ Catherine M. Hapka
Catherine M. Hapka
/s/ James Greenberg 7/15/97
- ------------------------- --------------------------
James A. Greenberg Date
James Greenberg
<PAGE>
EMPLOYEE
PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
July 15 , 1997
Accelerated Connections, Inc.
7979 Ivanhoe Avenue, Suite 550
La Jolla, CA 92037
The following confirms an agreement between Accelerated Connections, Inc.,
a Delaware corporation (the "Company") and me, which is a material part of the
consideration for my employment by the Company:
1. I understand that the Company possesses and will possess Proprietary
Information that is important to its business. For purposes of this Agreement,
"Proprietary Information" is information that was or will be developed, created,
or discovered by or on behalf of the Company, or which became or will become
known by, or was or is conveyed to the Company, which has commercial value in
the Company's business. "Proprietary Information" includes, but is not limited
to, information about algorithms, trade secrets, computer programs, designs,
technology, ideas, know-how, processes, formulas, compositions, data,
techniques, improvements, inventions (whether patentable or not), works of
authorship, business and product development plans, the salaries and terms of
compensation of other employees, customers and other information concerning the
Company's actual or anticipated business, research or development, or which is
received in confidence by or for the Company from any other person. I
understand that my employment creates a relationship of confidence and trust
between the Company and me with respect to Proprietary Information.
2. I understand that the Company possesses or will possess "Company
Materials" that are important to its business. For purposes of this Agreement,
"Company Materials" are documents or other media or tangible items that contain
or embody Proprietary Information or any other information concerning the
business, operations or plans of the Company, whether such documents have been
prepared by others or by me. "Company Materials" include, but are not limited
to, blueprints, drawings, photographs, charts, graphs, notebooks, customer
lists, computer disks, tapes, CD-Roms or printouts, sound recordings and other
printed, typewritten or handwritten documents, as well as samples, prototypes,
models, products and the like.
3. In consideration of my employment by the Company and the compensation
received by me from the Company, I hereby agree as follows:
a. All Proprietary Information and all title, patents, patent
rights, copyrights, mask work rights, trade secret rights, and other
intellectual property and rights anywhere in the world (collectively "Rights")
in connection with Proprietary Information shall be the sole property of the
Company. I hereby assign to the Company any Rights I may have or acquire in
<PAGE>
such Proprietary Information. At all times, both during my employment by the
Company and after its termination, I will keep in confidence and trust and will
not use or disclose any Proprietary Information without the prior written
consent of an officer of the Company. Disclosure restrictions of this Agreement
shall not apply to any information that I can document is generally known to the
public through no fault of mine. Nothing contained herein will prohibit an
employee from disclosing to anyone the amount of his or her wages.
b. All Company Materials shall be the sole property of the Company.
I agree that during my employment by the Company, I will not deliver any Company
Materials to any person or entity outside the Company without appropriate
non-disclosure agreements approved in writing by the Company. I further agree
that, immediately upon the termination of my employment by the Company or by me
for any reason, or during my employment if so requested by the Company, I will
return all Company Materials, apparatus, equipment and other physical property,
and any reproduction of such property, excepting only (i) my personal copies of
records relating to my compensation; (ii) my personal copies of any materials
previously distributed generally to stockholders of the Company; and (iii) my
copy of this Agreement.
c. I will promptly disclose in writing to my immediate supervisor or
to any alternative person as designated by the Company all "Inventions" (which
term includes improvements, inventions, works of authorship, trade secrets,
technology, computer programs, formulas, compositions, ideas, designs,
processes, techniques, know-how and data, whether or not patentable, relating to
the Company, or to any technology, product or Proprietary Information of the
Company or which the Company is attempting to develop) made or conceived or
reduced to practice or developed by me, either alone or jointly with others,
during the term of my employment.
I will not disclose Inventions covered by Section 3.d to any person
outside the Company unless I am requested to do so by management personnel of
the Company.
d. I agree that all Inventions that I make, conceive, reduce to
practice or develop (in whole or in part, either alone or jointly with others)
during my employment shall be the sole property of the Company to the maximum
extent permitted under the laws of the State of Colorado and I hereby assign
such Inventions and all Rights therein to the Company. No assignment in this
Agreement shall extend to inventions, the assignment of which is prohibited
under the laws of the State of Colorado. The Company shall be the sole owner of
all Rights in connection therewith.
e. I agree to perform, during and after my employment, all acts
deemed necessary or desirable by the Company to permit and assist it, at the
Company's expense, in evidencing, perfecting, obtaining, maintaining, defending,
and enforcing Rights and/or my assignment with respect to such Inventions made
during my employment in any and all countries. Such acts may include, but are
not limited to, execution of documents and assistance or cooperation in legal
proceedings. I hereby irrevocably designate and appoint the Company and its
duly authorized officers and agents as my agents and attorneys-in-fact to act
for and in my behalf and instead of me, to execute and file any documents with
the same legal force and effect as if executed by me.
-2-
<PAGE>
f. Any assignment of a copyright relating to matters arising during
my employment with the Company includes all rights of paternity, integrity,
disclosure and withdrawal and any other rights that may be known as or referred
to as "moral rights" (collectively "Moral Rights"). To the extent such Moral
Rights cannot be assigned under applicable law and to the extent the following
is allowed by the laws in the various countries where Moral Rights exist, I
hereby waive such Moral Rights and consent to any action of the Company that
would violate such Moral Rights in the absence of such consent. I will confirm
any such waivers and consents from time to time as requested by the Company.
g. I have attached hereto a complete list of all existing Inventions
to which I claim ownership as of the date of this Agreement and that I desire to
specifically clarify are not subject to this Agreement, and I acknowledge and
agree that such list is complete. If no such list is attached to this
Agreement, I represent that I have no such Inventions at the time of signing
this Agreement.
h. During the term of my employment and for one (1) year thereafter,
I will not directly or indirectly encourage or solicit or inform or encourage
others to hire or solicit any employee or consultant of the Company to leave the
Company for any reason. However, this obligation shall not affect any
responsibility I may have as an employee of the Company with respect to the bona
fide hiring and firing of Company personnel.
i. I agree that during my employment with the Company I will not
engage in any employment, business, or activity that is in any way competitive
with the business or any proposed business of the Company, and I will not assist
any other person or organization in competing with the Company or in preparing
to engage in competition with the business or any proposed business of the
Company. The provisions of this paragraph shall apply both during normal
working hours and at all other times including, but not limited to, nights,
weekends and vacation time while I am employed by the Company.
j. I represent that my performance of all the terms of this
Agreement will not breach any agreement to keep in confidence proprietary
information acquired by me in confidence or in trust prior to my employment by
the Company. I have not entered into, and I agree I will not enter into, any
agreement either written or oral in conflict herewith or in conflict with my
employment with the Company.
4. I agree that this Agreement is not an employment contract and that I
have the right to resign and the Company has the right to terminate my
employment at any time, for any reason, with or without cause.
5. I agree that this Agreement does not purport to set forth all of the
terms and conditions of my employment.
6. I agree that my obligations under paragraphs 3.a through 3.f and
paragraph 3.h of this Agreement shall continue in effect after termination of my
employment, regardless of the reason or reasons for termination, and whether
such termination is voluntary or involuntary on
-3-
<PAGE>
my part, and that the Company is entitled to communicate my obligations under
this Agreement to any future employer or potential employer of mine.
7. I agree that any dispute in the meaning, effect or validity of this
Agreement shall be resolved in accordance with the laws of the State of Colorado
without regard to the conflict of laws provisions thereof. I further agree that
if one (1) or more provisions of this Agreement are held to be illegal or
unenforceable under applicable Colorado law, such illegal or unenforceable
portion(s) shall be limited or excluded from this Agreement to the minimum
extent required so that this Agreement shall otherwise remain in full force and
effect and enforceable in accordance with its terms.
8. This Agreement shall be effective on the date my employment commences
and shall be binding upon me, my heirs, executors, assigns, and administrators
and shall inure to the benefit of the Company, its subsidiaries, successors and
assigns.
9. This Agreement can only be modified by a subsequent written agreement
executed by the President of the Company.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-4-
<PAGE>
I HAVE READ THIS AGREEMENT CAREFULLY AND I UNDERSTAND AND ACCEPT THE
OBLIGATIONS THAT IT IMPOSES UPON ME WITHOUT RESERVATION. NO PROMISES OR
REPRESENTATIONS HAVE BEEN MADE TO ME TO INDUCE ME TO SIGN THIS AGREEMENT. I
SIGN THIS AGREEMENT VOLUNTARILY AND FREELY, IN DUPLICATE, WITH THE UNDERSTANDING
THAT ONE COUNTERPART WILL BE RETAINED BY THE COMPANY AND THE OTHER COUNTERPART
WILL BE RETAINED BY ME.
Dated: July 15 , 1997 /s/ James Greenberg
---------------- -- ----------------------------------------
Employee
James Greenberg
Accepted and Agreed to:
ACCELERATED CONNECTIONS, INC.
By: /s/ Catherine M. Hapka
-------------------------------
[COUNTERPART SIGNATURE PAGE TO EMPLOYEE PROPRIETARY
INFORMATION AND INVENTIONS AGREEMENT]
<PAGE>
ACCELERATED CONNECTIONS, INC.
COVENANT NOT TO COMPETE
In consideration of my employment as a manager, executive, or as an officer
or employee who constitutes professional staff to executive and management
personnel of Accelerated Connections, Inc. (the "Company"), the compensation
received by me from the Company, as well as the access the Company has granted
to me to use, review, and become familiar with the Company's business, including
certain valuable proprietary information and trade secrets (hereafter referred
to as "Proprietary Information," which is defined in detail in the Proprietary
Information and Inventions Agreement for Employees I have signed
contemporaneously with this Agreement, and which is incorporated herein by
reference), and other good and valuable consideration, the sufficiency of which
is hereby acknowledged by my signature below, I agree as follows:
1. For a period of two (2) years from the date of termination of employment
with the Company and during the term of my employment, I will not do the
following, directly or indirectly, on my own account or as an employee,
consultant, partner, owner, officer, director, or stockholder of any other
firm, partnership, or corporation:
a. Conduct, engage in, be connected with, have any interest in, or aid or
assist anyone else in engaging in, or contribute my knowledge to any
work or activity that involves a product, process, apparatus, service,
or development that is used by or in connection with an entity that
provides XDSL services;
b. Solicit, divert, take away, or interfere with any of the business
customers of the Company, which customers I acknowledge will be
developed by the Company and are valuable trade secrets of the
Company;
c. Interfere with the suppliers, manufacturers, distributors,
wholesalers, or other such companies with which the Company transacts
business.
2. Nothing in this Agreement shall prevent the Employee from owning shares of
stock of any corporation in competition with the Company if the stock of
the corporation is publicly traded on a nationally recognized stock
exchange.
3. At the sole discretion of the Company, I shall be permitted to engage in
such proposed work or activity set forth in Paragraph 1 of this Agreement,
and the Company shall furnish me a written consent to that effect signed by
an officer. If I shall have furnished to the Company clear and convincing
written evidence, including assurances from me and my new employer, that
the fulfillment of my duties in such proposed work or activity would not
likely cause me (and, in the case of Paragraph 1(c), any former employee or
consultant of the Company) to disclose, base judgments upon, or use any
Proprietary information of the Company, the Company may elect to waive the
terms of Paragraph 1.
<PAGE>
Notwithstanding such a waiver by the Company, I shall continue to be
obligated regarding Proprietary information and inventions Agreement for
employees.
4. I acknowledge:
a. The Company has expended and will continue to expend substantial time,
money, and effort in developing the Proprietary Information;
b. I will, in the course of my employment be personally entrusted with
and exposed to the Proprietary Information;
c. The Company, during the term of my employment and after its
termination, will be engaged in the highly competitive communications
industry;
d. The Company intends to provide products and services nationally and
internationally;
e. With the access I have had to the Proprietary Information of the
Company, I could become a competitor of the Company; and
f. The Company will suffer great loss and irreparable harm if I were to
terminate my employment with the Company and thereafter enter directly
or indirectly into competition with the Company within two (2) years
after termination of my employment.
5. I acknowledge that damages cannot reasonably compensate the Company in the
event I violate this Agreement and that it would be difficult to ascertain
the lost profits that would be suffered. In the event I breach this
Agreement, I consent to the Company seeking injunctive relief, without
notice to me, in order to prevent my continued violation of this Agreement.
The Company may also pursue any other remedies it may have against me for
damages. I waive, however, any claim for damages I may have for the
wrongful issuance of any such injunctive relief.
6. No waiver of any breach or violation of this Agreement shall be implied
from forbearance or failure by the Company to take action for that breach
or violation. A waiver by the Company of any breach or provision shall not
be construed as a waiver of any subsequent breach. The terms of this
Agreement are severable, and if any particular portion is determined to be
invalid or unenforceable, the balance of this Agreement shall be enforced
to the fullest extent permissible under law.
7. This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Colorado. The Company may seek to
enforce this Agreement in any court of competent jurisdiction, to which I
consent to personal jurisdiction. If the Company enforces this Agreement,
the Company will be entitled to recover from me its
2
<PAGE>
reasonable costs and attorneys' fees in seeking the enforcement.
8. No provision of this Agreement may be terminated, amended, supplemented,
waived, or modified other than in writing signed by both parties.
9. This Agreement, together with the Proprietary Information and Inventions
Agreement for Employees, represents the entire Agreement between the
parties with respect to the subject matter of this Agreement.
10. This Agreement shall be binding upon me, my heirs, executors, assigns, and
administrators and shall inure to the benefit of the Company, its
successors, and assigns.
Accelerated Connections, Inc.
By: /s/ Catherine M. Hapka
---------------------------------------------
Name: Catherine M. Hapka
- ------------------------- --------------------------------------------
Name: /s/ James Greenberg Its: President & CEO
------------------- ---------------------------------------------
James Greenberg
3
<PAGE>
August 22, 1997
Mr. Rand A. Kennedy
1030 Weathersfield Drive
Worthington, OH 43085
Re: Offer Letter
Dear Rand:
It gives me great pleasure as Chief Network Officer and authorized
representative of Accelerated Connections, Inc. (the "Company") to offer you
employment with the Company. This letter will serve to lay out the basic terms
of your employment. The effective date of your employment is August 25, 1997.
1. Position
You will be V.P. of Network Engineering at Accelerated Connections
Inc. You will report directly to me, and be expected to devote your
full-time efforts to these responsibilities.
2. Salary
Your annual base salary will be $132,000, paid twice per month. You
will be eligible for all Company employee benefits. Until these
benefits are available, the Company will reimburse you for Cobra
extension of your existing company health benefits.
<PAGE>
August 22, 1997
Mr. Rand Kennedy
Page 2
3. Bonus
You will be eligible for an annual bonus of up to 25% of your base
salary, payable upon achievement of milestones to be established by
me.
4. Stock
You will be granted options to purchase 96,274 shares of Common Stock
at an exercise price of $.10 per share. 25% of the options will vest
on the first anniversary of the date of your employment, and the
remaining 75% will vest thereafter on a monthly basis over the
succeeding 3 year period, for a total vesting period of 4 years.
5. Location
The Company headquarters will be located in Colorado. You will be
expected to relocate to Denver. The Company will reimburse you for up
to $50,000 of your actual and reasonable expenses in relocating to
Denver. Reimbursable expenses include but are not limited to all
costs associated with the sale of your current primary residence, all
moving costs, all costs associated with the purchase of a new primary
residence in Denver, temporary housing for a period not to exceed 90
days in the event that your primary residence is not sold within 30
days of start of employment, and income tax uplift. You will be
required to repay the Company for all payments
<PAGE>
August 22, 1997
Mr. Rand Kennedy
Page 3
and reimbursements related to your relocation to Denver if you resign
or are terminated "With Cause" (defined in paragraph 6 below) on or
before the first anniversary of your start date.
6. Involuntary Termination
In the event that your employment is terminated by the Company
"Without Cause" (defined below) within your first year of employment,
you will receive a severance payment equal to one year of your base
pay payable in twelve monthly installments beginning on the first day
of the calendar month immediately following your termination Without
Cause. A termination "With Cause" shall mean a termination for any of
the following reasons: (i) your failure to perform your duties (other
than due to accident, sickness or disability beyond your reasonable
control) after implementation of the written warning process as
defined below; (ii) engaging in misconduct such as theft, assault,
sexual harassment, etc.; (iii) being convicted of a felony; (iv)
committing an act of fraud against, or the misappropriation of
property belonging to, the Company; or (v) breach of any
confidentiality, proprietary information or non-competition agreement
between you and the Company. A termination for any other reason shall
be a termination "Without Cause." A termination "Without Cause" will
reduce the time period associated with the "Covenant Not To Compete"
from two years to one year. The written warning process will consist
of the following steps:
1. A written warning will be given to you by your supervisor
specifying the areas of non-performance.
<PAGE>
August 22, 1997
Mr. Rand Kennedy
Page 4
2. Your supervisor will identify a cure period you will have to
demonstrate your ability to perform all job duties for your
position.
3. If you do not fully perform your job duties after the cure period
you will be terminated "With Cause".
4. A re-occurrence of a non-performance of job duties that has been
documented in a previous written warning can constitute an
immediate termination "With Cause".
Employment with Accelerated Connections Inc. will not be for a specified
term and can be terminated by you or by the Company at any time for any reason,
with or without cause, and with or without notice. Any contrary representations
which may have been made or which may be made to you are/will be superseded by
this offer. The "at will" nature of your employment described in this offer
letter shall constitute the entire agreement between you and the Company
concerning the duration of your employment and the circumstances under which you
or the Company may terminate the employment relationship. Although your job
duties, title, compensation and benefits may change over time, the "at will"
term of your employment can only be changed in a writing which is signed by you
and by the President of the Company. If you accept this offer, the terms
described in this letter will be the terms of your employment. This offer is
contingent on you executing the Accelerated Connections Proprietary Information
and Inventions Agreement and Non-Competition Agreement, copies of which are
attached hereto and incorporated by reference. The terms of this letter and
your employment will be governed by the laws of the State of Colorado.
<PAGE>
August 22, 1997
Mr. Rand Kennedy
Page 5
In compliance with the Federal Immigration Reform Act, your employment pursuant
to this offer is contingent on your providing the legally required proof of your
identity and authorization to work in the United States.
Assuming this letter is acceptable to you, please sign a copy and return it
to me.
<PAGE>
August 22, 1997
Mr. Rand Kennedy
Page 6
I believe we all have an excellent opportunity to build a major next
generation communications company. I'm delighted that you've decided to join
our team, and I am looking forward to working with you.
Sincerely,
/s/ Jim Greenberg
Jim Greenberg
Accepted:
/s/ Rand Kennedy 8/22/97
- -------------------------------- ------------------------------
Rand Kennedy Date
<PAGE>
EMPLOYEE
PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
8/22 , 1997
RHYTHMS NetConnections Inc.
11440 West Bernardo Court
Suite 300
San Diego, CA 92131
The following confirms an agreement between RHYTHMS NetConnections Inc.,
a Delaware corporation (the "Company") and me, which is a material part of the
consideration for my employment by the Company:
1. I understand that the Company possesses and will possess Proprietary
Information that is important to its business. For purposes of this Agreement,
"Proprietary Information" is information that was or will be developed, created,
or discovered by or on behalf of the Company, or which became or will become
known by, or was or is conveyed to the Company, which has commercial value in
the Company's business. "Proprietary Information" includes, but is not limited
to, information about algorithms, trade secrets, computer programs, designs,
technology, ideas, know-how, processes, formulas, compositions, data,
techniques, improvements, inventions (whether patentable or not), works of
authorship, business and product development plans, the salaries and terms of
compensation of other employees, customers and other information concerning the
Company's actual or anticipated business, research or development, or which is
received in confidence by or for the Company from any other person. I
understand that my employment creates a relationship of confidence and
trust between the Company and me with respect to Proprietary Information.
2. I understand that the Company possesses or will possess "Company
Materials" that are important to its business. For purposes of this Agreement,
"Company Materials" are documents or other media or tangible items that contain
or embody Proprietary Information or any other information concerning the
business, operations or plans of the Company, whether such documents have been
prepared by others or by me. "Company Materials" include, but are not limited
to, blueprints, drawings, photographs, charts, graphs, notebooks, customer
lists, computer disks, tapes, CD-Roms or printouts, sound recordings and other
printed, typewritten or handwritten documents, as well as samples, prototypes,
models, products and the like.
3. In consideration of my employment by the Company and the
compensation received by me from the Company from time to time, I hereby agree
as follows:
<PAGE>
a. All Proprietary Information and all title, patents, patent
rights, copyrights, mask work rights, trade secret rights, and other
intellectual property and rights anywhere in the world (collectively "Rights")
in connection therewith shall be the sole property of the Company. I hereby
assign to the Company any Rights I may have or acquire in such Proprietary
Information. At all times, both during my employment by the Company and after
its termination, I will keep in confidence and trust and will not use or
disclose any Proprietary Information or anything relating to it without the
prior written consent of an officer of the Company. Disclosure restrictions of
this Agreement shall not apply to any information that I can document is
generally known to the public through no fault of mine. Nothing contained
herein will prohibit an employee from disclosing to anyone the amount of his or
her wages.
b. All Company Materials shall be the sole property of the Company.
I agree that during my employment by the Company, I will not deliver any Company
Materials to any person or entity outside the Company without appropriate
non-disclosure agreements approved in writing by the Company. I further agree
that, immediately upon the termination of my employment by the Company or by me
for any reason, or during my employment if so requested by the Company, I will
return all Company Materials, apparatus, equipment and other physical property,
and any reproduction of such property, excepting only (i) my personal copies of
records relating to my compensation; (ii) my personal copies of any materials
previously distributed generally to stockholders of the Company; and (iii) my
copy of this Agreement.
c. I will promptly disclose in writing to my immediate supervisor or
to any alternative person as designated by the Company all "Inventions" (which
term includes improvements, inventions, works of authorship, trade secrets,
technology, computer programs, formulas, compositions, ideas, designs,
processes, techniques, know-how and data, whether or not patentable) made or
conceived or reduced to practice or developed by me, either alone or jointly
with others, during the term of my employment. Upon receipt of a written
request from the Company, I will also disclose to the President of the Company
Inventions conceived, reduced to practice, or developed by me within six (6)
months of the termination of my employment with the Company; such disclosures
shall be received by the Company in confidence (to the extent they are not
assigned in Section 3.d below and do not extend the assignment made in Section
3.d below).
I will not disclose Inventions covered by Section 3.d to any person outside the
Company unless I am requested to do so by management personnel of the Company.
-2-
<PAGE>
d. I agree that all Inventions that I make, conceive, reduce to
practice or develop (in whole or in part, either alone or jointly with others)
during my employment shall be the sole property of the Company to the maximum
extent permitted under the laws of the State of Colorado and I hereby assign
such Inventions and all Rights therein to the Company. No assignment in this
Agreement shall extend to inventions, the assignment of which is prohibited
under the laws of the State of Colorado. The Company shall be the sole owner of
all Rights in connection therewith.
e. I agree to perform, during and after my employment, all acts
deemed necessary or desirable by the Company to permit and assist it, at the
Company's expense, in evidencing, perfecting, obtaining, maintaining, defending,
and enforcing Rights and/or my assignment with respect to such Inventions in any
and all countries. Such acts may include, but are not limited to, execution of
documents and assistance or cooperation in legal proceedings. I hereby
irrevocably designate and appoint the Company and its duly authorized officers
and agents as my agents and attorneys-in-fact to act for and in my behalf and
instead of me, to execute and file any documents and to do all other lawfully
permitted acts to further the above purposes with the same legal force and
effect as if executed by me.
f. Any assignment of a copyright hereunder includes all rights of
paternity, integrity, disclosure and withdrawal and any other rights that may be
known as or referred to as "moral rights" (collectively "Moral Rights"). To the
extent such Moral Rights cannot be assigned under applicable law and to the
extent the following is allowed by the laws in the various countries where Moral
Rights exist, I hereby waive such Moral Rights and consent to any action of the
Company that would violate such Moral Rights in the absence of such consent. I
will confirm any such waivers and consents from time to time as requested by the
Company.
g. I have attached hereto a complete list of all existing Inventions
to which I claim ownership as of the date of this Agreement and that I desire to
specifically clarify are not subject to this Agreement, and I acknowledge and
agree that such list is complete. If no such list is attached to this
Agreement, I represent that I have no such Inventions at the time of signing
this Agreement.
h. During the term of my employment and for one (1) year thereafter,
I will not directly or indirectly encourage or solicit or inform or encourage
others to hire or solicit any employee or consultant of the Company to leave the
Company for any reason. However, this obligation shall not affect any
responsibility I may have as an employee of the Company with respect to the bona
fide hiring and firing of Company personnel.
i. I agree that during my employment with the Company I will not
engage in any employment, business, or activity that is in any way competitive
with the business or any proposed business of the Company, and I will not assist
any other person or organization in competing with the Company or in preparing
to engage in competition with the business or any proposed business of the
Company. The provisions of this paragraph shall apply both during normal
working hours and at all other times
-3-
<PAGE>
including, but not limited to, nights, weekends and vacation time while I am
employed by the Company.
j. I represent that my performance of all the terms of this
Agreement will not breach any agreement to keep in confidence proprietary
information acquired by me in confidence or in trust prior to my employment by
the Company. I have not entered into, and I agree I will not enter into, any
agreement either written or oral in conflict herewith or in conflict with my
employment with the Company.
4. I agree that this Agreement is not an employment contract and that I
have the right to resign and the Company has the right to terminate my
employment at any time, for any reason, with or without cause.
5. I agree that this Agreement does not purport to set forth all of the
terms and conditions of my employment, and that as an employee of the Company I
have obligations to the Company that are not set forth in this Agreement.
6. I agree that my obligations under paragraphs 3.a through 3.f and
paragraph 3.h of this Agreement shall continue in effect after termination of my
employment, regardless of the reason or reasons for termination, and whether
such termination is voluntary or involuntary on my part, and that the Company is
entitled to communicate my obligations under this Agreement to any future
employer or potential employer of mine.
7. I agree that any dispute in the meaning, effect or validity of this
Agreement shall be resolved in accordance with the laws of the State of Colorado
without regard to the conflict of laws provisions thereof. I further agree that
if one (1) or more provisions of this Agreement are held to be illegal or
unenforceable under applicable Colorado law, such illegal or unenforceable
portion(s) shall be limited or excluded from this Agreement to the minimum
extent required so that this Agreement shall otherwise remain in full force and
effect and enforceable in accordance with its terms.
8. This Agreement shall be effective on the date my employment commences
and shall be binding upon me, my heirs, executors, assigns, and administrators
and shall inure to the benefit of the Company, its subsidiaries, successors and
assigns.
9. This Agreement can only be modified by a subsequent written agreement
executed by the President of the Company.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-4-
<PAGE>
I HAVE READ THIS AGREEMENT CAREFULLY AND I UNDERSTAND AND ACCEPT THE
OBLIGATIONS THAT IT IMPOSES UPON ME WITHOUT RESERVATION. NO PROMISES OR
REPRESENTATIONS HAVE BEEN MADE TO ME TO INDUCE ME TO SIGN THIS AGREEMENT. I
SIGN THIS AGREEMENT VOLUNTARILY AND FREELY, IN DUPLICATE, WITH THE UNDERSTANDING
THAT ONE COUNTERPART WILL BE RETAINED BY THE COMPANY AND THE OTHER COUNTERPART
WILL BE RETAINED BY ME.
Dated: Aug 22 , 1997 /s/ Rand Kennedy
---------------- -- ----------------------------------------
Employee
Accepted and Agreed to:
RHYTHMS NetConnections Inc.
By: /s/ Eric H. Geis
--------------------------
[COUNTERPART SIGNATURE PAGE TO EMPLOYEE PROPRIETARY
INFORMATION AND INVENTIONS AGREEMENT]
<PAGE>
ATTACHMENT A
RHYTHMS NetConnections Inc.
11440 West Bernardo Court
Suite 300
San Diego, CA 92131
Gentlemen:
1. The following is a complete list of Inventions relevant to the subject
matter of my employment by RHYTHMS NetConnections Inc. (the "Company") that have
been made or conceived or first reduced to practice by me alone or jointly with
others prior to my employment by the Company that I desire to clarify are not
subject to the Company's Proprietary Information and Inventions Agreement.
X No Inventions
- ------
See below:
- ------
Additional sheets attached
- -------
2. I propose to bring to my employment the following materials and
documents of a former employer:
X No materials or documents
- ------
See below:
- ------
/s/ Rand Kennedy
--------------------------------------------------
Employee
A-1
<PAGE>
RHYTHMS NetConnections Inc.
COVENANT NOT TO COMPETE
In consideration of my employment as a manager, executive, or as an officer
or employee who constitutes professional staff to executive and management
personnel of RHYTHMS NetConnections Inc. (the "Company"), the compensation
received by me from time to time from the Company, as well as the access the
Company has granted to me to use, review, and become familiar with the Company's
business, including certain valuable proprietary information and trade secrets
(hereafter referred to as "Proprietary Information," which is defined in detail
in the Proprietary Information and Inventions Agreement for Employees I have
signed contemporaneously with this Agreement, and which is incorporated herein
by reference), and other good and valuable consideration, the sufficiency of
which is hereby acknowledged by my signature below, I agree as
follows:
1. For a period of two (2) years from the date of termination of employment
with the Company and during the term of my employment, I will not do the
following, directly or indirectly, on my own account or as an employee,
consultant, partner, owner, officer, director, or stockholder of any other
firm, partnership, or corporation:
a. Conduct, engage in, be connected with, have any interest in, or aid or
assist anyone else in engaging in, or contribute my knowledge to any
work or activity that involves a product, process, apparatus, service,
or development that is used by or in connection with an XDSL service
provider;
b. Solicit, divert, take away, or interfere with any of the business
customers of the Company, which customers I acknowledge will be
developed by the Company and are valuable trade secrets of the
Company;
c. Interfere with the suppliers, manufacturers, distributors,
wholesalers, or other such companies with which the Company transacts
business.
2. Nothing in this Agreement shall prevent the Employee from owning shares of
stock of any corporation in competition with the Company if the stock of
the corporation is publicly traded on a nationally recognized stock
exchange.
3. At the sole discretion of the Company, I shall be permitted to engage in
such proposed work or activity set forth in Paragraph 1 of this Agreement,
and the Company shall furnish me a written consent to that effect signed by
an officer. If I shall have furnished to the Company clear and convincing
written evidence, including assurances from me and my new employer, that
the fulfillment of my
<PAGE>
duties in such proposed work or activity would not likely cause me (and, in
the case of Paragraph 1(c), any former employee or consultant of the
Company) to disclose, base judgments upon, or use any Proprietary
information of the Company, the Company may elect to waive the terms of
Paragraph 1. Notwithstanding such a waiver by the Company, I shall
continue to be obligated regarding Proprietary information and inventions
Agreement for employees.
4. I acknowledge:
a. The Company has expended and will continue to expend substantial time,
money, and effort in developing the Proprietary Information;
b. I will, in the course of my employment be personally entrusted with
and exposed to the Proprietary Information;
c. The Company, during the term of my employment and after its
termination, will be engaged in the highly competitive communications
industry;
d. The Company intends to provide products and services nationally and
internationally;
e. With the access I have had to the Proprietary Information of the
Company, I could become a competitor of the Company; and
f. The Company will suffer great loss and irreparable harm if I were to
terminate my employment with the Company and thereafter enter directly
or indirectly into competition with the Company within two (2) years
after termination of my employment.
5. I acknowledge that damages cannot reasonably compensate the Company in the
event I violate this Agreement and that it would be difficult to ascertain
the lost profits that would be suffered. In the event I breach this
Agreement, I consent to the Company seeking injunctive relief, without
notice to me, in order to prevent my continued violation of this Agreement.
The Company may also pursue any other remedies it may have against me for
damages. I waive, however, any claim for damages I may have for the
wrongful issuance of any such injunctive relief.
6. No waiver of any breach or violation of this Agreement shall be implied
from forbearance or failure by the Company to take action for that breach
or violation. A waiver by the Company of any breach or provision shall not
be construed as a waiver of any subsequent breach. The terms of this
Agreement are severable, and if any particular portion is determined to be
invalid or unenforceable, the balance of this Agreement shall be enforced
to the fullest extent permissible under law.
2
<PAGE>
7. This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Colorado. The Company may seek to
enforce this Agreement in any court of competent jurisdiction, to which I
consent to personal jurisdiction. If the Company enforces this Agreement,
the Company will be entitled to recover from me its reasonable costs and
attorneys' fees in seeking the enforcement.
8. No provision of this Agreement may be terminated, amended, supplemented,
waived, or modified other than in writing signed by both parties.
9. This Agreement, together with the Proprietary Information and Inventions
Agreement for Employees, represents the entire Agreement between the
parties with respect to the subject matter of this Agreement.
10. This Agreement shall be binding upon me, my heirs, executors, assigns, and
administrators and shall inure to the benefit of the Company, its
successors, and assigns.
RHYTHMS NetConnections Inc.
By: /s/ Eric H. Geis
----------------------------------------
/s/ Rand Kennedy Name: Eric H. Geis
- ------------------------------ ---------------------------------------
Name: Rand Kennedy Its: Executive VP
------------------------ ----------------------------------------
3
<PAGE>
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made and entered into this _____ day of April, 1998
between Rhythms NetConnection Inc., a Delaware corporation ("Corporation"), and
_____________________________ ("Director").
RECITALS:
A. Director, a member of the Board of Directors of Corporation,
performs a valuable service in such capacity for Corporation; and
B. The stockholders of Corporation have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors, agents
and employees of Corporation to the maximum extent authorized by Section 145 of
the Delaware General Corporation Law, as amended (the "Law"); and
C. The Bylaws and the Law, by their non-exclusive nature, permit
contracts between Corporation and the members of its Board of Directors with
respect to indemnification of such directors; and
D. In accordance with the authorization as provided by the Law,
Corporation may from time to time purchase and maintain a policy or policies of
Directors and Officers Liability Insurance ("D & O Insurance"), covering certain
liabilities which may be incurred by its directors and officers in the
performance of services as directors and officers of Corporation; and
E. As a result of developments affecting the terms, scope and
availability of D & O Insurance there exists general uncertainty as to the
extent and overall desirability of protection afforded members of the Board of
Directors by such D & O Insurance, if any, and by statutory and bylaw
indemnification provisions; and
F. In order to induce Director to continue to serve as a member of
the Board of Directors of Corporation, Corporation has determined and agreed to
enter into this contract with Director;
NOW, THEREFORE, in consideration of Director's continued service as a
director after the date hereof, the parties hereto agree as follows:
1. INDEMNITY OF DIRECTOR. Corporation hereby agrees to hold
harmless and indemnify Director to the fullest extent authorized or permitted by
the provisions of the Law, as may be amended from time to time.
2. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth
in Section 3 hereof, Corporation hereby further agrees to hold harmless and
indemnify Director:
<PAGE>
(a) against any and all expenses (including attorneys' fees), witness
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by Director in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (including an action by or in the right of Corporation) to which
Director is, was or at any time becomes a party, or is threatened to be made a
party, by reason of the fact that Director is, was or at any time becomes a
director, officer, employee or agent of Corporation, or is or was serving or at
any time serves at the request of Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise; and
(b) otherwise to the fullest extent as may be provided to Director by
Corporation under the non-exclusivity provisions of the Bylaws of Corporation
and the Law.
3. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to
Section 2 hereof shall be paid by Corporation:
(a) except to the extent the aggregate of losses to be indemnified
thereunder exceeds the sum of such losses for which the Director is indemnified
pursuant to Section 1 hereof or pursuant to any D & O Insurance purchased and
maintained by Corporation;
(b) in respect of remuneration paid to Director if it shall be
determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
(c) on account of any action, suit or proceeding in which judgment is
rendered against Director for an accounting of profits made from the purchase or
sale by Director of securities of Corporation pursuant to the provisions of
Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or
similar provisions of any federal, state or local statutory law;
(d) on account of Director's conduct which is finally adjudged to
have been knowingly fraudulent or deliberately dishonest, or to constitute
willful misconduct;
(e) on account of Director's conduct which is the subject of an
action, suit or proceeding described in Section 7(c)(ii) hereof;
(f) on account of or arising in response to any action, suit or
proceeding (other than an action, suit or proceeding referred to in Section 8(b)
hereof) initiated by Director or any of Director's affiliates against
Corporation or any officer, director or stockholder of Corporation unless such
action, suit or proceeding was authorized in the specific case by action of the
Board of Directors of Corporation;
(g) on account of any action, suit or proceeding to the extent that
Director is a plaintiff, a counter-complainant or a cross-complainant therein
(other than an action, suit or proceeding permitted by Section 3(f) hereof); or
(h) if a final decision by a Court having jurisdiction in the matter
shall determine that such indemnification is not lawful (and, in this respect,
both Corporation and Director have been advised that the Securities and Exchange
Commission believes that
<PAGE>
indemnification for liabilities arising under the federal securities laws is
against public policy and is, therefore, unenforceable and that claims for
indemnification should be submitted to appropriate courts for adjudication).
4. CONTRIBUTION. If the indemnification provided in Sections 1
and 2 is unavailable and may not be paid to Director for any reason other than
those set forth in paragraphs (b) through (g) of Section 3, then in respect of
any threatened, pending or completed action, suit or proceeding in which
Corporation is or is alleged to be jointly liable with Director (or would be if
joined in such action, suit or proceeding), Corporation shall contribute to the
amount of expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred and paid or payable by
Director in such proportion as is appropriate to reflect (i) the relative
benefits received by Corporation on the one hand and Director on the other hand
from the transaction from which such action, suit or proceeding arose, and (ii)
the relative fault of Corporation on the one hand and of Director on the other
hand in connection with the events which resulted in such expenses, judgments,
fines or settlement amounts, as well as any other relevant equitable
considerations. The relative fault of Corporation on the one hand and of
Director on the other shall be determined by reference to, among other things,
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent the circumstances resulting in such expenses, judgments,
fines or settlement amounts. Corporation agrees that it would not be just and
equitable if contribution pursuant to this Section 4 were determined by pro rata
allocation or any other method of allocation which does not take account of the
foregoing equitable considerations.
5. CONTINUATION OF OBLIGATIONS. All agreements and obligations of
Corporation contained herein shall continue during the period Director is a
director, officer, employee or agent of Corporation (or is or was serving at the
request of Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise) and shall continue thereafter so long as Director shall be subject
to any possible claim or threatened, pending or completed action, suit or
proceeding, whether civil, criminal or investigative, by reason of the fact that
Director was serving Corporation or such other entity in any capacity referred
to herein.
6. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30)
days after receipt by Director of notice of the commencement of any action, suit
or proceeding, Director will, if a claim in respect thereof is to be made
against Corporation under this Agreement, notify Corporation of the commencement
thereof; but the omission so to notify Corporation will not relieve it from any
liability which it may have to Director otherwise than under this Agreement.
With respect to any such action, suit or proceeding as to which Director
notifies Corporation of the commencement thereof:
(a) Corporation will be entitled to participate therein at its own
expense;
(b) except as otherwise provided below, to the extent that it may
wish, Corporation jointly with any other indemnifying party similarly notified
will be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Director. After notice from Corporation to Director of its
election to assume the defense thereof, Corporation will not be liable to
Director under this Agreement for any legal or other expenses subsequently
incurred by
<PAGE>
Director in connection with the defense thereof other than reasonable costs of
investigation or as otherwise provided below. Director shall have the right to
employ his own counsel in such action, suit or proceeding but the fees and
expenses of such counsel incurred after notice from Corporation of its
assumption of the defense thereof shall be at the expense of Director unless (i)
the employment of counsel by Director has been authorized by Corporation, (ii)
Director shall have reasonably concluded that there may be a conflict of
interest between Corporation and Director in the conduct of the defense of such
action or (iii) Corporation shall not in fact have employed counsel to assume
the defense of such action, in each of which cases the fees and expenses of
Director's separate counsel shall be at the expense of Corporation. Corporation
shall not be entitled to assume the defense of any action, suit or proceeding
brought by or on behalf of Corporation or as to which Director shall have made
the conclusion provided for in (ii) above; and
(c) Corporation shall not be liable to indemnify Director under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent. Corporation shall be permitted to settle any
action except that it shall not settle any action or claim in any manner which
would impose any penalty, out-of-pocket liability, or limitation on Director
without Director's written consent. Neither Corporation nor Director will
unreasonably withhold its or his consent to any proposed settlement.
7. ADVANCEMENT AND REPAYMENT OF EXPENSES.
(a) In the event that Director employs his own counsel pursuant to
Section 6(b)(i) through (iii) above, Corporation shall advance to Director,
prior to any final disposition of any threatened or pending action, suit or
proceeding, whether civil, criminal, administrative or investigative, any and
all reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding within ten (10)
days after receiving copies of invoices presented to Director for such expenses.
(b) Director agrees that Director will reimburse Corporation for all
reasonable expenses paid by Corporation in defending any civil or criminal
action, suit or proceeding against Director in the event and only to the extent
it shall be ultimately determined by a final judicial decision (from which there
is no right of appeal) that Director is not entitled, under the provisions of
the Law, the Bylaws, this Agreement or otherwise, to be indemnified by
Corporation for such expenses.
(c) Notwithstanding the foregoing, Corporation shall not be required
to advance such expenses to Director if Director (i) commences any action, suit
or proceeding as a plaintiff unless such advance is specifically approved by a
majority of the Board of Directors or (ii) is a party to an action, suit or
proceeding brought by Corporation and approved by a majority of the Board which
alleges willful misappropriation of corporate assets by Director, disclosure of
confidential information in violation of Director's fiduciary or contractual
obligations to Corporation, or any other willful and deliberate breach in bad
faith of Director's duty to Corporation or its shareholders.
<PAGE>
8. Enforcement.
(a) Corporation expressly confirms and agrees that it has entered
into this Agreement and assumed the obligations imposed on Corporation hereby in
order to induce Director to continue as a director of Corporation, and
acknowledges that Director is relying upon this Agreement in continuing in such
capacity.
(b) In the event Director is required to bring any action to enforce
rights or to collect moneys due under this Agreement and is successful in such
action, the Corporation shall reimburse Director for all Director's reasonable
fees and expenses (including attorneys' fees) in bringing and pursuing such
action.
9. SUBROGATION. In the event of payment under this agreement,
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Director, who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable
Corporation effectively to bring suit to enforce such rights.
10. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Director by
this Agreement shall not be exclusive of any other right which Director may
have or hereafter acquire under any statute, provision of Corporation's
Certificate of Incorporation or Bylaws, agreement, vote of stockholders or
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office.
11. SURVIVAL OF RIGHTS. The rights conferred on Director by this
Agreement shall continue after Director has ceased to be a director, officer,
employee or other agent of Corporation or such other entity.
12. SEPARABILITY. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any or
all of the provisions hereof shall be held to be invalid or unenforceable to any
extent for any reason, such invalidity or unenforceability shall not affect the
validity or enforceability of the other provisions hereof or the obligation of
the Corporation to indemnify the Director to the full extent provided by the
Bylaws or the Law, and the affected provision shall be construed and enforced so
as to effectuate the parties' intent to the maximum extent possible.
13. GOVERNING LAW. This Agreement shall be interpreted and enforced
in accordance with the internal laws of the State of Delaware.
14. BINDING EFFECT. This Agreement shall be binding upon Director
and upon Corporation, its successors and assigns, and shall inure to the benefit
of Director, his heirs, executors, administrators, personal representatives and
assigns and to the benefit of Corporation, its successors and assigns.
15. AMENDMENT AND TERMINATION. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless set
forth in a writing signed by both parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
DIRECTOR: RHYTHMS NETCONNECTIONS INC.
By:
- ------------------------------- ------------------------------------------
(Signature) (Signature)
- ------------------------------- ---------------------------------------------
Print Name Print Name and Title
<PAGE>
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made and entered into this _____ day of April, 1998
between Rhythms NetConnections Inc., a Delaware corporation ("Corporation"), and
______________________________ ("Officer").
RECITALS:
A. Officer, an officer (but not currently a member of the Board of
Directors) of Corporation, performs a valuable service in such capacity for
Corporation; and
B. The stockholders of Corporation have adopted Bylaws (the
"Bylaws") providing, for the indemnification of the officers, directors, agents
and employees of Corporation to the maximum extent authorized by Section 145 of
the Delaware General Corporation Law, as amended (the "Law"); and
C. The Bylaws and the Law, by their non-exclusive nature, permit
contracts between Corporation and its officers with respect to indemnification
of officers; and
D. In accordance with the authorization as provided by the Law,
Corporation may from time to time purchase and maintain a policy or policies of
Directors and Officers Liability Insurance ("D & O Insurance"), covering certain
liabilities which may be incurred by its directors and officers in the
performance of services as directors and officers of Corporation; and
E. As a result of developments affecting the terms, scope and
availability of D & O Insurance there exists general uncertainty as to the
extent and overall desirability of protection afforded officers by such D & O
Insurance, if any, and by statutory and bylaw indemnification provisions; and
F. In order to induce Officer to continue to serve as an officer of
Corporation, Corporation has determined and agreed to enter into this contract
with Officer;
NOW, THEREFORE, in consideration of Officer's continued service as an
officer after the date hereof, the parties hereto agree as follows:
1. INDEMNITY OF OFFICER. Corporation hereby agrees to hold harmless
and indemnify Officer to the fullest extent authorized or permitted by the
provisions of the Law, as it may be amended from time to time.
2. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth
in Section 3 hereof, Corporation hereby further agrees to hold harmless and
indemnify Officer:
(a) against any and all legal expenses (including attorneys' fees),
witness fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by Officer in connection with any threatened, pending or
completed action, suit or proceeding, whether civil,
<PAGE>
criminal, administrative or investigative (including an action by or in the
right of Corporation) to which Officer is, was or at any time becomes a party,
or is threatened to be made a party, by reason of the fact that Officer is, was
or at any time becomes a director, officer, employee or agent of Corporation, or
is or was serving or at any time serves at the request of Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise; and
(b) otherwise to the fullest extent as may be provided to Officer by
Corporation under the non-exclusivity provisions of the Bylaws of Corporation
and the Law.
3. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to
Section 2 hereof shall be paid by Corporation:
(a) except to the extent the aggregate of losses to be indemnified
thereunder exceeds the sum of such losses for which Officer is indemnified
pursuant to Section 1 hereof or pursuant to any D & O Insurance purchased and
maintained by Corporation;
(b) in respect of remuneration paid to Officer if it shall be
determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
(c) on account of any action, suit or proceeding in which judgment is
rendered against Officer for an accounting of profits made from the purchase or
sale by Officer of securities of Corporation pursuant to the provisions of
Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or
similar provisions of any federal, state or local statutory law;
(d) on account of Officer's conduct which is finally adjudged to have
been knowingly fraudulent or deliberately dishonest, or to constitute willful
misconduct;
(e) on account of Officer's conduct which is the subject of an
action, suit or proceeding described in Section 7(c)(ii) hereof;
(f) on account of or arising in response to any action, suit or
proceeding (other than an action, suit or proceeding referred to in Section 8(b)
hereof) initiated by Officer or any of Officer's affiliates against Corporation
or any officer, director or stockholder of Corporation unless such action, suit
or proceeding was authorized in the specific case by action of the Board of
Directors of Corporation;
(g) on account of any action, suit or proceeding to the extent that
Officer is a plaintiff, a counter-complainant or a cross-complainant therein
(other than an action, suit or proceeding permitted by Section 3(f) hereof); or
(h) if a final decision by a Court having jurisdiction in the matter
shall determine that such indemnification is not lawful (and, in this respect,
both Corporation and Officer have been advised that the Securities and Exchange
Commission believes that indemnification for liabilities arising under the
federal securities laws is against public policy and is, therefore,
unenforceable and that claims for indemnification should be submitted to
appropriate courts for adjudication).
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<PAGE>
4. CONTRIBUTION. If the indemnification provided in Sections 1 and
2 is unavailable and may not be paid to Officer for any reason other than those
set forth in paragraphs (b) through (g) of Section 3, then in respect of any
threatened, pending or completed action, suit or proceeding in which Corporation
is or is alleged to be jointly liable with Officer (or would be if joined in
such action, suit or proceeding), Corporation shall contribute to the amount of
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred and paid or payable by Officer in
such proportion as is appropriate to reflect (i) the relative benefits received
by Corporation on the one hand and Officer on the other hand from the
transaction from which such action, suit or proceeding arose, and (ii) the
relative fault of Corporation on the one hand and of Officer on the other hand
in connection with the events which resulted in such expenses, judgments, fines
or settlement amounts, as well as any other relevant equitable considerations.
The relative fault of Corporation on the one hand and of Officer on the other
hand shall be determined by reference to, among other things, the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent the circumstances resulting in such expenses, judgments, fines or
settlement amounts. Corporation agrees that it would not be just and equitable
if contribution pursuant to this Section 4 were determined by pro rata
allocation or any other method of allocation which does not take account of the
foregoing equitable considerations.
5. CONTINUATION OF OBLIGATIONS. All agreements and obligations of
Corporation contained herein shall continue during the period Officer is a
director, officer, employee or agent of Corporation (or is or was serving at the
request of Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise) and shall continue thereafter so long as Officer shall be subject to
any possible claim or threatened, pending or completed action, suit or
proceeding, whether civil, criminal or investigative, by reason of the fact that
Officer was serving Corporation or such other entity in any capacity referred to
herein.
6. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30)
days after receipt by Officer of notice of the commencement of any action, suit
or proceeding, Officer will, if a claim in respect thereof is to be made against
Corporation under this Agreement, notify Corporation of the commencement
thereof; but the omission so to notify Corporation will not relieve it from any
liability which it may have to Officer otherwise than under this Agreement.
With respect to any such action, suit or proceeding as to which Officer notifies
Corporation of the commencement thereof:
(a) Corporation will be entitled to participate therein at its own
expense;
(b) except as otherwise provided below, to the extent that it may
wish, Corporation jointly with any other indemnifying party similarly notified
will be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Officer. After notice from Corporation to Officer of its
election to assume the defense thereof, Corporation will not be liable to
Officer under this Agreement for any legal or other expenses subsequently
incurred by Officer in connection with the defense thereof other than reasonable
costs of investigation or as otherwise provided below. Officer shall have the
right to employ his or her own counsel in such action, suit or proceeding but
the fees and expenses of such counsel incurred after notice from Corporation of
its assumption of the defense thereof shall be at the expense of Officer unless
(i)
-3-
<PAGE>
the employment of counsel by Officer has been authorized by Corporation, (ii)
Officer shall have reasonably concluded that there may be a conflict of interest
between Corporation and Officer in the conduct of the defense of such action or
(iii) Corporation shall not in fact have employed counsel to assume the defense
of such action, in each of which cases the fees and expenses of Officer's
separate counsel shall be at the expense of Corporation. Corporation shall not
be entitled to assume the defense of any action, suit or proceeding brought by
or on behalf of Corporation or as to which Officer shall have made the
conclusion provided for in (ii) above; and
(c) Corporation shall not be liable to indemnify Officer under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent. Corporation shall be permitted to settle any
action except that it shall not settle any action or claim in any manner which
would impose any penalty, out-of-pocket liability, or limitation on Officer
without Officer's written consent. Neither Corporation nor Officer will
unreasonably withhold its or his or her consent to any proposed settlement.
7. ADVANCEMENT AND REPAYMENT OF EXPENSES.
(a) In the event that Officer employs his or her own counsel pursuant
to Section 6(b)(i) through (iii) above, Corporation shall advance to Officer,
prior to any final disposition of any threatened or pending action, suit or
proceeding, whether civil, criminal, administrative or investigative, any and
all reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding within ten (10)
days after receiving copies of invoices presented to Officer for such expenses.
(b) Officer agrees that Officer will reimburse Corporation for all
reasonable expenses paid by Corporation in defending any civil or criminal
action, suit or proceeding against Officer in the event and only to the extent
it shall be ultimately determined by a final judicial decision (from which there
is no right of appeal) that Officer is not entitled, under the provisions of the
Law, the Bylaws, this Agreement or otherwise, to be indemnified by Corporation
for such expenses.
(c) Notwithstanding the foregoing, Corporation shall not be required
to advance such expenses to Officer if Officer (i) commences any action, suit or
proceeding as a plaintiff unless such advance is specifically approved by a
majority of the Board of Directors or (ii) is a party to an action, suit or
proceeding brought by Corporation and approved by a majority of the Board which
alleges willful misappropriation of corporate assets by Officer, disclosure of
confidential information in violation of Officer's fiduciary or contractual
obligations to Corporation, or any other willful and deliberate breach in bad
faith of Officer's duty to Corporation or its shareholders.
8. ENFORCEMENT.
(a) Corporation expressly confirms and agrees that it has entered
into this Agreement and assumed the obligations imposed on Corporation hereby in
order to induce Officer to continue as an officer of Corporation, and
acknowledges that Officer is relying upon this Agreement in continuing in such
capacity.
-4-
<PAGE>
(b) In the event Officer is required to bring any action to enforce
rights or to collect moneys due under this Agreement and is successful in such
action, Corporation shall reimburse Officer for all of Officer's reasonable fees
and expenses (including attorneys' fees) in bringing and pursuing such action.
9. SUBROGATION. In the event of payment under this agreement,
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Officer, who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable
Corporation effectively to bring suit to enforce such rights.
10. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Officer by
this Agreement shall not be exclusive of any other right which Officer may have
or hereafter acquire under any statute, provision of Corporation's Certificate
of Incorporation or Bylaws, agreement, vote of stockholders or directors, or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding office.
11. SURVIVAL OF RIGHTS. The rights conferred on Officer by this
Agreement shall continue after Officer has ceased to be a director, officer,
employee or other agent of Corporation or such other entity.
12. SEPARABILITY. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any or
all of the provisions hereof shall be held to be invalid or unenforceable to any
extent for any reason, such invalidity or unenforceability shall not affect the
validity or enforceability of the other provisions hereof or the obligation of
Corporation to indemnify Officer to the full extent provided by the Bylaws or
the Law, and the affected provision shall be construed and enforced so as to
effectuate the parties' intent to the maximum extent possible.
13. GOVERNING LAW. This Agreement shall be interpreted and enforced
in accordance with the internal laws of the State of Delaware.
14. BINDING EFFECT. This Agreement shall be binding upon Officer and
upon Corporation, its successors and assigns, and shall inure to the benefit of
Officer, his or her heirs, executors, administrators, personal representatives
and assigns and to the benefit of Corporation, its successors and assigns.
15. AMENDMENT AND TERMINATION. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless set
forth in a writing signed by both parties hereto.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
OFFICER: RHYTHMS NETCONNECTIONS INC.
By:
- ------------------------------ -------------------------------------
(Signature) (Signature)
- ------------------------------ ----------------------------------------
Print Name Print Name and Title
[SIGNATURE PAGE TO INDEMNIFICATION AGREEMENT]
<PAGE>
SILICON VALLEY BANK
QUICKSTART LOAN AND SECURITY AGREEMENT
Borrower: Rhythms NetConections Inc. Address: 11440 West Bernardo Court,
Suite 300
Date: October 29, 1997 San Diego, California 92127
SILICON'S OFFER TO EXTEND FINANCING ON THE TERMS SET FORTH HEREIN SHALL EXPIRE
IF THIS AGREEMENT
IS NOT EXECUTED BY BORROWER AND RETURNED TO SILICON WITHIN 30 DAYS OF THE ABOVE
DATE.
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK ("Silicon"), whose address is 3003 Tasman Drive, Santa
Clara, California 95054 and the borrower named above (jointly and severally, the
"Borrower"), whose chief executive office is located at the above address
("Borrower's Address").
1. LOANS. Silicon will make loans to Borrower (the "Loans") in amounts
determined by Silicon in its reasonable business judgment up to the amount (the
"Credit Limit") shown on the Schedule to this Agreement (the "Schedule"),
provided no Event of Default and no event which, with notice or passage of time
or both, would constitute an Event of Default has occurred. All Loans and other
monetary Obligations will bear interest at the rate shown on the Schedule.
Interest will be payable monthly, on the date shown on the monthly billing from
Silicon. Silicon may, in its discretion, charge interest to Borrower's deposit
accounts maintained with Silicon.
2. SECURITY INTEREST. As security for all present and future indebtedness,
guarantees, liabilities, and other obligations, of Borrower to Silicon
(collectively, the "Obligations"), Borrower hereby grants Silicon a continuing
security interest in all of Borrower's interest in the following types of
property, whether now owned or hereafter acquired, and wherever located
(collectively, the "Collateral"): All "accounts," "general intangibles,"
"contract rights," "chattel paper," "documents," "letters of credit,"
"instruments," "deposit accounts," "inventory," "farm products," investment
property," "fixtures" and "equipment," as such terms are defined in Division 9
of the California Uniform Commercial Code in effect on the date hereof, and all
products, proceeds and insurance proceeds of the foregoing.
3. REPRESENTATIONS AND AGREEMENTS OF BORROWER. Borrower represents to Silicon
as follows, and Borrower agrees that the following representations will continue
to be true, and that Borrower will comply with all of the following agreements
throughout the term of this Agreement:
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and
will continue to be, duly authorized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation. The execution,
delivery and performance by Borrower of this Agreement, and all other documents
contemplated hereby have been duly and validly authorized, and do not violate
any law or any provision of, and are not grounds for acceleration under, any
agreement or instrument which is binding upon Borrower.
3.2 NAME; PLACES OF BUSINESS. The name of Borrower set forth in this
Agreement is its correct name. Borrower shall give Silicon 15 days' prior
written notice before changing its name. The address set forth in the
heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the
locations set forth on the Schedule. Borrower will give Silicon at least 15
days prior written notice before changing its chief executive office or
locating the Collateral at any other location.
3.3 COLLATERAL. Silicon has and will at all times continue to have a
first-priority perfected security interest in all of the Collateral other than
specific equipment. Borrower will immediately advise Silicon in writing of any
material loss or damage to the Collateral.
3.4 FINANCIAL CONDITION AND STATEMENTS. All financial statements now or
in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles. Since the last date
covered by any such statement, there has been no material adverse change in the
financial condition or business of Borrower. Borrower will provide Silicon:
(i) within 30 days after the end of each month, a monthly financial statement
prepared by Borrower, and such other information as Silicon shall reasonably
request; (ii) within 120 days following the end of Borrower's fiscal year,
complete annual financial statements, certified by independent certified public
accountants acceptable to Silicon and accompanied by the unqualified report
thereon by said independent certified public accountants; and (iii) other
financial information reasonably requested by Silicon from time to time.
3.5 TAXES; COMPLIANCE WITH LAW. Borrower has filed, and will file, when
due, all tax returns and reports required by applicable law, and Borrower has
paid, and will pay, when due, all taxes, assessments, deposits and contributions
now or in the future owed by Borrower. Borrower has complied, and will comply,
in all material respects, with all applicable laws, rules and regulations.
3.6 INSURANCE. Borrower shall at all times insure all of the tangible
personal property Collateral and carry such other business insurance as is
customary in Borrower's industry.
3.7 ACCESS TO COLLATERAL AND BOOKS AND RECORDS. At reasonable times, on
one business day notice, Silicon, or its
-1-
<PAGE>
SILICON VALLEY BANK QUICKSTART LOAN AND SECURITY AGREEMENT
agents, shall have the right to inspect the Collateral, and the right to audit
and copy Borrower's books and records.
3.8 OPERATING ACCOUNTS. Borrower shall maintain its primary operating
accounts with Bank.
3.9 ADDITIONAL AGREEMENTS. Borrower shall not, without Silicon's prior
written consent, do any of the following: (i) enter into any transaction
outside the ordinary course of business except for the sale of capital stock to
venture investors, provided that Borrower promptly delivers written notification
to Silicon of any such sale; (ii) sell or transfer any Collateral, except in the
ordinary course of business; (iii) pay or declare any dividends on Borrower's
stock (except for dividends payable solely in stock of Borrower); or (iv)
redeem, retire, purchase or otherwise acquire, directly or indirectly, any of
Borrower's stock other than the repurchase of up to five percent (5%) of
Borrower's then issued stock in any fiscal year from Borrower's employees or
directors pursuant to written agreement with Borrower.
4. TERM. This Agreement shall continue in effect until the maturity date set
forth on the Schedule (the "Maturity Date"). This Agreement may be terminated,
without penalty, prior to the Maturity Date as follows: (i) by Borrower,
effective three business days after written notice of termination is given to
Silicon; or (ii) by Silicon at any time after the occurrence of an Event of
Default, without notice, effective immediately. On the Maturity Date or on any
earlier effective date of termination, Borrower shall pay all Obligations in
full, whether or not such Obligations are otherwise then due and payable. No
termination shall in any way affect or impair any security interest or other
right or remedy of Silicon, nor shall any such termination relieve Borrower of
any Obligation to Silicon, until all of the Obligations have been paid and
performed in full.
5. EVENTS OF DEFAULT AND REMEDIES. The occurrence of any of the following
events shall constitute an "Event of Default" under this Agreement: (a) Any
representation, statement, report or certificate given to Silicon by Borrower or
any of its officers, employees or agents, now or in the future, is untrue or
misleading in a material respect; or (b) Borrower fails to pay when due any Loan
or any interest thereon or any other monetary Obligation; or (c) the total
Obligations outstanding at any time exceed the Credit Limit; or (d) Borrower
fails to perform any other non-monetary Obligation, which failure is not cured
within 5 business days after the date due; or (e) Dissolution, termination of
existence, insolvency or business failure of Borrower; or appointment of a
receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by or against Borrower under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect; or (f) a material
adverse change in the business, operations, or financial or other condition of
Borrower. If an Event of Default occurs, Silicon, shall have the right to
accelerate and declare all of the Obligations to be immediately due and payable,
increase the interest rate by an additional four percent per annum, and
exercise all rights and remedies accorded it by applicable law.
6. GENERAL. If any provision of this Agreement is held to be unenforceable,
the remainder of this Agreement shall still continue in full force and effect.
This Agreement and any other written agreements, documents and instruments
executed in connection herewith are the complete agreement between Borrower and
Silicon and supersede all prior and contemporaneous negotiations and oral
representations and agreements, all of which are merged and integrated in this
Agreement. There are no oral understandings, representations or agreements
between the parties which are not in this Agreement or in other written
agreements signed by the parties in connection this Agreement. The failure of
Silicon at any time to require Borrower to comply strictly with any of the
provisions of this Agreement shall not waive Silicon's right later to demand and
receive strict compliance. Any waiver of a default shall not waive any other
default. None of the provisions of this Agreement may be waived except by a
specific written waiver signed by an officer of Silicon and delivered to
Borrower. The provisions of this Agreement may not be amended, except in a
writing signed by Borrower and Silicon. Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all other reasonable costs incurred by Silicon,
in connection with this Agreement (whether or not a lawsuit is filed). If
Silicon or Borrower files any lawsuit against the other predicated on a breach
of this Agreement, the prevailing party shall be entitled to recover its
reasonable costs and attorneys' fees from the non-prevailing party. Borrower may
not assign any rights under this Agreement without Silicon's prior written
consent. This Agreement shall be governed by the laws of the State of
California.
7. MUTUAL WAIVER OF JULY TRIAL. BORROWER AND SILICON EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY CONDUCT, ACT OR OMISSION OF
SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS,
ATTORNEYS OR AFFILIATES;
Borrower:
Rhythms Netconnections Inc.
----------------------------------------------------------------------
By /s/ Eric H. Geis
--------------------------------------------------------------------
President or Vice President
Silicon:
SILICON VALLEY BANK
By /s/ John W. Otterson
--------------------------------------------------------------------
Title Senior Vice President
-----------------------------------------------------------------
-2-
<PAGE>
SILICON VALLEY BANK
SCHEDULE TO
QUICKSTART LOAN AND SECURITY AGREEMENT (MASTER)
BORROWER: Rhythms NetConections Inc.
------------------------------
DATE: October 29, 1997
------------------------------
This Schedule is an integral part of the Loan and Security Agreement
between Silicon Valley Bank ("Silicon") and the above-named borrower
("Borrower") of even date.
CREDIT LIMIT (AGGREGATE)
(Section 1): $1,000,000 (includes, without limitation,
Equipment Advances and the Merchant Services and
Business Visa Reserve, if any)
INTEREST RATE (Section l): A rate equal to the "Prime Rate" in effect from
time to time, plus 0.25% per annum. Interest shall
be calculated on the basis of a 360-day year for
the actual number of days elapsed. "Prime Rate"
means the rate announced from time to time by
Silicon as its "prime rate;" it is a base rate
upon which other rates charged by Silicon are
based, and it is not necessarily the best rate
available at Silicon. The interest rate applicable
to the Obligations shall change on each date there
is a change in the Prime Rate.
MATURITY DATE (Section 4): April 29, 1999
-------------------------
OTHER LOCATIONS AND ADDRESSES
(Section 3.2):
-------------------------
OTHER AGREEMENTS: Borrower also agrees as follows:
1. LOAN FEE. Borrower shall concurrently pay
Silicon a non-refundable Loan Fee in the amount of
$2,500.00
2. BANKING RELATIONSHIP. Borrower shall at all
times maintain its primary banking relationship
with Silicon.
BORROWER: SILICON:
Rhythms NetConnections Inc. SILICON VALLEY BANK
- -----------------------------------
By /s/ Eric H. Geis By /s/ John W. Otterson
--------------------------------- ----------------------------
PRESIDENT OF VICE PRESIDENT Title Senior Vice President
-------------------------
<PAGE>
SILICON VALLEY BANK
SCHEDULE TO
QUICKSTART LOAN AND SECURITY AGREEMENT (EQUIPMENT ADVANCES)
BORROWER: Rhythms NetConections Inc.
------------------------------
DATE: October 29, 1997
------------------------------
This Schedule is an integral part of the Loan and Security Agreement
between Silicon Valley Bank ("Silicon") and the above-named borrower
("Borrower") of even date.
CREDIT LIMIT (EQUIPMENT)
(Section 1): $ 1,000,000 (such amount to be funded under the
aggregate Credit Limit). Equipment Advances will
be made only on or prior to 4/29/98 (the "Last
Advance Date") and only for the purpose of
purchasing equipment reasonably acceptable to
Silicon. Borrower must provide invoices for the
equipment to Silicon on or before the Last Advance
Date.
INTEREST RATE (Section 1): A rate equal to the "Prime Rate" in effect from
time to time, plus .25% per annum. Interest shall
be calculated on the basis of a 360-day year for
the actual number of days elapsed. "Prime Rate"
means the rate announced from time to time by
Silicon as its "prime rate;" it is a base rate
upon which other rates charged by Silicon are
based, and it is not necessarily the best rate
available at Silicon. The interest rate applicable
to the Obligations shall change on each date there
is a change in the Prime Rate.
MATURITY DATE (Section 4): After the Last Advance Date, the unpaid principal
balance of the Equipment Advances shall be repaid
in 36 equal monthly installments of principal,
plus interest, commencing on 5/29/98 and
continuing on the same day of each month
thereafter until the entire unpaid principal
balance of the Equipment Advances and all accrued
unpaid interest have been paid (subject to
Silicon's right to accelerate the Equipment
Advances on an Event of Default).
BORROWER: SILICON:
Rhythms NetConnections Inc. SILICON VALLEY BANK
- -----------------------------------
BY /s/ Eric H. Geis BY /s/ John W. Otterson
--------------------------------- ----------------------------
PRESIDENT OR VICE PRESIDENT TITLE Senior Vice President
-------------------------
<PAGE>
SILICON VALLEY BANK
PRO FORMA INVOICE FOR LOAN CHARGES
BORROWER: Rhythms NetConnections Inc.
------------------------------
ACCOUNT OFFICER: John Otterson
------------------------------
DATE: October 29, 1997 , 1997
--------------------
Loan Fee $ 2,500.00*
---------
FEES DUE $ 2,500.00
-------- ---------
---------
*Loan fee inclusive of UCC search and filing fees
Please indicate the method of payment:
{ } A check for the total amount is attached.
{X} Debit DDA # 3300060771 for the total amount.
--------------
{ } Loan proceeds
/s/ Eric H. Geis 11/3/97
-----------------------------------
Authorized Signer (Date)
/s/ John W. Otterson 11/4/97
-----------------------------------
Silicon Valley Bank (Date)
Account Officer's Signature
<PAGE>
SUN FINANCIAL GROUP, INC.
MASTER LEASE AGREEMENT
NO. 1642
--------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Master Lease Agreement ("Lease Agreement") is made as of the 19th day of
November , 1997, between SUN FINANCIAL GROUP, INC of 2502 N. Rocky Point Drive,
Suite 375 Tampa, FL 33607 (the "Lessor") and RHYTHMS NETCONNECTIONS INC having
Its principal offices at 7337 South Revere Parkway, Suite 100 Englewood, CO
80112 (the "Lessee").
TERMS AND CONDITIONS
1. DEFINITIONS.
"Lease Order" shall refer to that document wherein Lessor agrees to lease
to Lessee and Lessee agrees to lease from Lessor certain Equipment. Each Lease
Order shall be signed and submitted by Lessee to Lessor and, when so submitted,
shall constitute a firm irrevocable offer by Lessee to lease the Equipment
identified on the Lease Order subject to the terms of the Lease Order and this
Lease Agreement which, if accepted by Lessor by signing and returning to Lessee
one copy of the same within thirty (30) days of the date of the Lease Order
shall be deemed a duly executed and in force Lease Order.
"Initial Term" shall mean the period beginning on the Commencement Date and
continuing for the number of months set forth in each Lease Order.
"Equipment" shall mean the equipment identified in a duly executed and in
force Lease Order and all related replacements, parts, additions, software,
accessories, alterations and repairs incorporated therein or affixed thereto,
together with any Items included on the related Lease Order including, but not
limited to, training, maintenance, license agreements, etc.
"Software" shall mean a computer program in any data, program description,
media or supporting documentation provided by a licensor as part of the
transaction.
"Delivery and Acceptance Date" shall mean the date that the Equipment
listed on the related Lease Order is accepted at Lessee's premises, such date
being specified in the related Delivery and Acceptance Receipt. Unless
expressly agreed otherwise by the parties or Lessee notifies Lessor in writing
that the Equipment has been rejected, the Equipment must be accepted within
seven (7) days after the delivery date, and if not accepted by such time the
Delivery and Acceptance Date shall be deemed to be seven (7) days after the
delivery date.
"Commencement Date" means, as to the Equipment designated on any Lease
Order, where the Delivery and Acceptance Date for such Equipment falls on the
first day of the month, that date or, in any other case, the first day of the
month or calendar quarter if so provided in the Lease Order following the
Delivery and Acceptance Date, unless otherwise agreed by the parties.
"Progress Payment Rider" shall refer to that document wherein the seller of
the Equipment requires payment prior to the commencement of a Lease Order and
Lessee agrees to make payments prior to the commencement of a Lease Order.
2. NET LEASE.
THIS LEASE AGREEMENT TOGETHER WITH EACH LEASE ORDER CONSTITUTES A NET LEASE
AND LESSEE'S AGREEMENT TO PAY RENT AND ANY OTHER OBLIGATIONS HEREUNDER AND UNDER
ANY APPLICABLE LEASE ORDERS SHALL BE ABSOLUTE AND UNCONDITIONAL AND SHALL NOT BE
SUBJECT TO ANY ABATEMENT, REDUCTION, SET-OFF, DEFENSE, COUNTERCLAIM,
INTERRUPTION, DEFERMENT OR RECOUPMENT FOR ANY REASON WHATSOEVER. Lessor and
Lessee will enter into one or more Lease Orders pursuant to this Lease
Agreement. Subject to the terms and conditions of this Lease Agreement and a
duly executed and in force Lease Order, Lessor agrees to lease to Lessee and
Lessee agrees to lease from Lessor the Equipment described in each Lease Order.
This Lease Agreement is a master lease and the terms and conditions of this
Lease Agreement shall be incorporated into and be a part of each Lease Order.
Each Lease Order shall be treated as a separate lease with respect to the
Equipment covered by such Lease Order. In the event of any conflict between the
language of this Lease Agreement and any Lease Order entered into pursuant
hereto, the language of the Lease Order shall prevail with respect to that Lease
Order and the Equipment covered thereby. NO EQUIPMENT SHALL BE DEEMED LEASED
HEREUNDER UNLESS IT IS THE SUBJECT OF A DULY EXECUTED AND IN FORCE LEASE ORDER.
3. TERM.
The term of this Lease Agreement shall commence on the date set forth above
and shall continue in effect for the Initial Term of any Lease Order and any
extended term as provided herein.
The term of each lease as to any items of Equipment designated on any Lease
Order shall commence on the Delivery and Acceptance Date for such Equipment, and
shall continue for the Initial Term and any extended term provided herein.
(CONTINUED ON THE FOLLOWING 3 PAGES)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IN WITNESS WHEREOF, the parties have executed this Lease Agreement effective as
of the date first above written.
LESSOR: SUN FINANCIAL GROUP, INC. LESSEE: RHYTHMS NETCONNECTIONS INC.
Signature: /s/ Bryan A. Whitmire Signature: /s/ Joseph R. D'Angelo
-------------------------- ------------------------------
By: Bryan A. Whitmire By: Joseph R. D'Angelo
--------------------------------- -------------------------------------
Title: Vice President Marketing Title: Vice President & General Manager
------------------------------ ----------------------------------
Date: January 15, 1998 Date: 31 December 1997
------------------------------- -----------------------------------
1 of 4
<PAGE>
4. RENTAL. Rental shall begin to accrue on the Delivery and Acceptance Date
and Lessee shall pay to Lessor, as rental for the Equipment during the Initial
Term, the rent set forth in the respective Lease Order, which shall be due and
payable in advance on the first day of each calendar month or quarter as
specified in the Lease Order during such Initial Term plus any extended term
(each date being hereinafter called a "Rent Payment Date"), unless modified by a
Progress Payment Rider. If the Delivery and Acceptance Date of any Equipment
shall be other than the first day of the month, Lessee shall make an initial
payment based on the Delivery and Acceptance Date in an amount equal to the
fraction of the rent as specified in the related Lease Order for each day from
the Delivery and Acceptance Date to (but not including) the Commencement Date.
Rent shall be paid to Lessor at the address set forth above or at such other
place as Lessor shall designate in writing, or if to an Assignee of Lessor, at
such place as such Assignee shall designate in writing, and shall be paid free
and clear of all claims, demands or setoffs against Lessor or such Assignee.
Whenever any payment by Lessee (of rent or otherwise) is past due hereunder for
more than seven (7) days, Lessee shall pay to Lessor, as additional rent,
interest on such amount until and including the date of payment, at the lesser
of 1.5% per month or the maximum allowable rate of interest permitted by law.
5. TAXES. Lessee covenants to promptly report, file, pay and indemnify and
hold Lessor harmless with respect to any and all Taxes, as hereinafter defined.
The term "Taxes" as used herein shall mean all taxes (including sales, use,
excise, personal property, ad valorem, stamp, documentary and other taxes), and
all other governmental fees, charges and assessments (general or special) due,
assessed or levied by any foreign, federal, state, county or local government or
taxing authority, and any penalties, fines or interest thereon, which are
imposed against, upon or relating to the Equipment or the use, registration,
rental, shipment, transportation, delivery, ownership or operation thereof, and
on or relating to the lease thereof including the rentals or receipts due under
this Lease Agreement, but shall not include any taxes solely based upon or
measured by the income of Lessor. Lessee will, upon request by Lessor, submit
to Lessor written evidence of Lessee's payment of all Taxes due hereunder. Any
tax returns filed by Lessee shall show Lessor as the owner of the Equipment.
6. INSTALLATION, USE, MAINTENANCE AND INSPECTION OF EQUIPMENT.
(a) Lessee shall pay all installation, transportation, rigging, unpacking
and repacking, drayage, handling and insurance charges on the Equipment upon
delivery to Lessee and upon redelivery to Lessor upon the expiration or earlier
termination of the Initial Term or any extension thereof, to such destination as
is specified by Lessor within the continental United States of America ("Return
Location"). Lessee shall furnish appropriate Installation facilities for the
Equipment. Lessee represents and warrants that: (i) it has selected all
Equipment based on its own judgment and expressly disclaims any reliance upon
statements made by Lessor, and (ii) as of the Delivery and Acceptance Date, as
between Lessee and Lessor, Lessee shall have unconditionally accepted such
Equipment. Lessee shall execute and deliver to Lessor a Delivery and Acceptance
Receipt which shall be conclusive evidence that, without limitation, Lessee
finds the Equipment complete, in good working order and condition and
satisfactory for its requirements.
(b) Lessee shall comply with all laws, regulations and orders of any
governmental branch or agency which relates to the installation, use, possession
or operation of the Equipment, and shall use the Equipment in the regular course
of its business only, within its normal capacity, without abuse.
(c) Lessee, at its own expense, shall maintain the Equipment in good
operating condition, repair and appearance, and protect the same from
deterioration other than normal wear and tear, and shall enter into, and keep in
force a maintenance agreement with the manufacturer of the Equipment. Lessee
shall cause the manufacturer to keep the Equipment in good and efficient working
order, less normal wear and tear in full compliance and in accordance with the
provisions of such maintenance agreement and shall furnish evidence of such
agreement to Lessor upon request. During Lessee's normal business hours, Lessee
shall provide the manufacturer's field engineering representatives with access
to the equipment to install engineering changes necessary to keep the Equipment
at currently announced engineering change levels. Upon deinstallation of any
Equipment, Lessee shall provide Lessor evidence from the manufacturer stating
the Equipment is at currently announced engineering change levels and is
qualified for the manufacturer's maintenance agreement. The Equipment shall be
returned in the same operating order, repair, condition and appearance as on the
Delivery and Acceptance Date, reasonable wear and tear excepted.
(d) During Lessee's normal business hours, upon prior written notice to
Lessee and subject to Lessee's reasonable security procedures, Lessee shall
permit Lessor or its designee to inspect the Equipment, Lessee's equipment log
and maintenance records.
(e) Prior to delivery of any Equipment, the obligations of Lessor may be
suspended to the extent that Lessor is hindered or prevented from complying
therewith because of labor disturbances, acts of God, fire, storms, accidents,
failure of the manufacturer to deliver any Equipment, governmental regulations
or any cause whatsoever not within the control of Lessor.
7. RELOCATION. Lessee shall not move or permit to be moved any Equipment from
the location set forth in the applicable Lease Order without the prior written
consent of Lessor, which shall not be unreasonably withheld, provided, however,
in no event shall any Equipment be moved to a location outside the United States
of America. Risk of loss and all costs and expenses incurred in connection with
any movement of Equipment shall be the responsibility of Lessee.
8. ALTERATIONS AND MODIFICATIONS. Lessee shall not make modifications,
alterations or additions to Equipment (other than normal operating accessories
or controls) without the prior written consent of Lessor, which consent shall
not be unreasonably withheld. Notwithstanding the foregoing, Lessee shall be
entitled to acquire and install, at Lessee's expense, such additional features
or options ("Modifications") which (i) will not impair the originally intended
function or use of the Equipment in which the Modifications are Installed, (ii)
will not require removal of any part of the Equipment, (iii) will not interfere
with Lessee's ability to obtain and maintain the maintenance contract required
by Paragraph 6(c), and (iv) the addition of which will not have an adverse
impact upon the value of the underlying Equipment or Lessor's rights therein.
Such Modifications shall be of the type which are readily installed and removed
without damage to the Equipment so as to restore the Equipment to the condition
in which it existed prior to the installation of such Modifications provided,
however, that if Lessor so agrees in writing, Lessee shall not be required to
remove such Mortifications. Any Modifications not so removed shall become the
property of Lessor. All Modifications must qualify for the manufacturer's
maintenance agreement and be maintained in accordance with Paragraph 6(c)
hereof. Lessee hereby grants to Lessor the right and opportunity to first
submit or match the last proposal for the lease, financing or supply of any
Modification.
9. SOFTWARE. Lessee and Lessor acknowledge that the Equipment may contain or
encode a description of certain Software in which Lessor and Lessee may have no
ownership or other proprietary rights where required by the Software owner,
manufacturer or distributor. Lessee shall enter into a license or other
agreement for the use of such Software. Any Software agreement shall be
separate and distinct from this Master Lease and any Lease Order, and Lessor and
Assignee shall not have any obligations thereunder, but shall have the right to
require Lessee to terminate Lessee's use of the Software if an Event of Default
shall occur and shall be continuing hereunder. In the event rent specified in a
Lease Order includes an amount attributable to the financing by Lessor of
Lessee's fee for use of Software, Lessee agrees that such amount shall be deemed
rent and subject to all the provisions of this Lease Agreement. Upon
termination of this Lease Agreement for reasons other than default, Lessee
hereby assigns to Lessor, to the extent assignable, any and all rights and
obligations relating to software and applicable software licenses.
10. OWNERSHIP, SECURITY INTEREST. It is expressly understood that the
Equipment is, and shall at all times remain, personal property of Lessor.
Lessee shall have no right, title or interest in the Equipment except as
expressly provided herein. If requested by Lessor, Lessee will obtain, prior to
delivery of any Equipment, a certificate satisfactory to Lessor from all parties
with a real property interest in the premises where the Equipment shall be
located waiving any claim with respect to the Equipment. If Lessor supplies
Lessee with labels, plates or other markings stating that the Equipment is owned
by Lessor, Lessee shall attach same in a prominent place on the Equipment.
Lessee agrees to execute Uniform Commercial Code financing statements and any
and all additional instruments requested by Lessor to perfect the interest of
Lessor, its successors or assigns in this Master Lease, any Lease Order, the
payments due hereunder or the Equipment Lessee authorizes Lessor to file a copy
of the Master Lease or any Lease Order or invoice as a financing statement.
Lessee agrees to reimburse Lessor for all recording and filing fees.
11. ASSIGNMENT OR SUBLETTING BY LESSEE. LESSEE SHALL NOT ASSIGN, TRANSFER,
PLEDGE OR OTHERWISE DISPOSE OF THIS LEASE AGREEMENT, ANY LEASE ORDER OR ANY OF
ITS RIGHTS THEREUNDER NOR SUBLEASE OR LEND ANY OF THE EQUIPMENT TO ANY OTHER
PERSON WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR ANY PURPORTED ASSIGNMENT,
TRANSFER, PLEDGE, OR OTHER DISPOSITION OF THIS LEASE AGREEMENT, ANY LEASE ORDER
OR ANY OF LESSEE'S RIGHTS THEREUNDER, OR ANY PURPORTED SUBLEASE OR LENDING OF
THE EQUIPMENT, WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, AT LESSOR'S OPTION, SHALL
BE VOID AND OF NO EFFECT. FOR THE PURPOSES OF THIS PARAGRAPH 11, ANY PURPORTED
SALE OR OTHER TRANSFER OF A CONTROLLING OWNERSHIP INTEREST OF LESSEE (WHETHER IN
ONE TRANSACTION OR SERIES OF RELATED TRANSACTIONS) SHALL BE DEEMED AN ASSIGNMENT
OF THE LESSEE'S RIGHTS HEREUNDER REQUIRING THE PRIOR WRITTEN CONSENT OF THE
LESSOR. As to any permitted assignment or sublease, the following conditions
shall apply.
(a) Lessee shall remain fully liable for all payments due under each Lease
Order and remain the primary obligor for all remaining obligations under this
Lease Agreement and any Lease Order hereunder.
(b) Lessee shall give Lessor at least thirty (30) days written notice of
the location of the Equipment and the identity of the assignee or sublessee
prior to the installation at assignee's or sublessee's premises. Lessee shall
be responsible for obtaining any and all financing statements and other
documentation reasonably requested by Lessor.
(c) Any sublessee's interest in any permitted sublease hereunder shall be
subordinate to the interests of Lessor or any Assignee of Lessor.
2 of 4
<PAGE>
12. DISCLAIMER OF WARRANTIES.
(a) LESSEE ACKNOWLEDGES THAT LESSOR IS NOT THE MANUFACTURER OF THE
EQUIPMENT, NOR THE AGENT OF THE MANUFACTURER AND THAT LESSOR HAS MADE NO
REPRESENTATIONS, WARRANTIES OR COVENANTS OF ANY KIND, EXPRESS OR IMPLIED, AS TO
ANY MATTER WHATEVER. INCLUDING BUT NOT LIMITED TO: THE DESIGN, CONDITION OR
PERFORMANCE OF THE EQUIPMENT, ITS MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF THE EQUIPMENT, THE
CONFORMITY OF THE EQUIPMENT TO THE PROVISIONS AND SPECIFICATIONS OF ANY LAW,
RULE, REGULATION, CONTRACT OR PURCHASE ORDER, OR WITH RESPECT TO PATENT,
TRADEMARK OR COPYRIGHT INFRINGEMENT OR THE LIKE, OR LATENT DEFECTS. LESSOR
EXPRESSLY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES. AS TO LESSOR,
LESSEE LEASES THE EQUIPMENT "AS IS, WHERE IS".
(b) LESSEE AGREES THAT LESSOR SHALL NOT BE LIABLE TO THE LESSEE FOR ANY
CLAIM, LOSS OR DAMAGE, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR OTHERWISE,
INCLUDING WITHOUT LIMITATION, LOSS OF PROFIT, LOSS OF BUSINESS, OR OTHER
FINANCIAL LOSS, WHICH MAY BE CAUSED, DIRECTLY OR INDIRECTLY, BY THE EQUIPMENT,
THE INADEQUACY OF THE EQUIPMENT FOR ANY PURPOSE OR ANY USE THEREOF, BY ANY
DEFICIENCY OR DEFECT THEREIN, OR BY ANY INCIDENT WHATSOEVER IN CONNECTION
THEREWITH, ARISING IN STRICT LIABILITY, NEGLIGENCE, CONTRACT, TORT OR OTHERWISE,
OR IN ANY WAY RELATING TO OR ARISING OUT OF THE EQUIPMENT, THIS LEASE AGREEMENT
OR ANY LEASE ORDER. THE LESSEE AGREES THAT IT WILL, IRRESPECTIVE OF ANY SUCH
CLAIM, LOSS, DAMAGE OR EXPENSE, CONTINUE TO PAY SUCH MONTHLY RENTAL CHARGES AND
OTHER SUMS AS MAY COME DUE UNDER ANY LEASE ORDER HEREUNDER.
13. ASSIGNMENT OF MANUFACTURER'S WARRANTIES. Lessor hereby assigns to Lessee,
to the extent assignable, all manufacturers warranties, service agreements and
patent indemnities with respect to the Equipment, if any, for the purpose of
making appropriate claims against the manufacturer, provided that the Lessor
shall retain at all times the right to be protected by these warranties,
agreements and indemnities as the owner of the Equipment. The Lessee's sole
remedy for the breach of any such warranty, indemnification or service agreement
shall be against the manufacturer, and not against Lessor or any Assignee of
Lessor, nor shall any such breach have any effect whatsoever on the rights and
obligations of either party with respect to this Lease Agreement. Lessor will,
upon request by Lessee and at Lessee's sole expense, cooperate with Lessee in
the enforcement of any benefit provided in any such warranties, service
agreements and patent indemnities.
14. INDEMNIFICATION. Lessee agrees that it will defend, indemnify and hold
Lessor harmless against any and all claims, demands, liabilities, obligations,
losses, damages, injuries, penalties, actions, costs and expenses, including
reasonable attorney's fees, of whatever kind and nature arising out of or in
connection with the possession, use, condition (including, but not limited to,
latent and other defects, whether or not discoverable by Lessor or Lessee),
operation, ownership by Lessor, selection, delivery, leasing or return of any
item of Equipment leased hereunder, regardless of where, how and by whom
operated, or any failure on the part of Lessee to accept the Equipment or
otherwise to perform or comply with the provisions of this Lease Agreement or
any Lease Order, except for Lessor's gross negligence or willful misconduct.
The indemnities and assumptions of liabilities and obligations herein provided
for shall continue in full force and effect notwithstanding the expiration or
termination of the Initial Term, any renewal or extension thereof, or of any
Lease Order or this Lease Agreement.
15. ASSIGNMENT BY LESSOR. LESSOR MAY ASSIGN OR TRANSFER THIS MASTER LEASE OR
ANY LEASE ORDER HEREUNDER OR LESSOR'S INTEREST IN THE EQUIPMENT OR GRANT A
SECURITY INTEREST THEREIN TO ONE OR MORE ASSIGNEES WITHOUT NOTICE TO LESSEE.
Any Assignee of Lessor shall have all of the rights but none of the obligations
of Lessor hereunder unless expressly agreed in writing, and Lessee agrees that
it will not assert against any Assignee any defense or counterclaim that Lessee
may have against Lessor. Lessee shall have no greater obligations to any
Assignee than it had to Lessor at the time of assignment and such assignment
shall not limit or otherwise restrict the rights afforded Lessee hereunder.
Lessee hereby (i) consents to such assignments and/or grants, (ii) agrees to
promptly execute and deliver UCC financing statements, an Acknowledgment and
Consent of Assignment and such further acknowledgments, agreements, certificates
and other instruments as may be reasonably requested by Lessor or Assignee to
effect such assignments and/or grants. Lessee acknowledges that any assignment
or transfer by Lessor made in accordance with the provisions of this paragraph
shall not materially change Lessee's duties or obligations under this Lease nor
materially increase the burdens or risks imposed on Lessee. In the event of an
assignment all references herein to Lessor shall be deemed to include Assignee.
Notwithstanding any such assignment: (i) Lessor shall not be relieved of any of
its obligations hereunder; and (ii) the rights of Lessee to quiet enjoyment and
possession of the Equipment shall not be impaired so long as Lessee is not in
default under this Lease.
16. QUIET POSSESSION AND ENJOYMENT. Lessor covenants that so long as Lessee is
not in default hereunder, neither Lessor nor any Assignee will disturb Lessee's
quiet possession and enjoyment of the Equipment subject to and in accordance
with the provisions of this Lease Agreement and the applicable Lease Order.
17. DAMAGE DESTRUCTION OR LOSS.
(a) Upon delivery of the Equipment to Lessee until the Equipment is
redelivered to Lessor, Lessee shall bear the entire risk of loss, damage, or
destruction with respect to the Equipment resulting from any cause whatsoever.
(b) if any Equipment becomes damaged beyond repair, lost, stolen, destroyed
or permanently rendered unfit or in the event of any condemnation or taking by
any governmental authority (any such occurrence being hereinafter referred to as
an "Event of Loss"), then Lessee shall promptly notify Lessor and shall do
either of the following within thirty (30) days after the occurrence of an Event
of Loss:
(i) At its expense, promptly replace the affected Equipment with like
or better replacement equipment of identical make, model, configuration,
capacity and condition, in good repair, free and clear of all liens, in which
case any such replacement equipment shall become the property of Lessor and for
all purposes of this Master Lease shall be deemed to be the Equipment which it
replaced; or
(ii) Terminate the Lease Order with respect to the affected Equipment
and pay to Lessor on the next payment date, an amount equal to the present value
of the remaining rental payments discounted by five percent (5%) plus the fair
market value in continued use of the Equipment.
18. INSURANCE. Lessee shall at its expense insure the Equipment against all
risks and in such amounts as Lessor shall reasonably require (but not less than
the full replacement value) with carriers reasonably acceptable to Lessor, shall
maintain a loss payable endorsement in favor of Lessor and its assigns affording
to Lessor and its assigns such additional protection as Lessor and its assigns
shall reasonably require, and Lessee shall maintain lability insurance
reasonably satisfactory to Lessor and its assigns. All such Insurance policies
shall name Lessee, Lessor and its assigns as additional insureds and shall name
Lessor and its assigns as loss payee(s), and shall provide that insurance
coverage shall not be canceled or altered without at least thirty (30) days
prior written notice to Lessor and Assignee, and that no breach of warranty by
Lessor shall invalidate such insurance with respect to any additional insured.
Lessee shall promptly furnish appropriate evidence of such insurance to Lessor
and any Assignee.
19. REPRESENTATIONS AND WARRANTIES OF LESSEE. Lessee represents and warrants
to Lessor and any Assignees on the date hereof and on the date of each Lease
Order that: (i) the execution and performance of this Lease Agreement and all
Lease Orders are duly authorized and this Lease Agreement and the Lease Orders
constitute legal, valid and binding obligations of Lessee enforceable in
accordance with their terms, (ii) the performance under the Lease Agreement and
all Lease Orders by Lessee will not result in any breach, default or violation
of Lessee's articles of incorporation or by-laws, if applicable, or partnership
agreement, if applicable, or any agreement to which Lessee is a party, (iii)
Lessee is in good standing duly organized, and validly existing in its
jurisdiction of incorporation or organization and in any jurisdiction(s) in
which any of the Equipment is to be located, (iv) there are no actions, suits or
proceedings pending or threatened, before any court, agency, or arbitrator which
will, if determined adversely to Lessee, materially adversely affect its ability
to perform its obligations under this Lease Agreement or any Lease Order, and
(v) any and all information with respect to Lessee heretofore furnished to
Lessor was, when furnished, true and complete.
20. FINANCIAL STATEMENTS ETC. During the term of this Lease Agreement, Lessee
shall furnish to Lessor and any Assignee Lessee's audited balance sheet, income
statement and statement of cash flows for its most recent fiscal year, within
ninety days and quarterly statements within forty-five days, all prepared in
accordance with generally accepted accounting principles consistently applied,
and, from time to time, such other information concerning the Equipment as
Lessor or any Assignee may reasonably request.
3 of 4
<PAGE>
21. DEFAULT. The occurrence of any of the following events shall constitute an
"Event of Default" hereunder and under each Lease Order entered into pursuant
hereto.
(a) Lessee shall fail to pay any installment of rent or other charge due
under this Lease Agreement or any Lease Order thereunder within ten (10) days
after the same is due and payable.
(b) Lessee attempts to move, sell, assign, transfer, encumber, dispose of,
sublet or lend any of the Equipment without the prior written consent of Lessor.
(c) Except for defaults covered by Paragraph (a) above, Lessee shall fail
to perform or observe any covenant, condition or agreement to be performed or
observed by it hereunder or under any Lease Order and such failure continues
unremedied for fifteen (15) days after notice thereof to Lessee by Lessor.
(d) Any representation or warranty made by Lessee in this Lease Agreement,
any Lease Order or in any document or certificate made or furnished to Lessor in
connection herewith or pursuant hereto shall prove to be false at any time in
any material respect;
(e) Lessee ceases doing business as a going concern; makes an assignment
for the benefit of creditors; admits in writing its inability to pay its
debts as they become due; files a voluntary petition in bankruptcy; is
adjudicated to be bankrupt or insolvent; files a petition seeking for itself
any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar arrangement under any present or future statute, law
or regulation or files an answer admitting the material allegations of a
petition filed against it in any such proceeding; consents to or acquiesces
in the appointment of a trustee receiver or liquidator of it or of all or any
substantial part of its assets or properties, or if it or its shareholders
shall take any action to effect a dissolution or liquidation and, in the case
of any such proceeding not being instituted by Lessee, such proceeding is not
dismissed or vacated within thirty (30) days.
22. REMEDIES. Upon the occurrence of any Event of Default and at any time
thereafter, Lessor may with or without terminating this Lease Agreement do any
one or more of the following:
(a) Proceed by appropriate court action to enforce performance by Lessee of
the applicable terms of this Lease Agreement or any Lease Order.
(b) Declare immediately payable all sums due and to become due hereunder
for the full term of any and all Lease Orders under this Master Lease.
(c) If the Lease Order provides for a Stipulated Loss Value or other fixed
value of the Equipment, recover (i) any then accrued and unpaid rent plus
interest thereon at the late payment rate, (ii) the Stipulated Loss Value or
other fixed value at Lessor's option of the Equipment as of the rent payment
date immediately preceding Lessee's date of default, and (iii) all commercially
reasonable costs and expenses incurred by Lessor in any repossession, recovery,
storage, repair, sale, release or other disposition of the Equipment, including
reasonable attorney's fees and costs incurred in connection therewith or
otherwise resulting from Lessee's default.
(d) if the Lease Order does not provide for a Stipulated Loss Value or
other fixed value for the Equipment, recover from Lessee damages not as a
penalty but herein liquidated for all purposes and in an amount equal to the sum
of (i) any then accrued and unpaid Rent plus interest thereon at the Late
Payment Rate, (ii) the present value of all remaining Rent contracted to be paid
over the unexpired portion of the Initial Term or any extended term, discounted
at an interest rate of five percent (5%) per annum plus prepayment penalty fees,
(iii) all commercially reasonable costs and expenses incurred by Lessor in any
repossession, recovery, storage, or repair, sale, re-tease or other disposition
of the Equipment, including reasonable attorney's fees and costs incurred in
connection therewith or otherwise resulting from Lessee's default and (iv) the
fair market residual value in continued use at the time of default of the
Equipment determined by Lessor.
(e) Re-lease or sell any or all of the Equipment at a public or private
sale with the privilege of becoming the purchaser or Lessee thereof, on such
terms and notice as Lessor shall deem reasonable, and thereafter Lessor shall
apply the proceeds derived therefrom as follows, Lessee remaining liable for any
deficiency: First, to reimburse Lessor for all costs and expenses incurred by
Lessor in any repossession, recovery, storage, repair, sale, re-lease or other
disposition of the Equipment, including reasonable attorney's fees, commissions
and broker's fees and costs incurred in connection therewith or otherwise
resulting from Lessee's default; second, to pay Lessor any amounts owing
hereunder; third, to reimburse Lessee for any amount paid hereunder as a result
of Lessee's default; and fourth, any surplus remaining thereafter to Lessor.
(f) Take immediate possession of any or all of such Equipment wherever
situated, and for such purpose, enter upon any premises (by summary proceedings
or otherwise) where the equipment is located without prejudice to any other
remedy or claim referred to herein; and
(g) Exercise any other right or remedy which may be available to it under
the Uniform Commercial Code or any other applicable law.
A termination hereunder shall occur only upon notice by Lessor and only as
to such Equipment as Lessor specifically elects to terminate and this Master
Lease and all Lease Orders hereunder shall continue in full force and effect as
to the remaining Equipment, if any. No remedy referred to in this Paragraph 22
is intended to be exclusive, but each shall be cumulative and in addition to any
other remedy referred to above or otherwise available to Lessor at law or in
equity. No express or implied waiver by Lessor of any default shall constitute
a waiver of any other default by Lessee or a waiver of any of Lessor's rights.
23. LOSS OF ANTICIPATED TAX BENEFITS. Lessee acknowledges that unless
otherwise agreed to in writing by Lessor, Lessor intends to claim all available
tax benefits of ownership with respect to the Equipment (the "Tax Benefits"),
including, but not limited to, cost recovery deductions as provided in Section
168 of the Internal Revenue Code of 1986, as amended (the "Code"), with respect
to each item of Equipment for each of Lessor's taxable years during the Initial
Term and any extended or renewal term. Notwithstanding anything herein to the
contrary, if Lessor shall not be entitled to or shall be subject to recapture of
the Tax Benefits as a result of any act, omission or misrepresentation of
Lessee, Lessee shall pay to Lessor upon demand an amount sufficient to reimburse
Lessor for such loss, together with any related interest and penalties based on
the highest marginal corporate income tax rate prevailing at the time of such
loss, regardless of whether Lessor or any member of a consolidated group of
which Lessor is also a member is then subject to any increase in tax as a result
of such loss of Tax Benefits.
24. TERMINATION. Each Lease Order may be terminated by either party at the end
of the Initial Term or any renewal or extended term thereof provided written
notice of termination of a Lease Order is given between one hundred eighty days
and ninety days prior to the termination of the Lease Order. If proper notice
of termination is not given, or if the Equipment is not returned to Lessor as
notified, the term of the Lease Order shall be extended on the same terms and
conditions for six months. Thereafter, the Lease Order as so extended may be
terminated by either party at the end of any calendar month by giving the other
party ninety days prior written notice.
25. GENERAL
(a) This Lease Agreement and any Lease Order hereunder shall be governed in
all respects by the laws of the State of Florida. Lessor and Lessee agree that
any dispute between them arising under this Lease Agreement or any Lease Order
shall be resolved in the state or federal courts in the State of Florida having
within its jurisdiction the City of Tampa, Florida. Lessee hereby knowingly and
irrevocably waives any objections to an action in such courts in the State of
Florida on the grounds of lack of personal jurisdiction or improper venue and
agrees that effective service of process may be made upon Lessee by mail under
the notice provisions of subparagraph 25(c) hereof. NO RIGHTS OR REMEDIES
REFERRED TO IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE SHALL BE INCORPORATED
INTO THIS LEASE AGREEMENT UNLESS EXPRESSLY GRANTED IN THIS LEASE AGREEMENT OR A
LEASE ORDER HEREUNDER.
(b) This Lease Agreement and all Lease Orders now or hereafter becoming a
part of this Lease Agreement constitute the entire agreement between Lessee and
Lessor with respect to the Equipment covered thereby and supersede any prior or
contemporaneous agreements or understandings relating thereto. No covenant,
condition or other term or provision hereof or of any Lease Order may be waived,
changed, amended or modified except by a written agreement signed by both Lessor
and Lessee.
(c) All notices, consents or requests desired or required to be given
hereunder shall be in writing and shall be mailed, via certified mail, return
receipt requested, to the address of the other party set forth on the first page
hereof or to such other address as such party shall have designated by a proper
notice.
(d) This Lease Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective permitted successors and assigns.
(e) Paragraph headings are for convenience of reference only and shall not
be construed as part of this Lease Agreement
(f) It is expressly understood that all of the Equipment shall be and
remain personal property of the Lessor notwithstanding the manner in which the
same may be attached or affixed to realty, and Lessee shall do all acts and
execute all documents necessary to insure that the Equipment remains personal
property.
(g) All agreements, representations and warranties contained in this Lease
Agreement, any Lease Order, and in any document delivered pursuant hereto or in
connection herewith shall be for the benefit of Lessor and any Assignee and
shall survive the execution and delivery, and the expiration or other
termination, of this Lease Agreement and any Lease Order.
(h) Time is of the essence of this Lease Agreement and each Lease Order.
(i) Lessee shall, upon request of Lessor, perform all such other acts and
execute and deliver to Lessor all such other documents which Lessor deems
reasonably necessary to implement the provisions of this Lease Agreement or any
Lease Order.
(j) Each Lease Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but there shall be only one executed
original of each Lease Order which shall be marked "Original" (the "Original")
and all other counterparts shall be marked "Duplicate". To the extent, if any,
that a Lease Order constitutes chattel paper (as such term is defined in the
Uniform Commercial Code) no security interest in the Lease Order may be created
through the transfer or possession of any counterpart other than the Original of
the Lease Order accompanied by an Original or certified copy of the Lease
Agreement.
4 of 4
<PAGE>
ADDENDUM TO MASTER LEASE AGREEMENT
DATED
NOVEMBER 19, 1997
BETWEEN
SUN FINANCIAL GROUP, INC.
AND
RHYTHMS NETCONNECTIONS INC.
SECTION 1.
The eleventh line is amended by replacing "seven (7) days" with "fourteen
(14) days" after "accepted within" and seven (7) days" with "fourteen (14) days"
after "shall be deemed to be".
SECTION 4.
The second line is amended by deleting "or quarter" after "each calendar
month".
SECTION 6(c).
This second line is amended by inserting "or certified maintenance
provider" after "and keep in force a maintenance agreement with the
manufacturer" and "or certified maintenance provider" after "Lessee shall cause
the manufacturer".
SECTION 6(c).
The third sentence is deleted in its entirety.
SECTION 7.
The first sentence is amended by replacing "not move or permit to be moved
any Equipment from the location set forth in the applicable lease Order without
the prior written consent of Lessor, which shall not be unreasonably withheld;"
with "be permitted to relocate the Equipment within the State set forth in the
applicable Lease Order without the prior written consent of the Lessor provided
Lessee provides Lessor with a quarterly report detailing any and all relocation
of the Equipment."
SECTION 8.
The first sentence is amended by replacing "shall not" with "may" and ",
which consent shall not be unreasonably withheld" with "provided Lessee provides
Lessor with a quarterly report detailing any and all modifications, alterations
or additions to the Equipment".
The second sentence is amended by deleting "(ii) will not require the
removal of any part of the Equipment." after "use of the Equipment in which the
Modifications are installed.".
The fourth line is amended by deleting the word "contract" after "(iii)
will not interfere with Lessee's ability to obtain and maintain the
maintenance".
The seventh line is amended by changing the word "agreement" with
"requirements" after "All Modifications must qualify for the manufactures
maintenance".
SECTION 11.
The second line is amended by adding "WHICH SHALL NOT BE UNREASONABLY
WITHHELD" after "THE PRIOR WRITTEN CONSENT OF LESSOR"
The fifth line is amended by inserting ", DEFINED AS GREATER THAN 50%."
after "CONTROLLING OWNERSHIP INTEREST OF LESSEE".
The seventh line is amended by inserting the sentence "SUCH CONSENT SHALL
NOT BE UNREASONABLY WITHHELD BY LESSOR (ie, If the purported assignee has a
better credit rating than the Lessee).".
<PAGE>
PAGE TWO
ADDENDUM TO MASTER LEASE AGREEMENT
RHYTHMS NETCONNECTIONS INC.
DATED NOVEMBER 19, 1997
SECTION 14.
The fifth line is amended by deleting "gross" after "except for Lessor's"
and deleting "willful" after "negligence or".
SECTION 17(b)(ii).
The second line is amended by inserting "end of term" after "plus the".
SECTION 21(b).
The first line is amended by inserting "Equipment out of the State" after
"Lessee attempts to move".
SECTION 23.
The fourth line is amended by inserting "material" after "as a result of
any" and "." after "or shall be subject to the recapture of"
SECTION 24.
The third line is amended by changing "six" with "three" after "on the same
terms and conditions for", with respect to Lease Order No. 1 only.
LESSOR: SUN FINANCIAL GROUP, INC. LESSEE: RHYTHMS NETCONNECTIONS INC.
SIGNATURE: /s/ Brian A. Whitmire SIGNATURE: /s/ Joseph R. D'Angelo
-------------------------- ------------------------------
BY: BRIAN A. WHITMIRE BY: Joseph R. D'Angelo
--------------------------------- -------------------------------------
TITLE: VICE PRESIDENT TITLE: Vice President & GM
------------------------------ ----------------------------------
DATE: 6-16-98 DATE: 31 December 1997
------------------------------- -----------------------------------
<PAGE>
SUN FINANCIAL GROUP, INC.
LEASE ORDER NO. 1
----------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Reference is made to that certain Master Lease Agreement Number 1642,
between SUN FINANCIAL GROUP, INC., as Lessor, and RHYTHMS NETCONNECTIONS INC.,
as Lessee. The terms used herein shall have the same meaning as such terms have
in such Master Lease Agreement.
NOW, THEREFORE, Lessor hereby leases to Lessee and Lessee hereby leases
from Lessor the Equipment identified below on the terms and conditions as stated
below:
EQUIPMENT
See Equipment Addendum attached hereto and made a part hereof.
LEASE TERMS:
INITIAL TERM: 36 MONTHS;
--------
BILLED: MONTHLY [X] QUARTERLY [ ] OTHER [ ]
RENTAL RATE: $64,000.00, Plus Tax.
ADDITIONAL PROVISIONS:
Fair Market Value exercisable only at the end of Initial Term and further
provided Lessee is not in default. First and Last months rent payments due upon
commencement of the lease. Fair Market Value is defined as the estimated
amount, as of a certain date, at which the equipment subject to the lease may
reasonably be valued in the marketplace by a buyer who could choose not to buy
and a seller who could choose not to sell. In the event that the parties cannot
agree on a Fair Market Value amount, an independent appraiser with knowledge of
the equipment, appropriate certification and experience utilizing Fair Market
Value as defined shall be retained to render an opinion. Lessee may extend the
lease, purchase the Equipment or return the Equipment only at the end of the
Initial Term and provided Lessee is not in default.
This Lease Order shall not be binding upon Lessor until accepted by Lessor
in writing at its offices as first set forth in the Master Lease Agreement.
Lessee acknowledges that on or before signing this Lease Order, the Lessee has
either received a copy of the purchase agreement between the vendor or supplier
and the Lessor for the purchase of the Equipment or that the Lessee is aware
that it may have certain rights pursuant to the terms of such purchase agreement
and may contact such vendor or supplier directly for a description of any such
rights.
IN WITNESS WHEREOF, the parties have executed this Lease Order on the date
written below.
Signature: /s/ Bryan A. Whitmire Signature: /s/ Joseph R. D'Angelo
----------------------------- ------------------------------
By: Bryan A. Whitmire By: Joseph R. D'Angelo
------------------------------------ -------------------------------------
(Print Name) (Print Name)
Title: Vice President Marketing Title: Vice President & GM
--------------------------------- ----------------------------------
Date: January 15, 1998 Date: 31 December 1997
---------------------------------- -----------------------------------
/s/ (illegible)
<PAGE>
EQUIPMENT ADDENDUM
TO LEASE ORDER NO. 1
BETWEEN
SUN FINANCIAL GROUP, INC., AS LESSOR
AND
RHYTHMS NETCONNECTIONS INC., AS LESSEE
<TABLE>
<CAPTION>
QTY MODEL DESCRIPTION COST
- --------------------------------------------------------------------------------
<C> <C> <S> <C>
1 DATA COMMUNICATION EQUIPMENT
AND RELATED IT EQUIPMENT INCLUDING
NETWORK INSTALLATION COST AND
OPERATING SYSTEM SOFTWARE
TOTAL COST $2,000,000.00
</TABLE>
EQUIPMENT LOCATION:
7337 South Revere Parkway
Suite 100
Englewood, CO. 80112
<PAGE>
SUN FINANCIAL GROUP, INC.
DELIVERY AND ACCEPTANCE RECEIPT
TO LEASE ORDER NO. 1
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Reference is made to that certain Master Lease Agreement Number 1642,
between SUN FINANCIAL GROUP, INC., as Lessor, and RHYTHM NETCONNECTIONS, INC.,
as Lessee.
The undersigned hereby acknowledges receipt in good condition and accepts
as satisfactory all of the following Equipment and certifies that such Equipment
has been properly installed and has been accepted by Lessee for leasing under
the Master Lease Agreement and applicable Lease Order, that such Equipment has
become subject to and governed by the provisions of the Master Lease Agreement
and applicable Lease Order, and that Lessee is obligated to pay the rentals and
all other sums provided for in the applicable Lease Order with respect to such
Equipment subject to the terms and conditions of the Master Lease Agreement and
the Lease Order.
EQUIPMENT
As set forth on applicable Lease Order Equipment Addendum.
The Delivery and Acceptance Date in respect to such Equipment is 13 February
1998.
IN WITNESS WHEREOF, the undersigned has executed this Delivery and
Acceptance Receipt as of the Delivery and Acceptance Date set forth above.
LESSEE: RHYTHMS NETCONNECTIONS, INC.
Signature: /s/ Joseph R. D'Angelo
-----------------------------------
By: Joseph R. D'Angelo
-----------------------------------
(Print Name)
Title: Chief Financial Officer
-----------------------------------
Date: 13 February 1998
-----------------------------------
<PAGE>
SUN FINANCIAL GROUP, INC.
DELIVERY AND ACCEPTANCE RECEIPT
TO LEASE ORDER NO.
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Reference is made to that certain Master Lease Agreement Number 1642,
between SUN FINANCIAL GROUP, INC., as Lessor, and RHYTHMS NETCONNECTIONS INC.,
as Lessee.
The undersigned hereby acknowledges receipt in good condition and accepts
as satisfactory all of the following Equipment and certifies that such Equipment
has been properly installed and has been accepted by Lessee for leasing under
the Master Lease Agreement and applicable Lease Order, that such Equipment has
become subject to and governed by the provisions of the Master Lease Agreement
and applicable Lease Order, and that Lessee is obligated to pay the rentals and
all other sums provided for in the applicable Lease Order with respect to such
Equipment subject to the terms and conditions of the Master Lease Agreement and
the Lease Order.
EQUIPMENT
As set forth on applicable Lease Order Equipment Addendum
The Delivery and Acceptance Date in respect to such Equipment is February 16,
1998.
IN WITNESS WHEREOF, the undersigned has executed this Delivery and
Acceptance Receipt as of the Delivery and Acceptance Date set forth above.
LESSEE: RHYTHMS NETCONNECTIONS, INC.
Signature: /s/ Eric H. Geis
-----------------------------------
By: Eric H. Geis
-----------------------------------
(Print Name)
Title: VP & GM
-----------------------------------
Date: 2/16/98
-----------------------------------
<PAGE>
EQUIPMENT DESCRIPTION AND LOCATION
The equipment located and described below, leased pursuant to Lease Order No. 1,
under Master Lease Agreement dated November 19, 1997 between Rhythms
Netconnections Inc., as Lessee and Sun Financial Group, Inc., as Lessor. This
filing is for information purposes only. The transactions covered by this UCC
filing arc considered to be a true lease, by the parties hereto.
<TABLE>
<CAPTION>
QTY MODEL DESCRIPTION COST
- --------------------------------------------------------------------------------
<C> <C> <S> <C>
1 DATA COMMUNICATION EQUIPMENT
AND RELATED IT EQUIPMENT INCLUDING
NETWORK INSTALLATION COST AND
OPERATING SYSTEM SOFTWARE
TOTAL COST $2,000,000.00
</TABLE>
EQUIPMENT LOCATION:
7337 South Revere Parkway
Suite 100
Englewood, CO. 80112
<PAGE>
SUN FINANCIAL
GROUP, INC.
ADDENDUM NO. 1
TO
LEASE ORDER NO. 1
DATED DECEMBER 31, 1997
BETWEEN
SUN FINANCIAL GROUP, INC., AS LESSOR
AND
RHYTHMS NETCONNECTIONS, INC., AS LESSEE
Provided Lessee is not in default and with one hundred
twenty (120) days notice, Lessee has the option of
terminating the lease within the first twelve (12) months by
paying Sun Financial Group, Inc., or its assignee, a sum
which, when combined with the accumulated rental under the
Lease at the time of termination, present values, at the
Lessor's actual debt rate, to 89.9% of the Equipment cost.
Lessor: Sun Financial Group, Inc. Lessee: Rhythms NetConnections, Inc.
Signature: /s/ Brian A. Whitmire Signature: /s/ Joseph R. D'Angelo
-------------------------- -------------------------
By: BRIAN A. WHITMIRE By: Joseph R. D'Angelo
--------------------------------- --------------------------------
Title: VICE PRESIDENT Title: Chief Financial Officer
------------------------------ -----------------------------
Date: 6/16/98 Date: 6 March 1998
------------------------------- ------------------------------
Four Embarcadero Center, Suite 2200 - San Francisco, CA 94111
(415) 955-3499 - FAX: (415) 955-3479
<PAGE>
SECOND ADDENDUM TO MASTER LEASE AGREEMENT
DATED AS OF NOVEMBER 19, 1997
BETWEEN
SUN FINANCIAL GROUP, INC.
AND
RHYTHMS NETCONNECTIONS INC.
Dated as of May 19, 1998
This Addendum amends the Master Lease Agreement, dated as of November 19,
1997 (the "Lease"), between Sun Financial Group, Inc. and Rhythms NetConnections
Inc. All capitalized terms used but not defined herein shall have the
respective meanings given thereto in the Lease.
1. ADDITIONAL FINANCING.
(a) COMMITMENT. Subject to the satisfaction of the conditions set forth
in paragraph 2 below, Lessor has agreed to provide up to $24,500,000 of lease
financing in addition to that previously provided to Lessee. The funding of
each Lease Order is subject to the satisfaction of the conditions set forth in
paragraph 3 below. Lessor's commitment to finance Equipment under this
Addendum, shall terminate on the same day of the month in the fifteenth month
following the date hereof.
(b) TERM AND LEASE RATE FACTOR. The Initial Term of each Lease Order
financed under this Addendum shall be 36 months and the rental for the initial
Lease Order under this Addendum and each subsequent Lease Order funded during
the six month period following the funding of such initial Lease Order shall be
payable in accordance with Section 4 of the Lease in an amount equal to the
amount funded under the applicable Lease Order multiplied by 3.0% (the "Lease
Rate Factor"). The Lease Rate Factor for all Lease Orders funded following the
first six month period will be adjusted by calculating a new Lease Rate Factor
using as the implicit interest rate for such Lease Rate Factor the U.S. Treasury
note rate for notes having a 36 month term as quoted in THE WALL STREET JOURNAL
on the date of preparation of the first such Lease Order funded during such
subsequent period.
(c) END OF TERM OPTIONS. Provided that the Lease has not been terminated
and that no Event of Default or event which, with notice or lapse of time or
both, would become an Event of Default shall have occurred and be continuing,
not more than 180 days and not less than 120 days prior to the expiration of the
Initial Term of each Lease Order funded under this Addendum, by written notice
to Lessor, Lessee shall irrevocably elect either the option under clause (i) or
a combination of the options under clauses (i), (ii) and (iii) within the
parameters set forth therein:
(i) Lessee may elect to purchase Equipment having an original total
cost (determined with reference to the Equipment Addendum to the applicable
Lease Order) equal to at least 70% of the aggregate total cost of the
Equipment under such Lease Order for a purchase price equal to the "Fair
Market Value" (as defined below) thereof as of the end of the Initial Term
of such Schedule, but such amount shall not be less than fifteen percent
(15%) of the aggregate total amount originally funded with respect to the
Equipment being purchased, nor more than twenty-five percent (25%) of the
aggregate total amount originally funded with respect to the Equipment
being purchased, under such Lease Order, plus any applicable sales or other
transfer tax.
<PAGE>
(ii) Lessee may elect to return either (i) one hundred percent (100%)
of the Equipment subject to such Lease Order, or (ii) Equipment having an
original total cost (determined with reference to the Equipment Addendum to
the applicable Lease Order) equal to not more than thirty percent (30%) of
the aggregate total cost of the Equipment subject to such Lease Order, in
each case in the condition required by the Lease.
(iii) Lessee may elect to renew the Lease with respect to any
Equipment not purchased or returned at the end of Initial Term of the
applicable Lease Order, for not less than twelve (12) months or the
remainder of an item of Equipment's remaining useful life if shorter, for a
rent equal to the "Fair Rental Value" (as defined below) of such item for
such additional period, which rent shall be paid monthly in advance. At
the end of the renewal term, Lessee shall elect one of the options set
forth in clauses (i), (ii) or (iii) of this paragraph (c).
"Fair Market Value" shall mean the estimated amount, as of a certain date,
at which the Equipment subject to the Lease may reasonably be valued in the
marketplace by a buyer who could choose not to buy and a seller who could
choose not to sell. In the event that the parties cannot agree on a Fair
Market Value amount, an independent appraiser (mutually acceptable to
Lessor and Lessee) with knowledge of the Equipment, appropriate
certification and experience utilizing Fair Market Value as defined shall
be retained to render an opinion.
"Fair Rental Value" shall mean the estimated amount, as of a certain date,
at which the Equipment subject to the Lease may reasonably be valued in the
marketplace by a lessee who could choose not to lease and a lessor who
could choose not to lease. In the event that the parties cannot agree on a
Fair Rental Value amount, an independent appraiser (mutually acceptable to
Lessor and Lessee) with knowledge of the Equipment, appropriate
certification and experience utilizing Fair Rental Value as defined shall
be retained to render an opinion.
(d) EARLY TERMINATION. Provided that the Lease has not been terminated
and that no Event of Default or event which, with notice or lapse of time or
both, would become an Event of Default shall have occurred and be continuing,
and with not less than 120 days prior written notice, Lessee may elect to
terminate Lease Order No. 1 or Lease Order No. 2 prior to the first anniversary
date of the commencement of the Initial Term of each by paying to Lessor a sum
which, when combined with the accumulated rental under the Lease at the time of
termination, present values, at Lessor's actual debt rate, to 89.9% of the
Equipment cost.
2. CONDITIONS TO EXECUTION OF THIS ADDENDUM. On or prior to the date of
execution of this Addendum by Lessor and the funding of the first Lease Order
under this Addendum, Lessor shall have received in form and substance
satisfactory to Lessor:
(a) A legal opinion of Lessee's legal counsel in form and substance
reasonably satisfactory to Lessor covering the matters set forth in
Exhibit A hereto.
(b) Copies, certified by the Secretary or Assistant Secretary or Chief
Financial Officer of Lessee, of: (A) the Certificate/Articles of
Incorporation and By-Laws of Lessee (as amended to the date of the
Lease) and (B) the resolutions adopted by Lessee's board of directors
authorizing the execution and delivery of the Lease and this Addendum,
the Lease Orders and the other documents referred to herein and the
performance by Lessee of its obligations hereunder and thereunder.
2
<PAGE>
(c) A good standing certificate (including franchise tax status) with
respect to Lessee from Lessee's state of incorporation, the state
where Lessee's chief executive office is located and each state where
Equipment is expected to be located, each dated a date reasonably
close to the date of acceptance of the Lease by Lessor.
(d) Evidence of the insurance coverage required by Section 18 of the
Lease, if not previously provided to Lessor.
(e) All other documents as Lessor shall have reasonably requested.
3. CONDITIONS TO THE FUNDING OF EACH LEASE ORDER. Prior to the funding
of each Lease Order, Lessee shall have satisfied all of the following
conditions:
(a) Lessor shall have received:
(i) A Landlord's Waiver and Consent of each landlord of premises on
which Equipment will be located, substantially in the form of Exhibit B
hereto.
(ii) To the extent Lessor, in its commercially reasonable business
judgment, deems it necessary, a release or other arrangement with any other
lessor or lender to the Lessee to insure that there will be no impairment
of Lessor's interest in the Equipment subject to the Lease Order.
(iii) Copies of invoices, purchase orders and canceled checks relating
to all Equipment being placed under the Lease pursuant to the Lease Order
and/or a Purchase Order and Invoice Assignment from Lessee to Lessor
substantially in the form of Exhibit C hereto.
(b) Lessee shall have filed or recorded, to the satisfaction of Lessor,
all instruments and documents, including, but not limited to, precautionary
Financing Statements on Form UCC-1 and releases and termination statements on
Form UCC-2, then deemed necessary by Lessor to preserve and protect its rights
hereunder, under the Uniform Commercial Code (including the termination of any
after-acquired property clause of third parties with respect to any Unit).
(c) Lessor shall have received all other documents and Lessee shall have
performed all other acts as Lessor shall have reasonably requested to consummate
the transaction contemplated by the Lease Order.
(d) Except with the prior consent of Lessor, not to be unreasonably
withheld or delayed, the cost of installation, stand-alone software and services
of the Equipment which is financed under the Lease Order shall not exceed
fifteen percent (15%). Lessee will use its diligent efforts to obtain from the
vendor of any software financed under the Lease a consent to transfer the right
to use such software to a third party without further payment if an Event of
Default under the Lease exists.
(e) On the date of funding of the Lease Order no Event of Default or
event, which with the passage of time or the giving of notice or both would
constitute an Event of Default, shall exist.
(f) Except with the prior written consent of Lessor which shall not be
unreasonably withheld, all of the Equipment subject to the Lease Order shall
consist of routers and ATM switches, DSLAMs, IP concentrators and servers and
related networking and information technology hardware and software.
(g) The amount to be funded under the Lease Order shall not be less than
$2,000,000.
3
<PAGE>
Lessor may, in its sole discretion, terminate its commitment herein to fund
Lease Orders under the Lease if there is any material adverse change to the
general affairs, management, results of operations, condition (financial or
otherwise) or prospects of Lessee, whether or not arising from transactions in
the ordinary course of business.
4. FINANCIAL COVENANTS
(a) CERTAIN DEFINITIONS. The following capitalized terms shall have
the following respective meanings for purposes of this Section 4:
"CONSOLIDATED OPERATING CASH FLOW" shall have the meaning given
to such term in the Indenture.
"INDENTURE" shall mean the Indenture, dated as of May 5, 1998,
between Lessee and State Street Bank and Trust Company of
California, N.A., as trustee.
(b) CONSOLIDATED OPERATING CASH FLOW. Lessee shall not permit its
Consolidated Operating Cash Flow for the fiscal quarter ending on the date set
forth below to be less than the amount set forth opposite such date below:
<TABLE>
<CAPTION>
<S> <C>
June 30, 1998 $ - 8,275.80
September 30, 1998 -11,937.90
December 31, 1998 -15,031.90
March 31, 1999 -18,070.00
June 30, 1999 -19,912.10
September 30, 1999 -23,523.50
December 31, 1999 -27,801.80
March 31, 2000 -32,670.30
June 30, 2000 -31,320.90
September 30, 2000 -30,158.70
December 31, 2000 -29,810.30
March 31, 2001 -27,838.20
June 30, 2001 -18,479.50
September 30, 2001 - 8,686.60
December 31, 2001 - 1,599.00
</TABLE>
A breach of a financial covenant under this paragraph 4 shall constitute an
"Event of Default" under Section 21 of the Lease.
5. REPORTING. Lessee shall furnish to Lender:
(a) FINANCIAL STATEMENTS. So long as Lessee is not subject to the
reporting requirements of Section 12 or Section 15 of the Securities and
Exchange Act of 1934, as amended, promptly as they are available, unaudited
quarterly and audited annual financial statements of Lessee and such other
financial information as Lender may reasonably request from time to time. From
and after such time as Lessee becomes a publicly reporting company, promptly as
they are available and in any event: (i) at the time of filing of Lessee's Form
10-K with the Securities and Exchange Commission after the end of each fiscal
year
4
<PAGE>
of Lessee, the financial statements of Lessee filed with such Form 10-K; and
(ii) at the time of filing of Lessee's Form 10-Q with the Securities and
Exchange Commission after the end of each of the first three fiscal quarters of
Lessee, the financial statements of Lessee filed with such Form 10-Q.
(b) COMPLIANCE STATEMENTS. Within thirty (30) days of the end of each
fiscal quarter of Lessee, a certificate of Lessee's Chief Financial Officer or
other senior officer stating that he or she has reviewed the provisions of the
Lease and this Addendum and that Lessee is not in default in the observance or
performance of any of the provisions hereof, or if Lessee shall be so in
default, specifying all such defaults and events of which he or she may have
knowledge, and setting forth the calculation of compliance or noncompliance with
each of the financial covenants set forth in paragraph 4 above.
(c) MANAGEMENT REPORTS. Within twenty (20) days of the end of each month,
a management report setting forth by month and year-to-date, (i) new markets
entered and total markets entered, (ii) new central office locations and total
central office locations, and (iii) new lines and total lines.
6. ASSIGNMENT. Section 15 of the Lease shall be deemed amended to add
the following sentence:
"Notwithstanding the foregoing, Lessor shall in all circumstances
retain at least a 25% interest in the Lease, the Lease Orders thereto
and the Equipment.
5
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have executed this Addendum as of May
19, 1998.
LESSOR LESSEE:
SUN FINANCIAL GROUP, INC. RHYTHMS NETCONNECTIONS INC.
By: /s/ Matthew Maloney By: /s/ Joseph R. D'Angelo
------------------------------- -------------------------------------
Name: Matthew Maloney Name: Joseph R. D'Angelo
------------------------------ -----------------------------------
Title: Vice President Title: VP and GM Eastern Region
----------------------------- ----------------------------------
<PAGE>
EXHIBIT 10.13
INTERCONNECTION AGREEMENT
BETWEEN
ACCELERATED CONNECTIONS, INC.
AND
PACIFIC BELL
<PAGE>
TABLE OF CONTENTS
INTERCONNECTION AGREEMENT......................................1
RECITALS.......................................................1
DEFINITIONS....................................................1
Network Interconnection........................................8
Interconnection Within Each LATA..............................9
Single POI Model..............................................9
Sizing And Structure of Interconnection Facilities...........10
Trunking Directionality......................................10
Common Channel Signaling and Signaling Protocol..............11
Local Interconnection Trunk Arrangements.....................11
Meet Point Trunking Arrangements.............................12
Combination Interconnection Trunk Groups.....................14
Control Office Functions.....................................15
Testing and Trouble Responsibilities.........................15
Bilateral Agreement..........................................16
Performance Standards and Measurements.......................16
Interconnection Forecasting..................................16
Interconnection Grade Of Service.............................17
Interconnection Deployment...................................17
Interconnection Trunk Servicing..............................18
Network Management...........................................18
Tariffed Services............................................19
End User Repair Calls........................................19
Referral Services............................................19
Nondiscriminatory Access To Network Elements..................20
Links........................................................20
Transport....................................................26
Ports/Local Switching........................................27
Cross Connects...............................................27
Multiplexing.................................................27
Nondiscriminatory Access to Databases and Associated
Signaling...................................................27
Forecasts for Certain Unbundled Network Elements.............27
Interconnection and Network Element Request Process..........27
Nondiscriminatory Access To Poles, Ducts, Conduits and
Rights of Way................................................29
Emergency Services, Directory Assistance and Operator Call
Completion Services..........................................31
Emergency Services...........................................31
Directory Assistance.........................................32
Call Completion Service......................................33
White Page Directory Listings.................................33
Nondiscriminatory Access To Number Resources..................34
Number Portability............................................35
Interim Number Portability...................................35
Permanent Number Portability.................................35
Requirements for INP and PNP.................................36
Local Dialing Parity..........................................38
Reciprocal Compensation Arrangements.........................38
<PAGE>
Table of Contents
Telecommunications Services Available for Resale..............44
Collocation and Mid Span Meets................................44
Physical Collocation.........................................45
Shared Space Collocations....................................46
Microwave Collocation........................................48
POT Bay Engineering..........................................48
Virtual Collocation..........................................48
Mid-Span Meet Arrangements...................................48
Meet Point Billing Arrangements...............................49
Local Interconnection Data Exchange for Billing...............52
Audit Process.................................................52
Audiotext and Mass Announcement Services......................54
Usage Sensitive Compensation.................................54
Billing and Collection Compensation..........................54
Branding......................................................54
Most Favorable Terms and Treatment............................54
Dispute Resolution and Binding Arbitration....................55
Force Majeure.................................................56
Regulatory Decision...........................................56
Regulatory Approval...........................................56
Integration...................................................56
Term of Agreement.............................................57
Effective Date................................................57
Amendment of Agreement........................................57
Limitation of Liability.......................................57
Intellectual Property.........................................57
Indemnity.....................................................57
Assignment....................................................58
Controlling Law...............................................58
Default.......................................................58
Nondisclosure.................................................58
Execution In Duplicate........................................60
Notices.......................................................60
Good Faith Performance........................................60
ii
<PAGE>
INTERCONNECTION AGREEMENT
THIS INTERCONNECTION AGREEMENT ("Agreement"), made as of this _____ day
of July 1997, is between ACI Communications Company ("ACI"), a California
corporation, and Pacific Bell ("Pacific"), a California corporation.
RECITALS
WHEREAS, a major purpose of the Telecommunications Act of 1996 ("the
Act") is to permit and encourage the vigorous competition that provides
widespread consumer choice; and
WHEREAS, the most effective way to achieve this purpose is to eliminate
any perceived or real market power possessed by some carriers; and
WHEREAS, Pacific is willing to sell unbundled network elements and
additional features, as well as services for resale on the terms and subject
to the condition of this Agreement; and
WHEREAS, ACI is a Telecommunications carrier and has requested that
Pacific negotiate an Agreement with ACI for the provision of interconnection,
Unbundled Network Elements and services pursuant to the Act and in
conformance with Pacific's duties under the Act; and
WHEREAS, Section 252 of the Act mandates good faith negotiations between
incumbent Local Exchange Carriers and any telecommunications carrier
requesting interconnection without regard to the standards set forth in
subsections (b) and (c) of Section 251 of the Act; and
WHEREAS, the Parties have arrived at this Agreement through voluntary
negotiations undertaken pursuant to the Act.
NOW, THEREFORE, in consideration of the mutual provisions contained
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, ACI and Pacific hereby covenant and agree
as set forth in this Agreement.
DEFINITIONS
For purposes of this Agreement, certain terms have been defined here and
elsewhere in this Agreement to encompass meanings that may differ from, or be
in addition to, the normal connotation of the defined word. Unless the
context clearly indicates otherwise, any term defined or used in the singular
shall include the plural. The words "shall" and "will" are used
interchangeably throughout this Agreement and the use of either connotes a
mandatory requirement. The use of one or the other shall not mean a
different degree of right or obligation for either Party. A defined word
intended to convey its special meaning is capitalized when
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<PAGE>
used. Other terms that are capitalized, and not defined in this Agreement,
shall have the meaning in the Act, unless the context clearly indicates
otherwise.
1. "Assured Link" is a 2-wire analog voice frequency channel that supports
analog transmission of 300-3000 Hertz ("Hz") with loss no greater than
5.5db measured at 1004 Hz with 900 ohms at the central office POI and
600 ohms at the MPOE.
2. "Automatic Number Identification" or "ANI" is a Feature Group D
signaling parameter which refers to the number transmitted through the
network identifying the billing number of the calling party.
3. "Basic Link" is a Plain Old Telephone Service (POTS) grade 2-wire
circuit or equivalent voice frequency channel that supports analog
transmission of 300-3000 Hertz ("Hz") with loss no greater than 8.0db
measured at 1004 Hz with 900 ohms at the central office POI and 600 ohms
at the MPOE. In addition, coin supervision and ground start signaling
options are available.
4. "2-Wire Switched Capable Digital Connectivity Copper Link" is a
physical, 2 wire continuous copper loop from DF to MPOE, where
facilities are available, link which provides digital connectivity to
the customer's premises, having no greater loss then 31db end-to-end,
measured at 80,000 HZ with 135 ohms at the central office POI and 135
ohms at the MPOE. This link will not have any load coils and bridge
taps will be within limits.
5. "2-Wire Digital (ISDN/xDSL Capable) Link" is a 2-wire ISDN capable Link,
which is an upgrade to the Basic Link for the transmission of digital
services having no greater loss than 38db end-to-end, measured at 40,000
Hz with 135 ohms at the central office POI and 135 ohms at the MPOE;
without loop repeaters, midspan repeaters may be required. This Link
will not have any load coils or bridge taps within limits defined by the
specification applicable to the ISDN/xDSL Links. In addition, the ISDN
Capable Link, without midspan repeaters, will be used for Link requests
to support xDSL type transmission rates.
6. "Busy Line Verification" or "BLV" refers to a service in which an end
user requests an operator to confirm the busy status of a line.
7. "Busy Line Verification and Interrupt" or "BLVI" refers to a service in
which an end user requests an operator to confirm the busy status of a
line and requests an interruption of the call.
8. "Calling Party Number" or "CPN" is a CCS parameter which refers to the
number transmitted through the network identifying the calling party.
9. "Central Office Switch" or "Central Office" means a switching entity
within the public switched telecommunications network, including but not
limited to:
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<PAGE>
"End Office Switches" which are switches from which end user Exchange
Services are directly connected and offered.
"Tandem Switches" which are switches that are used to connect and
switch trunk circuits between and among Central Office Switches and
IXC switches.
Central Office Switches may be employed as combination End Office/Tandem
Switches.
10. "Centralized Message Distribution System" ("CMDS") is the transport
system that LECs use to exchange outcollect and Carrier Access Billing
System ("CABS") access messages among each other and other parties
connected to CMDS.
11. "Charge Number" is a CCS parameter which refers to the number
transmitted through the network identifying the billing number of the
calling party.
12. "CLASS Features" mean certain CCS-based features available to end users.
CLASS features include, but are not necessarily limited to: Automatic
Call Back; Call Trace; Caller ID and Related Blocking Features;
Distinctive Ringing/Call Waiting; Selective Call Forward; and Selective
Call Rejection.
13. "Combination Interconnection Trunk Group" means a trunk group that
combines local interconnection traffic and traffic from jointly provided
Switched Access service.
14. "Commission" means the California Public Utilities Commission.
15. "Common Channel Signaling" or "CCS" means a method of digitally
transmitting call set-up and network control data over a special network
fully separate from the public switched network elements that carry the
Actual call. Signaling System 7 ("SS7") is the CCS network presently
used by telecommunications carriers.
16. "Control Office" is an exchange carrier center or office designated as
its company's single point of contact for the provisioning and
maintenance of its portion of interconnection arrangements.
17. "Cross Connect" means an intra-wire center channel connecting separate
pieces of telecommunications equipment
18. "DSX Panel" is a cross-connect bay/panel used for the termination of
equipment and facilities operating at digital rates.
19. "DS-1" is a digital signal rate of 1.544 Megabits Per Second ("Mbps").
20. "DS-3" is a digital signal rate of 44.736 Mbps.
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<PAGE>
21. "EISCC" refers to the connection between the collocation point of
termination ("POT Bay") and the unbundled Network Element or
interconnection point to a switched or dedicated arrangement or service
in Pacific's network.
22. "Electronic File Transfer" refers to any system/process which utilizes
an electronic format and protocol to send/receive data files.
23. "Exchange Message Record" or "EMR" is the standard used for exchange of
telecommunications message information among LECs for billable,
non-billable, sample, settlement and study data. EMR format is contained
in BR-010-200-010 CRIS Exchange Message Record, a Bellcore document
which defines industry standards for exchange message records.
24. "Exchange Service" means a service offered to end users which provides
the end user with a telephonic connection to the public switched
telecommunications network, and which enables such end user to generally
place calls to, or receive calls from, other stations on the public
switched telecommunications network. Exchange Service includes but may
not be limited to basic residence and business line service, PBX trunk
line service, pay phone line service, Centrex line service and ISDN line
services. Exchange Service does not include Private Line, Switched and
Special Access services.
25. "FCC" means the Federal Communications Commission.
26. "Interconnection" means the connection of separate pieces of equipment,
transmission facilities, etc., between or among networks.
27. "Interexchange Carrier" or "IXC" means a provider of interexchange
telecommunications services.
28. "Interim Number Portability" or "INP" means the delivery of SPNP
capabilities through the use of switch-based call routing. INP
arrangements cannot support certain CLASS features.
29. "ISDN" means Integrated Services Digital Network, which is a digital
switched network service. "Basic Rate ISDN" provides for channelized (2
bearer and 1 data) end-to-end digital connectivity for the transmission
of voice and/or data on either or both bearer channels and packet data
on the data channel. "Primary Rate ISDN" provides for 23 bearer and 1
data channels.
30. "LATA" means Local Access Transport Area, which denotes a geographical
area established for the provision and administration of communications
services. It encompasses one or more designated exchanges, which are
grouped to serve common social, economic and other purposes (based on
the Modification of Final Judgment).
-4-
<PAGE>
31. "Link" is a component of an Exchange Service. For purposes of general
illustration, the Link is the transmission facility (or channel or group
of channels on such facility) which extends from a Main Distribution
Frame, DSX-panel, or functionally comparable piece of equipment in a
Pacific Wire Center, to a demarcation or connector block in/at a
customer's premises. The terms Loop and Link are synonymous.
32. "Local Exchange Carrier" or "LEC" shall have the meaning set forth in
the Act.
33. "Local Exchange Routing Guide" or "LERG" is a Bellcore Reference
Document used by LECs and IXCs to identify NPA-NXX routing and homing
information as well as network element and equipment designations.
34. "Local Exchange Traffic" means traffic originated on the network of a
LEC in a LATA and completed directly between that LEC's network and the
network of another LEC in that same LATA, including intraLATA toll
traffic and traffic originated to or terminated from LECs not party to
this Agreement. Local Exchange Traffic does not include traffic that is
routed to or terminated from the network of an IXC.
35. "Local Interconnection Trunks/Trunk Groups" are used for the termination
of Local Exchange Traffic, using the Bellcore Technical Reference
GR-317, as well as WSP traffic, using the appropriate technical
references.
36. "MECAB" refers to the Multiple Exchange Carrier Access Billing document
prepared by the Billing Committee of the Ordering and Billing Forum
("OBF"), which functions under the auspices of the Carrier Liaison
Committee of the Alliance for Telecommunications Industry Solutions
("ATIS"). The MECAB document, published by Bellcore as Special Report
SR-BDS-000983, contains the recommended guidelines for the billing of an
access service provided by two or more LECs or by one LEC in two or more
states within a single LATA.
37. "MECOD" refers to the Multiple Exchange Carriers Ordering and Design
Guidelines for Access Services - Industry Support Interface, a document
developed by the Ordering/Provisioning Committee under the auspices of
the OBF, which functions under the auspices of the Carrier Liaison
Committee of the ATIS. The MECOD document, published by Bellcore as
Special Report SR STS-002643, establishes methods for processing orders
for access service which is to be provided by two or more LECs.
38. "Meet Point Billing" refers to a billing arrangement used when two LECs
jointly provide a Switched Access service over Meet Point Trunks, with
each LEC receiving an appropriate share of the revenues. The access
services will be billed using Switched Access rate structures, and the
LECs will decide whether a single bill or multiple bill will be sent.
39. "Meet Point Trunks/Trunk Groups" are used for the joint provision of
Switched Access services, utilizing the Bellcore Technical Reference
GR-394.
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<PAGE>
40. "Mid Span Meet" is an interconnection between two LECs whereby each
provides its own cable and equipment up to the meet point of the cable
facilities. The meet point is the demarcation establishing ownership of
and responsibility for its portion of the transmission facility.
41. "NANP" means the "North American Numbering Plan," the system of
telephone numbering employed in the United States, Canada, and certain
Caribbean countries.
42. "Network Element" is a facility or item of equipment used in the
provision of a telecommunications service. Such term also includes
features, functions, and capabilities that are provided by means of such
facility or equipment including but not limited to subscriber numbers,
databases, signaling systems, and information sufficient for billing
and collection or used in the transmission, routing or other provision
of a telecommunications service.
43. "Numbering Plan Area" or "NPA," also referred to as an area code, is the
three digit indicator which is defined by the "A", "B" and "C" digits of
each 10-digit telephone number within the NANP. Each NPA contains 800
possible NXX codes. There are two general categories of NPA.
"Geographic NPA" is associated with a defined geographic area, and all
telephone numbers bearing such NPA are associated with services
provided within that geographic area. A "Non-Geographic NPA," also
known as a "Service Access Code" ("SAC Code") is typically associated
with a specialized telecommunications service which may be provided
across multiple geographic NPA areas; 500, Toll Free Service NPAs, 900,
and 700 are examples of Non-Geographic NPAs.
44. "NXX", "NXX Code" or "Central Office Code" is the three digit switch
entity indicator which is defined by the "D", "E" and "F" digits of a
10-digit telephone number within the NANP. Each NXX Code contains 10,000
station numbers.
45. "Percent Local Usage" or "PLU" is a calculation which represents the
ratio of the local minutes to the sum of local and intraLATA toll
minutes sent between the Parties over Local Interconnection Trunks.
Directory Assistance, BLV/BLVI, 900, 976, transiting calls from other
LECs, WSP traffic and interLATA Switched Access calls are not included
in the calculation of PLU.
46. "Permanent Number Portability" or "PNP" means the delivery of SPNP
capabilities through the use of call routing and addressing capabilities
using new database queries, without impairment of quality, reliability,
or convenience. PNP arrangements will be designed to support all CLASS
features.
47. "Point of Interconnection" or "POI" means the physical location(s) at
which the Parties' networks meet for the purpose of establishing
interconnection. POIs may include a
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<PAGE>
number of different technologies and/or technical interfaces based on
the Parties' mutual agreement.
48. "Physical Collocation" means the physical placement of equipment of one
LEC, necessary for interconnection or access to unbundled Network
Elements, at the Wire Center of the other LEC. It is an interconnection
architecture in which the collocated carrier extends network
transmission facilities to a collocation space, with access on a seven
days a week, 24 hours a day basis, within a Wire Center in the network
of a second carrier.
49. "Port" means a component of an Exchange Service; for purposes of general
illustration, the Port includes a line card and associated peripheral
equipment on an end office switch which serves as the hardware
termination for the customer's exchange service on that switch and
generates dial tone and provides the customer a pathway into the public
switched telecommunications network. Each Port is typically associated
with one (or more) telephone number(s) which serves as the customer's
network address.
50. "Rate Center" means the specific geographic point and corresponding
geographic area which have been identified by a given LEC as being
associated with a particular NPA-NXX code which has been assigned to the
LEC for its provision of Exchange Services.
51. "Rating Point" is the V&H coordinates associated with the NPA-NXX at a
particular telephone number for rating purposes.
52. "Routing Point" means a location which a LEC has designated on its own
network as the homing (routing) point for traffic inbound to Exchange
Services provided by the LEC which bear a certain NPA-NXX designation.
The Routing Point is employed to calculate mileage measurements for the
distance-sensitive transport element charges of Switched Access
services. The Routing Point need not be the same as the Rating Point,
nor must it be located within the rate center area, but must be in the
same LATA as the NPA-NXX.
53. "Service Control Point" or "SCP" is the node in the CCS network to which
informational requests for service handling, such as routing, are
directed and processed. The SCP is a real time database system that,
based on a query from a Service Switching Point ("SSP"), performs
subscriber or application-specific service logic and then sends
instructions back to the SSP on how to continue call processing.
54. "Service Provider Number Portability" or "SPNP" means the ability of
users of telecommunications services to retain existing telephone
numbers when switching from one telecommunications carrier to another
but remaining in the same geographic area.
55. "Signal Transfer Point" or "STP" performs a packet switching function
that routes signaling messages among SSPs, SCPs, Signaling Points
("SPs"), and other STPs in order to set up calls and to query databases
for advanced services.
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<PAGE>
56. "Switched Access" service means an offering of facilities for the
purpose of the origination or termination of traffic from or to Exchange
Service customers in a given area pursuant to a Switched Access tariff.
Switched Access services include: Feature Group A, Feature Group B,
Feature Group D, Toll Free Service, and 900 access. Switched Access does
not include traffic exchanged between LECs for purpose of local exchange
interconnection.
57. "T-1/DS1 (4-Wire) Capable Links" are Links that will support full duplex
transmission of isochronous serial data at 1.544 Mbps.
58. "Toll Free Service" means service provided with any dialing sequence
that invokes toll-free (i.e., 800-like) service processing. Toll Free
Service includes calls to the Toll Free Service 800/888 NPA SAC codes.
59. "Trunk-Side" refers to a Central Office switch connection that is
capable of, and has been programmed to treat the circuit as, connecting
to another switching entity, for example, another Central Office
switch. Trunk-Side connections offer those transmission and signaling
features appropriate for the connection of switching entities, and
cannot be used for the direct connection of ordinary telephone station
sets.
60. "Virtual Collocation" means a collocation arrangement in which the
collocator's facilities are terminated into a Wire Center of a LEC and
are connected to LEC facilities that are provided and maintained by the
LEC on behalf of the collocator for the primary purpose of
interconnecting the collocator's facilities to the facilities of the
LEC.
61. "Wire Center" denotes a building or space within a building which serves
as an aggregation point on a given carrier's network, where transmission
facilities and circuits are connected or switched. Wire Center can also
denote a building in which one or more Central Offices, used for the
provision of Exchange Services and access services, are located.
62. "Wireless Service Provider" or "WSP" means a provider of Commercial
Mobile Radio Services ("CMRS") (E.G., cellular service provider,
Personal Communications Services provider or paging service provider).
63. "xDSL" refers to a set of service enhancing copper technologies,
including but not limited to Asymmetric Digital Subscriber Loop (ADSL),
High Bit Rate, or Hybrid, Digital Subscriber Loop (HDSL) and Integrated
Digital Subscriber Loop (IDSL), that are designed to provide digital
communications services over copper loops either in addition to or
instead of normal analog voice service.
1. NETWORK INTERCONNECTION [THE ACT, SECTION 271(C)(2)(B)(I)]
When ACI provides local and toll traffic, ACI and Pacific agree to
interconnect their networks through facilities between ACI end offices
and/or Access Tandem Switches
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and/or Pacific end office and/or Access Tandems set forth in Appendix A.
The Parties will establish logical trunk groups referencing the
appropriate ACI Central Office or Routing Point and Pacific Central
Office. In addition, where necessary, and as mutually agreed to, the
Parties will define facilities between their networks to permit trunk
group(s) to be established between the points listed in Appendix A.
Compensation terms for services described in this Section are set forth
in the Reciprocal Compensation Section below.
This Section describes the interconnection of the facilities and
equipment of ACI and Pacific for interconnection of their networks for
the transmission and routing of Exchange Service and jointly provided
Switched Access service.
When ACI provides local and intraLATA toll, the Parties shall
reciprocally terminate Local Exchange Traffic, as follows:
1.1. INTERCONNECTION WITHIN EACH LATA
Unless otherwise agreed and specified in Appendix A, the Parties
will interconnect with each and every access tandem in the LATA(s)
in which the Parties originate traffic. In addition, unless
otherwise described in Appendix A, neither Party may route Local
Interconnection Traffic to the other Party's access tandem if such
traffic is destined for an NXX which subtends another tandem. In
addition to the tandem interconnection described above, either
Party may establish end office-to-end office or end
office-to-tandem or tandem-to-tandem trunk groups. In the case of
host-remote end offices, such interconnection shall occur at the
location of the host or remote, at the option of the Party
deploying the host-remote end office. Such additional Local
Interconnection Trunk Groups will be identified in Appendix A or
amendments thereto.
The Parties agree that in multi-tandem LATAs (I.E., LATAs where the
tandem Party operates more than one access tandem) LATA-wide
terminating arrangement may be selected. Under such an arrangement,
interconnection is established at a single tandem designated by the
tandem Party for termination of all Local Exchange Traffic destined
for any end office that subtends one of the access tandems operated
by the tandem Party.
Amendments to Appendix A may be made by either Party, upon 30 days
written notice and acceptance by the other Party. Acceptance will
not be unreasonably withheld. Such amendments may be made without
the need to renegotiate the terms of the rest of this Agreement.
1.2. SINGLE POI MODEL
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Interconnection for each trunk group between pairs of the Parties'
switches and/or routing points for the exchange of local and
intraLATA toll and jointly provided Switched Access traffic shall
be at a single POI.
ACI will be responsible for engineering its network on its side of
the POI frame. Pacific will be responsible for engineering the POI
frame (if any) and its network on its side of the POI frame.
1.3. SIZING AND STRUCTURE OF INTERCONNECTION FACILITIES
The Parties will mutually agree on the appropriate sizing for
facilities based on the standards set forth below. The
interconnection facilities provided by each Party shall be
Alternate Mark Inversion Line Code and Superframe Format Framing
("AMI") at either the DS-1 or DS-3 level, except as modified below.
When interconnecting at Pacific's tandems, the Parties agree to
establish Bipolar Zero Substitution Extended Super Frame ("B8ZS
ESF") two-way trunks where technically feasible for the sole
purpose of transmitting 64Kbps Clear Channel Capability ("CCC")
data calls between them. In no case will these trunks be used for
calls for which the User Service Information parameter (also
referred to as "Bearer Capability") is set for "speech." Where
additional equipment is required, such equipment would be
obtained, engineered, and installed on the same basis and with the
same intervals as any similar growth job for IXC, LEC, or Pacific
internal customer demand for 64Kbps CCC trunks.
When interconnecting at Pacific's digital End Offices, the Parties
have a preference for use of B8ZS ESF trunks for all traffic
between their networks. Where available, such trunk equipment will
be used for these Local Interconnection Trunk Groups and Meet
Point Trunk Groups. Where AMI trunks are used, either Party may
request upgrade to B8ZS ESF when such equipment is available.
All interconnection facilities between the Parties will be sized
according to mutual forecasts and sound engineering practice, as
mutually agreed to by the Parties during planning - forecasting
meetings.
1.4. TRUNKING DIRECTIONALITY.
Local Interconnection Trunk Groups, Meet Point Trunk Groups and
Combined Interconnection Trunk Groups, will be installed as two-way
trunk groups. Separate two-way FGD trunks will be established for
Switched Access traffic where one of the Parties is operating as
an IXC and such arrangements are specifically excluded.
Interconnection will be provided via two-way trunks unless both
Parties agree to implement one-way trunks on a case-by-case basis.
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1.5. COMMON CHANNEL SIGNALING AND SIGNALING PROTOCOL
The Parties will interconnect their networks using SS7 signaling as
defined in GR-317 and GR-394, including ISDN User Part ("ISUP") for
trunk signaling and Transaction Capabilities Application Part
("TCAP") for CCS-based features in the interconnection of their
networks and access to databases such as 800 and Line Information
Data Base ("LIDB"), where ACI requests such access from Pacific. ACI
may establish CCS interconnections with Pacific either directly
and/or through a third party. CCS interconnection, whether direct or
by third party shall be pursuant to PUB L-780023-PB/NB. The Parties
will cooperate in the exchange of TCAP messages to facilitate full
interoperability of CCS-based features between their respective
networks, including all CLASS features and functions, to the extent
each Party offers such features and functions to its own end users.
All CCS signaling parameters, as may be deployed by either Party for
its use, will be provided, including CPN. Neither Party will be
required by the other Party to deploy any CCS signaling parameters
not already deployed within its network. All privacy indicators will
be honored.
1.6. LOCAL INTERCONNECTION TRUNK ARRANGEMENTS
1.6.1. Where a LATA-wide terminating option is selected, the
Parties shall deliver to the designated LATA-wide tandem
only those publicly-dialable NPA-NXX codes which subtend
either the designated tandem or one of the other tandems
in that LATA operated by the LATA-wide provider.
1.6.2. Unless otherwise agreed as in Section 1.6.1, above, the
Parties shall deliver traffic over the Local
Interconnection Trunk Group(s) to an access tandem only
for those publicly-dialable NPA NXX codes served by end
offices that directly subtend the access tandem or to
those WSPs that directly subtend the access tandem.
1.6.3. Where end office trunking is used, the Parties shall
deliver traffic over the Local Interconnection Trunk
Group(s) to an end office only for those
publicly-dialable NPA NXX codes served by that end office.
1.6.4. With respect to the interconnection provided for in
Sections 1.6.1 - 1.6.3, above, the source for the routing
instructions shall be the LERG, except as specified in
Appendix A. In any case, Pacific will not be required to
route calls destined to ACI NXXs via another LEC tandem.
1.6.5. Where either Party delivers over the Local
Interconnection Trunk Group miscellaneous calls (I.E.,
time, weather, NPA-555, Busy Line Verify/Interrupt, 976,
California 900, Mass Calling Codes) destined for the
other Party, it shall deliver such traffic in accordance
with the serving arrangements defined in the LERG.
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1.6.6. Either Party may terminate Directory Assistance calls over
the Local Interconnection Trunk Groups using NPA-555
routing.
1.6.7. Toll Free Service calls will be routed over Meet Point
Trunks unless the end office Party performs the SSP
function and the 800 SCP returns an intraLATA
POTS-routable number and a CIC of 110. In such a case,
these calls will be routed over the Local Interconnection
Trunk Groups, if the POTS-routable number returned is
located in one of the Party's networks.
1.6.8. Neither Party shall terminate Switched Access traffic over
Local Interconnection Trunks.
1.6.9. N11 codes (I.E., 411, 611, 911) shall not be sent between
the Parties' networks over the Local Interconnection Trunk
Groups.
1.6.10. Each Party shall establish procedures whereby its
operator bureau will coordinate with the operator bureau
of the other Party in order to provide BLV/BLVI services
on calls between their respective end users. BLV and
BLVI inquiries between operator bureaus shall be routed
using network-routable access codes published in the LERG
over the Local Interconnection Trunks.
1.7. MEET POINT TRUNKING ARRANGEMENTS
1.7.1. In meet point trunking arrangements, either Party can
provide the tandem transport and switching functions and
either Party may use Meet Point Trunks to send and
receive Feature Group B and D ("FGB" and "FGD") calls
from Switched Access customers who are connected to the
other Party's access tandem. Switched Access customers
will direct which Party will provide each function based
on Access Service Requests ("ASRs") placed with both
Parties.
1.7.2. Two-way trunks will be established to enable ACI and
Pacific to jointly provide FGB and FGD Switched Access
services.
1.7.3. The Parties will use facilities and two-way trunk groups
separate from the Local Interconnection Trunk Groups for
Meet Point Trunks (unless Combination Interconnection
Trunk Groups are used as described below). Where separate
facilities are used for Meet Point Trunks, neither Party
will charge the other Party for these facilities,
including multiplexing and Cross Connects.
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1.7.4. In the case of Switched Access services provided through
either Party's access tandem, neither Party will offer
blocking capability for Switched Access customer traffic
delivered to the other Party's tandem for completion on
that Party's network. Neither Party shall have any
responsibility to ensure that any Switched Access
customer will accept traffic the other Party directs to
the Switched Access customer.
1.7.5. The Tandem Party in meet point trunking arrangements
shall direct traffic received from Switched Access
customers directly to the other Party's end office where
such connection exists and is available. Where no end
office connection exists or is available, traffic
received from Switched Access customers shall in all
cases be sent to the other Party's tandem under which
the end office is homed.
Traffic sent to Switched Access customers shall in all
cases be routed from the end office through only one
tandem of either Party to the Switched Access customer.
The Parties understand and agree that the Switched
Access customer may select which Party's access tandem is
used for traffic sent to the Switched Access customer.
Proof of such selection shall be in the form of ASRs
from the Switched Access customer.
1.7.6. The Parties will provide all CCS signaling including, but
not limited to, Charge Number and originating line
information ("OLI"). For terminating FGD, either Party
will pass CPN if it receives CPN from FGD carriers. All
privacy indicators will be honored. Network signaling
information such as Transit Network Selection ("TNS")
parameter (CCS environment) and CIC/OZZ information
(non-CCS environment) will be provided by the end office
Party wherever such information is needed for call
routing or billing. Where CIC/OZZ or TNS information has
not been provided to the end office Party, the tandem
Party will route originating Switched Access traffic to
the IXC using available translations. The Parties will
make reasonable efforts to obtain any necessary CIC/OZZ
codes directly from Switched Access customers who use
such codes. The Parties will follow all OBF adopted
guidelines pertaining to TNS and CIC/OZZ codes.
1.7.7. CCS shall be used in conjunction with Meet Point Trunks,
except multifrequency ("MF") signaling must be used on a
separate Meet Point Trunk Group for originating FGD
access to Switched Access customers that use MF FGD
signaling protocol. For terminating FGD access from
Switched Access customers that use MF FGD, the tandem
Party will, as a first choice, complete those calls to
the end office provider over the CCS Meet Point Trunk
Group. MF and CCS trunk groups shall not be provided
within a DS-1 facility; a separate DS-1 per signaling
type must be used.
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1.7.8. All originating Toll Free Service calls for which the end
office Party requests that the tandem Party perform the
SSP function (e.g., perform the database query) shall be
delivered to the tandem Party using GR-394 format over
the Meet Point Trunk Group. Carrier Code "0110" and
Circuit Code of "08" shall be used for all such calls.
1.7.9. All originating Toll Free Service calls for which the end
office Party performs the SSP function, if delivered to
the tandem Party, shall be delivered by the end office
Party using GR-394 format over the Meet Point Trunk Group
for calls destined to IXCs, or shall be delivered by the
end office Party using GR-317 format over the Local
Interconnection Trunk Group for calls destined to end
offices that directly subtend the tandem or the
designated LATA-wide tandem to which the calls are
delivered.
1.7.10. Originating Feature Group B calls delivered to either
Party's tandem shall use GR-317 signaling format unless
the associated FGB carrier employs GR-394 signaling for
its FGB traffic at the serving access tandem.
1.8. COMBINATION INTERCONNECTION TRUNK GROUPS
1.8.1. The Parties agree to work cooperatively to combine all
functionalities of Local Interconnection Trunk Groups and
Meet Point Trunk Groups on a single Combination
Interconnection Trunk Group at any feasible point of
interconnection where either Party desires, except in
connection with the LATA-wide terminating option.
1.8.2. The initial decision as to whether the use of Combination
Interconnection Trunk Groups is feasible, including a
determination of switched software compatibility,
ordering procedures and billing procedures, will be made
no later than four months from the effective date of
this Agreement.
1.8.3. If the use of Combination Interconnection Trunk Groups is
found to be not feasible at that time, a review of such
feasibility and a further decision on the use of
Combination Interconnection Trunk Groups will occur at
six month intervals at either Party's option through the
term of the Agreement.
1.8.4. At the time that the use of Combination Interconnection
Trunk Groups is determined to be feasible, and ordering
and billing procedures have been established:
1.8.4.1. any new trunk groups may be ordered using the
Combination Interconnection Trunk Group option; and
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1.8.4.2. the Parties will work together in good faith to
complete the conversion from the use of separate
Local Interconnection Trunks and Meet Point Trunk
Groups to the use of Combination Interconnection
Trunk Groups within 6 months from that time. There
shall be no charges by either Party for this
conversion.
1.9. CONTROL OFFICE FUNCTIONS
The Parties shall share responsibility for all Control Office
functions for Local Interconnection Trunks and Trunk Groups, and
both Parties shall share the overall coordination, installation,
and maintenance responsibilities for these trunks and trunk groups.
The end office Party is responsible for all Control Office
functions for the Meet Point Trunks and Trunk Groups, and shall be
responsible for the overall coordination, installation, and
maintenance responsibilities for these trunks and trunk groups.
1.10. TESTING AND TROUBLE RESPONSIBILITIES
ACI and Pacific shall:
1.10.1. Cooperatively plan and implement coordinated repair
procedures for the Meet Point and Local Interconnection
Trunks and facilities to ensure trouble reports are
resolved in a timely and appropriate manner.
1.10.2. Provide trained personnel with adequate and compatible test
equipment to work with each other's technicians.
1.10.3. Promptly notify each other when there is any change
affecting the service requested, including the due date.
1.10.4. Coordinate and schedule testing activities with their own
personnel, and others as applicable, to ensure its
interconnection trunks/trunk groups are installed per
the interconnection order, meet agreed-upon acceptance
test requirements, and are placed in service by the due
date.
1.10.5. Perform sectionalization to determine if a trouble
condition is located in its facility or its portion of
the interconnection trunks prior to referring the
trouble to each other.
1.10.6. Advise each other's Control Office if there is an equipment
failure which may affect the interconnection trunks.
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1.10.7. Provide each other with a trouble reporting number to a
work center that is staffed 24 hours a day/7 days a week.
1.10.8. Provide to each other test-line numbers and access to
test lines, including a test-line number that returns
answer supervision in each NPA-NXX opened by a Party.
1.10.9. Based on the trunking architecture, mutually test for
system assurance that the proper recording of AMA records
in each company's switch is in place. These tests are
repeatable on demand by either Party upon reasonable
notice.
1.11. BILATERAL AGREEMENT
The Parties shall implement within 90 days of the effective date of
this Agreement, a bilateral agreement regarding the technical and
operational interfaces and procedures that are set forth in Appendix
B.
1.12. PERFORMANCE STANDARDS AND MEASUREMENTS
The Parties have agreed to certain performance standards and
measurements, attached to this Agreement, as Appendix C.
INTERCONNECTION FORECASTING
1.12.1. The Parties agree that during the first year of
interconnection, joint forecasting and planning meetings
will take place no less frequently than twice per year.
1.12.2. The Parties shall establish joint forecasting
responsibilities for traffic utilization over trunk
groups. Such forecasts shall be nonbinding on the
Parties. Orders for trunks that exceed forecasted
quantities for forecasted locations will be accommodated
as facilities and/or equipment are available.
Intercompany forecast information must be provided by the
Parties to each other on a semi-annual basis. The
semi-annual forecasts shall include:
1.12.2.1. Yearly forecasted trunk quantities for the
following trunks for a minimum period of three
(current and plus-1 and plus-2) years:
1.12.2.1.1. tandem Local Interconnection and Meet
Point Trunks;
1.12.2.1.2. tandem-subtending Local Inter-
connection and end office equivalent
Meet Point Trunk requirements; and
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1.12.2.1.3. direct end office Local Inter-
connection Trunks
1.12.2.2. The of Common Language Location Identifier (CLLI-
MSG) is described in Bellcore documents BR
795-100-100 and BR 795-400-100;
1.12.2.3. A description of major network projects
anticipated for the following six months. Major
network projects include trunking or network
rearrangements, shifts in anticipated traffic
patterns, or other activities that are
reflected by a significant increase or decrease
in trunking demand for the following six
months. Where either Party plans to terminate
traffic of other LECs over Local Interconnec-
tion Trunk Groups, the Parties will jointly plan
for the effects on their networks. This planning
will include the issues of network capacity,
forecasting and compensation calculation
(including verification of PLU).
1.12.3. If differences in the semi-annual basis forecasts of the
Parties vary by more than 24 additional DS0 two-way
trunks for each Local Interconnection Trunk Group, the
companies shall meet to reconcile the forecast to within
24 DS0 trunks.
1.12.4. If a trunk group is under 75 percent of centum call
seconds (ccs) capacity on a monthly average basis for
each month of any six month period, either Party may
issue an order to resize the trunk group, which shall be
left with not less than 25 percent excess capacity
unless otherwise agreed. In all cases, a probability of
blocking equal to that specified below in Subsection N
shall be maintained.
1.12.5. Each Party shall provide a specified point of contact for
planning, forecasting and trunk servicing purposes.
1.13. INTERCONNECTION GRADE OF SERVICE
A blocking standard of one half of one percent (.005) shall be
maintained during the average busy hour for final trunk groups
carrying jointly provided Switched Access traffic between an end
office and an access tandem. All other final trunk groups are to
be engineered with a blocking standard of one percent (.01).
1.14. INTERCONNECTION DEPLOYMENT
Upon request by either Party the Parties agree to develop and
implement engineering guidelines which will encourage the economic
deployment of increasingly robust and diverse interconnection
between their networks. The Parties agree that these guidelines,
when developed, will form the basis for
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creation of additional Local Interconnection Trunk Groups and Meet
Point Trunk Groups. The Parties agree to establish these
additional Local Interconnection Trunks and Meet Point Trunks,
subject to the availability of facilities and trunk equipment, as
soon as actual or projected the traffic volumes between any two
switches or Routing Points reaches a total volume equivalent to
225,000 minutes of use or more per month for a period of two
consecutive months. However, the Parties may choose not to
establish these trunks only by mutual agreement.
1.15. INTERCONNECTION TRUNK SERVICING
Orders from ACI to Pacific to establish, add, change or disconnect
trunks shall be processed by use of an Interconnection Service
Request ("ISR") using Pacific's CESAR electronic ordering interface
as the means of transmitting such orders. The Parties agree to
cooperate in the establishment of Network Data Mover ("NDM")
capability to exchange orders.
As discussed in this Agreement, both Parties will jointly manage the
capacity of all interconnection trunk groups. Pacific's Circuit
Provisioning Assignment Center ("CPAC") will send a Trunk Group
Service Request ("TGSR") to ACI or its designee by mail or facsimile
to trigger changes Pacific desires to the interconnection trunk
groups based on Pacific's capacity assessment. ACI will issue an ISR
Pacific's Local Interconnection Service Center ("LISC"):
1.15.1. within 10 business days after receipt of the TGSR, upon
review of and in response to Pacific's TGSR, or
1.15.2. at any time as a result of ACI's own capacity management
assessment, to begin the provisioning process. The
intervals used for the provisioning process will be the
same as those used for Pacific's Switched Access service.
Orders that comprise a major project shall be submitted at the same
time, and their implementation shall be jointly planned and
coordinated. In this context, major projects are those that
require the coordination and execution of multiple orders or
related activities between and among the Parties' work groups,
including but not limited to the initial establishment of Local
Interconnection, Combination Interconnection or Meet Point Trunk
Groups and service in an area, NXX code moves, re-homes, facility
grooming, or network rearrangements.
1.16. NETWORK MANAGEMENT
1.16.1. Protective Controls. Either Party may use protective
network traffic management controls such as 7-digit and
10-digit code gaps on traffic toward each other's
network, when required to protect the public switched
network from congestion due to facility failures, switch
congestion or
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failure or focused overload. The Parties will immediately
notify each other of any protective control action planned
or executed.
1.16.2. Expansive Controls. Where the capability exists,
originating or terminating traffic reroutes may be
implemented by either Party to temporarily relieve
network congestion due to facility failures or abnormal
calling patterns. Reroutes will not be used to circumvent
normal trunk servicing. Expansive controls will only be
used when mutually agreed to by the Parties.
1.16.3. Mass Calling. The Parties shall cooperate and share
pre-planning information regarding cross-network
call-ins expected to generate large or cross-network
call-ins expected to generate large or focused
temporary increases in call volumes, to prevent or
mitigate the impact of these events on the public
switched network.
1.16.4. High Volume Calling Trunk Groups. ACI and Pacific shall
cooperate to establish separate trunk groups for the
completion of calls to high volume customers such as
radio station contest lines.
1.17. TARIFFED SERVICES.
Either Party may opt at any time to terminate to the other Party
some or all of its traffic via any tariffed service offered by the
other Party (within the terms of the other Party's tariff), or any
service governed by a contract (within the terms of the contract)
between the two Parties. Any such rearrangements resulting from such
election shall require appropriate notification to the other Party,
joint planning, forecasting and project management.
1.18. END USER REPAIR CALLS
The Parties will educate their respective customers as to the correct
telephone numbers to call in order to access their respective repair
bureaus. In the case of misdirected repair calls, neither Party
shall make disparaging remarks about the other Party, nor shall they
use these repair calls as the basis for internal referrals or to
solicit customers to market services, nor shall they initiate any
extraneous communications, beyond the direct referral (if any) to
the correct repair telephone number. Either Party may respond with
correct information in answering customer questions.
1.19. REFERRAL SERVICES
When an end user customer changes from Pacific to ACI, or from ACI to
Pacific, and does not retain its original telephone number, and the
end user customer (or the customer's new provider on behalf of the
customer) requests provision of a
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referral announcement, the Party formerly providing service to the
end user will provide a referral announcement on the abandoned
telephone number. This announcement will provide the new number to
be dialed to reach this customer. This announcement will be
provided for the standard period specified in each Party's
exchange service tariff in effect as of the date this Agreement is
executed. There will be no charge for this service during the first
three year term of this Agreement. After that three year term
ends, the service will be provided at tariffed rates, if any,
unless otherwise agreed by the Parties.
2. NONDISCRIMINATORY ACCESS TO NETWORK ELEMENTS [THE ACT SECTIONS
271(C)(2)(B)(II), (IV), (V), (VI) AND (X)]
Pacific will not discontinue any unbundled Network Element provided
under this Agreement, during the term of this Agreement or extensions
without ACI's consent, except (i) to the extent required by network
changes or upgrades, in which event Pacific will comply with the network
disclosure requirements stated in the Act and FCC regulations
thereunder; or (ii) if required by a final order of the Court, the FCC
or the Commission as a result of remand or appeal of the FCC's order In
the Matter of Implementation of Local Competition Provisions of the
Telecommunications Act of 1996, Docket 96-98. In the event such a final
order allows but does not require discontinuance, Pacific may, on thirty
(30) days written notice, require that such terms be renegotiated and
the Parties shall renegotiate in good faith such mutually acceptable new
terms as may be required or appropriate to reflect the results of such
action. In the event that such new terms are not renegotiated within
ninety (90) days after such notice, or if the Parties are unable to
agree, either Party may submit the matter to the Dispute Resolution
Process described herein.
Pacific shall provide ACI access to the following unbundled Network
Elements for the provision of telecommunications services by ACI. ACI,
at its option, may combine such Network Elements from Pacific with
elements of its own network to provide such services. Pacific's prices
charged to ACI will be no greater than the cost of providing the Network
Element, including a reasonable profit.
2.1. LINKS. [the Act, Section 271(c)(2)(B)(iv)]
Pacific will make the following unbundled Links available as set
forth below:
- Basic Links.
- Assured Links.
- 2-Wire Digital ISDN/xDSL Capable Links.
- T-1/DS1 (4-wire) capable Links.
- 2-Wire Switched Capable Digital Connectivity
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2.1.1. Description of Link Service. Link Service consists of
transport between the minimum point of entry ("MPOE") at an end
user premises and a POI in the Pacific Wire Center from which
the transport is extended. At its sole discretion, Pacific will
provide Link Service over technology that meets the defined
parameters for each Link type.
2.1.2. Use and Suitability of Link Service. Link Service may not
be used to provide any service that would degrade or otherwise
adversely affect Pacific's network services, (E.G., introduce
harmful voltages or electrical currents in excess of standards
used in common industry practice).
2.1.3. Availability of Link Service. Link Service will be
available on an unbundled basis on the Effective Date from all
Pacific Wire Centers on a first-come, first-served basis,
applicable to all carriers, including Pacific, and subject to
the availability of Pacific's facilities and facilities at the
MPOE at the premise of ACI's end user customer. However,
certain of Pacific's geographical areas are currently served
solely via integrated digital loop carrier ("IDLC"). In such
areas, Pacific will make alternate arrangements equal in quality
to those used by Pacific, to permit ACI to order a contiguous
unbundled loop at prices no greater than the rates set forth in
Section 2.1.5. These arrangements may include, but are not
limited to, the following: (i) provide ACI with copper
facilities, or (ii) ACI universal digital loop carrier
facilities that are acceptable to ACI, or (iii) convert IDLCs to
non-integrated systems.
2.1.4. Interconnection to Link Service at Wire Center POI. ACI
must connect Link Service either:
2.1.4.1. via EISCC to a ACI collocated facility in the Pacific
Wire Center from which Link Service is extended; or
2.1.4.2. by means of Unbundled Services Cross Connect ("USCC")
connected to unbundled dedicated transport; or
2.1.4.3. via EISCC to a third party's collocated facility in
the Pacific Wire Center from which Link Service is
extended.
2.1.5. LINK SERVICE PRICES.
Pacific will provide Link Service at the prices set forth below
until the rates determined by the Commission in the OANAD
proceeding (R. 93-04-003/I. 93-04-002) are effective. At such
time those rates shall replace the rates below. Alternatively,
ACI has the option of paying the Link rates set forth below until
December 31, 1999.
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The prices set forth herein do not include Commission or FCC
mandated surcharges or applicable taxes. For partial months,
Pacific will prorate the monthly charge on a per day rate.
Pacific shall charge nonrecurring and monthly recurring rates as
set forth below for each Link (which nonrecurring and recurring
rates include the EISCC), plus applicable multiplexing, if
requested. All Link prices include any applicable End User
Common Line and Carrier Common Line flat rate equivalent
charges.
Business Link Zones referred to below are defined as shown in
Appendix D. Residence Link Zones referred to below are defined
as shown in Appendix E.
2.1.5.1. Basic and Assured Links:
Recurring Rates:
Business (Basic and Assured)
Zone 1 Zone 2 Zone 3
$13.81 $15.81 $20.81
Residence (Basic only)
Zone 1 Zone 2 Zone 3
$15.21 $18.31 $22.71
Nonrecurring rates:
Business Basic Links Zones 1, 2, and 3: The nonrecurring charge
for each Link is equal to Pacific's retail nonrecurring
charge for measured business service (1MB).
Business Assured Links Zones 1, 2, and 3: The nonrecurring
charge for each Link is equal to Pacific's retail
nonrecurring charge for Assured PBX Trunks.
Residence Basic Links Zones 1, 2, and 3: The nonrecurring charge
for each Link is equal to Pacific's retail nonrecurring
charge for flat-rated residence service (1FR), plus a $50
service charge for each service order at each customer
MPOE.
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2.1.5.2. 2-Wire Digital ISDN/xDSL Capable Links:
Recurring Rates:
Business 2-Wire Digital ISDN/xDSL Capable Links
Zone 1 Zone 2 Zone 3
$20.06 $23.06 $30.56
Residence 2-Wire Digital ISDN/xDSL Capable Links
Zone 1 Zone 2 Zone 3
$22.06 $25.06 $32.56
Nonrecurring rates:
Business 2-Wire Digital ISDN/xDSL Capable Links Zones 1, 2,
and 3: The nonrecurring charge for each Link is equal
to Pacific's retail nonrecurring charge for business
basic rate ISDN.
Residence 2-Wire Digital ISDN/xDSL Capable Links Zones 1,
2, and 3: The nonrecurring charge for each Link is
equal to Pacific's retail nonrecurring charge for
residential basic rate ISDN.
2.1.5.3. T-1/DS1 (4-Wire) Capable Links:
Availability rates and terms for T-1/DS1 (4-Wire
Capable Links) will be provided upon request of ACI
and added to this Agreement by written amendment.
2.1.5.4. 2-Wire Switched Capable Digital Connectivity
In this Agreement, rates for certain Network Elements are
specified as "To Be Determined" (TBD). In the event of
such a reference in this Agreement where there is no
corresponding price, it shall be deemed to be TBD. With
respect to all TBD prices, prior to ACI ordering any such
TBD items, the Parties shall meet and confer to establish a
price. If no agreement is reached, the Parties shall refer
any disputes to the Alternative Dispute Resolution process
set forth at Section 18.
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2.1.6. Cancellation Charge. A cancellation charge may apply if
ACI cancels an order for any type of Link after provisioning
has begun and prior to completion, as set forth in Pacific's
Schedule Cal. P.U.C. Tariff No. 175-T, Section 2
2.1.7. Assigned Telephone Number. Each Party is responsible for
assigning any telephone numbers necessary to provide its end
users with Exchange Service.
2.1.8. Billing and Payment. Pacific will bill and ACI will pay
Link Service bills in accordance with Pacific's billing, bill
dispute resolution, late payment charges and disconnection for
nonpayment requirements as set forth in Pacific's Schedule Cal.
P.U.C. Tariff No. 175-T, Section 2.
2.1.9. Ordering. ACI must order Link Service via ISR forms using
Pacific's CESAR System. Pacific will provide ACI access to
CESAR at no charge and initial training in its use for ordering
Link Service.
2.1.10. Provisioning Intervals. Basic, Assured and 2-Wire Digital
ISDN/xDSL Capable Links are provided within the same period of
time Pacific provisions its like exchange service at the time of
the order in the same geographic area using similar facilities
requiring field work (wiring). T-1/DS1 Link installation
intervals will be identical to the intervals for Pacific's
provisioning of its own hi-cap services. Intervals for a
"Project" (i.e. > 20 or more lines to a single end user MPOE on
a request at the same time) are established on a negotiated
interval basis between ACI and Pacific's Local Operations Center
("LOC")
2.1.11. Service Coordination. Link Service will be provided on the
due date and, if requested, will be provided during a 4-hour
window (either 8 a.m. to 12 p.m. or 1 p.m. to 5 p.m.).
Additional service coordination is charged as additional labor
billing per Pacific's Schedule Cal. P.U.C. Tariff No. 175-T,
Section. 13. Links are normally provisioned from 8 a.m. to 5
p.m. Monday through Friday.
The following coordination procedures apply only to Business
Basic Links ordered as a Project. On each Link order in a Wire
Center, ACI will contact Pacific and the Parties will agree on a
cutover time at least two business days before that cutover
time. The cutover time will be defined as a 60 minute window
within which both the ACI and Pacific personnel will make
telephone contact to begin the cutover activity. Coordination
for Business Basic Links meeting the definition of a Project
will be provided by the Parties at no charge.
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Within the appointed 60 minute cutover time, the ACI person will
telephone the LOC and when the LOC is contacted in that interval
such work will be promptly performed. In case of a continuous
busy signal or if the ACI personnel is placed on hold for more
than ten (10) minutes, the ACI personnel will telephone the LOC
trouble report desk to confirm and validate that ACI was ready
to connect within the sixty-minute window. If the ACI personnel
fails to telephone or is not ready within the appointed interval
and if ACI had not called to reschedule the work at least two
hours prior to the start of the interval, ACI and Pacific will
reschedule the work order and ACI will pay the nonrecurring
charge for the Link or Links scheduled for the missed
appointment. In addition, nonrecurring charges for the
rescheduled appointment will apply.
If the LOC is not available or not ready at any time during the
60 minute interval, ACI and Pacific will reschedule and Pacific
will waive the nonrecurring charge for the Link or Links
scheduled for that interval and the rescheduled installation.
If the LOC is available but the work is not begun promptly
(within 15 minutes of the LOC contact), Pacific will waive the
nonrecurring charge for the Link or Links scheduled for that
interval. The expected disconnection time for service to connect
the Link to the ACI collocation arrangement or transport is 5
minutes. If Pacific is solely responsible for a line being out
of service for more than 30 minutes, Pacific will waive the
nonrecurring charge for that Link. If unusual or unexpected
circumstances prolong or extend the time required to accomplish
the coordinated cut-over, the Party responsible for such
circumstances is responsible for the reasonable labor charges
of the other Party. Delays caused by the customer are the
responsibility of ACI.
In addition, if ACI has ordered INP as part of the Link
installation, Pacific will implement the INP service coincident
with the Link installation; provided, separate INP nonrecurring
charges will apply, where appropriate.
2.1.12. Maintenance and Testing. ACI is responsible for receiving
and coordinating resolution of all end user trouble reports
involving Link Service. ACI will isolate any trouble to the
Link portion of the service before contacting Pacific's LOC to
report the trouble. Pacific will charge ACI additional labor
billing charges when the trouble is referred to Pacific and the
trouble is found to be either on the customer side of the MPOE
or on the ACI side of the POI or collocation POT Bay.
2.1.13. Responsibilities of the Parties.
2.1.13.1. Thirty days prior to submitting any Link Service
orders ACI shall provide to Pacific forecasts of
number of Links at a Wire
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Center level. This includes associated additional line
("ADL") requirements when Pacific's primary
residential POTS service is not to be disconnected in
the establishment of Link Service. ACI shall provide
such forecasts on a semi-annual basis.
2.1.13.2. The Parties agree that ACI will be the single point
of contact for its end user customers.
2.1.13.3. Pacific will not provide repair or other assistance
to ACI end user customers except to refer such persons
who call Pacific to ACI. ACI will provide Pacific with
ACI's toll-free service referral number.
2.1.13.4. If, and only if, ACI's end user customer controls
access to the MPOE, ACI must ensure that Pacific has
access to the MPOE at the ACI end user customer's
premises as described in Pacific's Schedule Cal.
P.U.C. Tariff No. A2, Section 1.19.
2.1.13.5. ACI warrants that for each end user for whom ACI
orders disconnection of Pacific exchange service, ACI
has received proper authorization from that end user
to order such disconnection. ACI shall obtain and
verify such authorization using standard industry
practices, such as in certain circumstances
third-party verification.
2.1.13.6. The Parties agree to abide by existing and future
Commission rules that address slamming of local
exchange customers by LECs.
2.1.13.7. ACI is responsible for providing end user customer
listing information to obtain E9-1-1 Service,
Directory Assistance (411) and/or Directory listings.
Such listing information will be submitted to Pacific
via electronic transfer whenever practicable. These
services are provided pursuant to Pacific's tariffs,
except as modified by this Agreement, and are subject
to Commission requirements.
2.1.13.8. If Pacific terminates or ACI disconnects any Link
Service, Pacific will have no obligation to have any
communication with ACI's customer in connection with
such termination or disconnection.
2.2. TRANSPORT. [the Act, Sec. 271(c)(2)(B)(v)]
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Pacific will make available unbundled local transport as described in
Appendix F of this Agreement.
2.3. PORTS/LOCAL SWITCHING. [the Act, Section 271(c)(2)(B)(vi)]
Pacific will make available unbundled local switching and line side
Ports as described in Appendix F of this Agreement.
2.4. CROSS CONNECTS.
Pacific will make available unbundled Cross Connects between ACI's
collocation arrangements and any interconnection to Pacific's
unbundled Network Elements. Rates for unbundled Cross Connects,
other than the EISCC described above, are listed in Appendix F.
2.5. MULTIPLEXING.
Pacific will make available multiplexing services in connection with
Pacific's unbundled transport or other Pacific services or Pacific's
unbundled Network Elements. Rates for multiplexing services are
listed in Appendix F.
2.6. NONDISCRIMINATORY ACCESS TO DATABASES AND ASSOCIATED SIGNALING [the
Act, Section 271(c)(2)(B)(x)]
Pacific will make available, as described elsewhere in this Agreement,
interconnection to its SS7 signaling network to enable signaling
necessary for call routing and completion between the Parties.
Pacific will also make available unbundled SS7 signaling links (I.E.,
A, and D links) for connection to Pacific's STPs.
Pacific will make available access to Toll Free Service and LIDB
databases through its STPs on a per query basis. If any additional
databases are determined to be required under the Act as necessary
for call routing and completion, Pacific will make such databases and
associated signaling available to ACI. Rates for access to databases
and associated signaling are listed in Appendix F.
2.7. FORECASTS FOR CERTAIN UNBUNDLED NETWORK ELEMENTS.
For the first six months after ACI's first order for any Unbundled
Network Element (UNE), ACI shall provide to Pacific forecasts of the
number of each such UNE arrangement at a LATA level. Thereafter, ACI
shall make a good faith effort to provide such forecasts to Pacific
at a Wire Center level. ACI shall provide forecasts to Pacific on a
semi-annual basis.
2.8. INTERCONNECTION AND NETWORK ELEMENT REQUEST PROCESS.
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Any request for interconnection or access to an unbundled Network
Element that is not already available as described herein shall be
treated as an Interconnection and Network Element Request (INER).
Pacific shall use the INER Process to determine technical feasibility
of the requested interconnection or Network Elements and, for those
items found to be feasible, to provide the terms and timetable for
providing the requested items.
2.8.1. Either Party may identify an unbundled Network Element that
is not currently available in Pacific's network, by providing
written notice to the other Party, which notice shall include a
description of the Network Element adequate to determine
technical feasibility and development requirements.
2.8.2. The Parties agree to immediately work together to determine
(a) the technical feasibility of the request and (b) the
requirements to develop the request, and the anticipated cost
of developing the quote. If the Network Element is identified
by ACI, Pacific shall be allowed a commercially reasonable
period of time to evaluate the technical feasibility of the
request and the requirements to develop the requested Network
Element. Notwithstanding the foregoing, if the Parties cannot
agree within forty-five (45) days (or such other period of time
as may be mutually agreeable), whether the Network Element is
technically feasible, or on the requirements necessary to
develop the Network Element, the Parties shall use the Dispute
Resolution Process set forth herein to this Agreement.
2.8.3. The costs of developing the unbundled Network Element,
which includes, but is not limited to, the cost of developing
the quote, shall be recovered from any entity which utilizes
the Network Element so identified, including Pacific and its
affiliates. In addition, ACI shall pay its share of Pacific's
costs of developing any Network Element, not identified in this
Agreement (including, but not limited to, the cost of
developing the quote) if ACI requests development of the
Network Element but subsequently determines not to purchase the
Element. In all cases, ACI and Pacific shall meet and confer on
the amount of such costs, each Party's respective share of such
costs, and the method of recovery. In the event the Parties
cannot agree on the amount and method of recovery, the Parties
shall track their respective development costs and will use the
Dispute Process set forth herein to this Agreement. Any
determination made in Dispute Resolution shall be subject to
modification by a subsequent decision of the Commission. In no
event shall either Party allow the pendency of a dispute
concerning development costs to delay analysis or
implementation of the Network Element.
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2.8.4. Development costs are those one-time costs incurred to
design, create and test a new unbundled Network Element or new
form of access to an unbundled Network Element. (For example,
if Pacific determines that a new monitoring system is required
for one of its retail services, the costs for such system would
not be considered INER development costs, however, if
modification to such system would be requested or required in
order to provide the interconnection or Network Element in the
INER, the cost of the modification would be development costs
attributable to the requesting CLC.)
2.8.5. If ACI agrees to pay the development costs and requests
Pacific to proceed:
2.8.5.1. Pacific will additionally charge those development
costs, on a prorated basis (set forth in (2.8.5.3.)
below), to the next nine parties who place an initial
order after ACI for the interconnection or Network
Element;
2.8.5.2. As each additional party places its initial order for
the interconnection or Network Element. Pacific will
refund the appropriate prorated portion of the
development costs to parties who have previously paid
development costs (as set forth in (c) below); and
2.8.5.3. The charges and refunds will be made using the
proration chart set forth in this Agreement will
respect to collocation, except that the period of
proration for charges and refunds shall be 36 months
from when Pacific first makes the interconnection or
Network Element available.
2.8.6. Implementation costs are those costs incurred for the
development of the capability to order, bill, provision
and maintain the unbundled Network Element or unbundled
Network Element Combination. Pacific's recovery of its
implementation costs, if any, will be specified by
Amendment to this Agreement.
2.8.7. The charge(s) for unbundled Network Elements requested
amendment to pursuant to the process above shall be specified
by this Agreement.
3. NONDISCRIMINATORY ACCESS TO POLES, DUCTS, CONDUITS AND RIGHTS OF WAY
[THE ACT SECTION 271(C)(2)(B)(iii)]
3.1. Each Party will provide the other Party access to its poles, ducts,
conduits in, on or under public and private rights-of-way and
property and to the rights-of-way themselves on rates, terms and
conditions that are consistent with 47 U.S.C. Section 224
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and that are no less favorable than the rates, terms and conditions
available to any competing provider of telecommunications services.
Pacific shall impute to its own costs of providing telecommunications
services (and charge any affiliate, subsidiary, or associate company
engaged in the provision of such services) an amount equal to the pole
attachment rate for which Pacific (or such affiliate, subsidiary, or
associate company) would be liable under 47 U.S.C. Section 224.
3.2. Whenever either Party inquires of the other in writing whether it
intends to construct new poles, duct, or conduit or to acquire
additional right-of-way, the other Party shall respond within 30 days
of receipt of such inquiry to the other Party of such intention. Any
entity, including the Parties to this Agreement, that adds an
attachment after receiving such notification shall bear a
proportionate share of the costs incurred by the owner in making such
new pole, duct, conduit, or right-of-way accessible.
3.3. Whenever either Party intends to modify or alter its pole, duct,
conduit, or right-of-way in or on which the other Party shares or has
an existing attachment, it shall provide written notification of such
action to the other Party so that the other Party may have a
reasonable opportunity to add to or modify its existing attachment.
The notified Party, if it adds to or modifies its existing attachment
after receiving such notification shall bear a proportionate share of
the costs incurred by the other Party in making such pole, duct,
conduit, or right-of-way accessible.
3.4. Whenever either Pacific or ACI obtains an attachment to a pole, duct,
conduit or right-of-way of the other Party, it shall not be required
to bear any of the costs of rearranging or replacing its attachment,
if such rearrangement or replacement is required as a result of an
additional attachment or the modification of an existing attachment
sought by any other entity (including the owner of such pole, duct,
conduit or right-of-way).
3.5. To obtain access to poles, ducts, conduits and rights-of-way as
described above ACI must execute a separate Structure License
Agreement with Pacific. Upon request of ACI, Pacific shall provide
to ACI the names and numbers of the regional Single Points of Contact
(SPOCs) for administering all structure licensing and ROW agreements
within each defined geographical area.
3.6. At ACI's request, Pacific shall make reasonable best efforts to
provide ACI detailed engineering records and drawings of conduit,
poles and other ROW paths in selected areas as specified by ACI
within ten business days. Pacific shall provide written notice if
such records and drawings cannot be provided in ten business days.
In the event that Pacific does not provide the records and drawings
within ten business days, Pacific will provide the records and
drawings within a reasonable timeframe.
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3.7. Pacific shall allow personnel designated by ACI to examine conduit
system or pole line diagrams at Pacific's offices, provided that, for
security reasons, a non-disclosure agreement is signed and the ACI
representative is limited to a specific area within the Pacific
office or Pacific will make copies of such prints for ACI at ACI's
expense, or a mutually agreed upon third party will be permitted to
examine the diagrams.
3.8. To obtain access to poles, ducts, conduits and rights-of-way ACI must
execute a separate Structure License Agreement with Pacific.
4. EMERGENCY SERVICES, DIRECTORY ASSISTANCE AND OPERATOR CALL COMPLETION
SERVICES (E9-1-1, 0-) [THE ACT SECTION 271(C)(2)(B)(VII)]
4.1. EMERGENCY SERVICES.
4.1.1. Each Party will cooperate to ensure the seamless operation
of emergency call networks, including E9-1-1 and 0-
emergency calls.
4.1.2. Except as otherwise specified in this Agreement, Pacific
will provide any of the services discussed in this Section
in accordance with the rates, terms and conditions of its
tariffs.
4.1.3. Pacific will permit ACI to interconnect to the Pacific E9-
1-1 tandems which serve the areas in which ACI provides
exchange services so that ACI's customers may place calls
to Public Safety Answering Points ("PSAPs") by dialing 911.
4.1.4. ACI and Pacific will work cooperatively, including where
necessary, meeting with PSAP operators and/or state, county
and municipal government officials, to explain ACI's
interconnection with the Public Safety emergency network.
4.1.5. Pacific will not use information obtained from ACI in
connection with establishing and maintaining the E9-1-1
databases for any purpose not directly associated with the
operation of the Public Safety emergency network.
4.1.6. Pacific, as operator of the Automatic Location Identifier
("ALI") database will maintain processes and procedures to
receive and process ACI customer information within two
business days. Pacific will maintain an electronic
interface process to permit ACI to electronically update
the ALI database with ACI subscriber information at no
charge. The Parties further agree to work in industry
fora, such as the National Emergency
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Numbering Association ("NENA"), to establish an industry
standard format for transfer of E-9-1-1 customer records.
4.1.7. Two times a year, Pacific will provide to ACI (upon ACI's
request), at no charge, copies of the current Master Street
Address Guides ("MSAGs"), in paper form or on magnetic tape,
for the counties in which ACI provides Exchange Service.
4.1.8. Upon request of ACI, Pacific will provide ACI with the ten-
digit subscriber number for each PSAP which sub-tends each
Pacific E9-1-1 tandem to which ACI is interconnected so
that ACI or its Operator Services contractor may transfer
0- calls to the PSAP. ACI agrees to hold this information
in confidence and will use the information solely for the
purpose of routing 0- calls from the ACI Operator Services
platform to the PSAPs. In addition, Pacific agrees to
provide ACI with updates to this information in the same
time frame and manner in which that information is provided
to Pacific's Operator Services work centers.
4.2. DIRECTORY ASSISTANCE.
4.2.1. Either Party may terminate Directory Assistance calls over
the Local Interconnection Trunk Groups.
4.2.2. The Parties agree that ACI will provide to Pacific, via
Pacific's electronic gateway, subscriber information to be
input into Pacific's Directory Assistance databases.
There shall be no charge to ACI for the use of Pacific's
electronic gateway used for the delivery of such
information. Additionally, Pacific agrees to include these
standard directory listings in its Directory Assistance
databases at no charge to ACI or its customers within the
same number of business days from receipt of the data from
ACI as it takes Pacific to include its own customer
information in such databases, according to the rules
and provisions of Pacific's Schedule Cal. P.U.C. Tariff
No. 175-T, Section 9.3.
4.2.3. Pacific will accord ACI's directory listings information
including nonpublished information the same level of
confidentiality which Pacific accords its own directory
listing information.
4.2.4. Pacific shall ensure that access to ACI's customer
proprietary confidential directory information will be
limited solely to those employees who immediately supervise
or are directly involved in the processing or publishing of
listings, directory publication or directory delivery.
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4.2.5. Pacific will not use ACI directory listings for any
marketing purpose except for the marketing and sale of
directory advertising by its directory subsidiary.
4.2.6. Pacific agrees to provide ACI's non-published directory
records the same protection accorded Pacific's non-
published directory records with respect to the sale of
directory listings to third parties.
4.2.7. The Parties agree Pacific will maintain in its electronic
gateway the ability for ACI to ensure the formatting
accuracy of the information it transmits to Pacific for
inclusion in the Directory Assistance database. Listing
format errors will be returned to ACI for correction and
a total count of listings received and accepted will also
be transmitted. The Parties will work cooperatively through
OBF or other industry groups to further define standards for
transmittal of directory listing information.
4.3. CALL COMPLETION SERVICE
4.3.1. The Parties will complete operator-assisted calls to each
other's networks using Local Interconnection Trunks.
4.3.2. At ACI's request, in conjunction with the provision of
unbranded directory assistance service to ACI, Pacific will
provide DA Call Completion Service (which is comparable in
every way to the DA Call Completion Service Pacific makes
available to its own end users) in those areas where DA Call
Completion Service is generally available and where
facilities permit.
5. WHITE PAGE DIRECTORY LISTINGS [THE ACT, SECTION 271(C)(2)(B)(VIII)]
5.1. Directory listings refer to end user name, address and telephone
number data in Directory Assistance databases and/or all appropriate
White Pages directories. Pacific agrees to provide a standard
directory listing free of charge to each end user customer of ACI
according to the rules and provisions of Pacific's Schedule Cal.
P.U.C. Tariff No. 175-T, Section 9.3.
5.2. Pacific will make available its electronic interface for the
submission of the customer information from ACI. The Parties agree
to work within the national standards fora, such as the OBF, to
modify such interface as standards are adopted.
5.3. The Parties agree that ACI shall have the opportunity to have
customer service pages published in the White Pages sections of
Pacific's Directories in those areas where ACI provides Exchange
Service. These pages are found in the Customer Guide section of the
Directory and provide ACI's customer service information,
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including phone numbers. A maximum of two pages will be provided
without charge to ACI. Pages in excess of two will be charged by
Pacific in accordance with the nondiscriminatory rates of its
Schedule Cal. P.U.C. Tariff No. 175-T, Section 9.2.
5.4. The Parties further agree that the provision of customer listings
information to Pacific is solely for the sale of listings or
advertising services, inclusion in the Directory Assistance database
and/or White Pages, and for the purpose of directory delivery. This
information shall be given only to those employees of Pacific and
Pacific Bell Directory who are involved in the sale of these
services, and shall in no way be shared with the sales and marketing
employees of Pacific's telephone operations.
5.5. The Parties agree that, upon ACI's request, the NXX codes of all
LECs shall be commingled in the section of the Customer Service Pages
where calling areas are defined. No differentiation or segregation
of ACI's codes shall occur.
5.6. The Parties agree that ACI's end user customer listings will be
commingled with the end user customer listings of Pacific.
5.7. Pacific will not include Subscriber List Information of published ACI
local exchange customers in Pacific's Telephone Directory
Reproduction Rights Service, unless ACI authorizes release of its
Subscriber List Information to independent directory publications.
6. NONDISCRIMINATORY ACCESS TO NUMBER RESOURCES [THE ACT, SECTION
271(C)(2)(B)(IX)]
6.1. Each Party will comply with Industry Carriers Compatibility Forum
("ICCF") Central Office Code Guidelines.
6.2. Pacific, where it functions as Number Administrator, will assign NXX
codes to ACI, according to those Guidelines, on a basis no less
favorable than that on which Pacific assigns codes to itself or to
any other entity. So long as Pacific acts as the Number
Administrator, the Parties agree that these Number Administrator
functions will be provided without charge.
6.3. It shall be the responsibility of each Party to program and update
its own switches and network systems to recognize and route traffic
to the other Party's assigned NXX codes at all times. Neither
Pacific nor ACI shall charge each other for changes to switch
routing software necessitated by the creation, assignment or
reassignment or activation of NPA or NXX codes.
6.4. The Parties will each be responsible for the electronic input of
their respective number assignment information into the LERG.
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7. NUMBER PORTABILITY [THE ACT, SECTION 271(2)(C)(B)(XI)]
7.1. INTERIM NUMBER PORTABILITY.
7.1.1. Until the Parties implement the provisions of the FCC's
First Report and Order and Further Notice of Proposed
Rulemaking, CC Docket No. 95-116 ("FCC Number Portability
Order"), ACI and Pacific shall provide remote call
forwarding functionality, or other INP capabilities, to
each other pursuant to the terms and rates of the tariff
filed by Pacific. The remote call forwarding functionality
is identified in Pacific's tariff as Directory Number Call
Forwarding ("DNCF").
7.1.2. In the event that either Party elects to use a DNCF-like
INP service and until the Parties implement the provisions
of the FCC Number Portability Order, with regard to the
division of Switched Access revenues associated with INP,
the Party forwarding the calls to the other Party over the
INP arrangement shall pay the other Party $1.75 per month
for each business line and $1.25 per month for each
residence line associated with the INP arrangement.
Determination of the number of lines to which the above
payment shall apply will be made at the time the INP
arrangement is established. The payment shall be made based
on the total number of lines included in the same hunting
arrangement as the INP number. Partial months will be paid
on a prorated basis and such payment shall continue until
the INP arrangement is disconnected or PNP is made available
for the INP number, whichever occurs first. Such amount is
in consideration of the Switched Access compensation and
reciprocal compensation that would have been received by
each Party if PNP had been in effect. a) DNCF-like INP
calls will be delivered over Local Interconnection Trunk
Groups.
7.1.3. DNCF-like INP calls will be delivered over Local
Interconnection Trunk Groups.
7.2. PERMANENT NUMBER PORTABILITY.
7.2.1. The Parties agree to implement PNP, in compliance with FCC
or Commission orders, and pursuant to PUBL-780050 PB/NB,
Pacific Bell Local Number Portability Network Interface
Specification.
7.2.2. Both Parties agree to release ported telephone line numbers
back to the original carrier assigned an NXX in the LERG
when they "become vacant" (I.E., when they are no longer
in service for the original customer), and any applicable
referral/intercept period has expired. The Parties agree
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to comply with such industry guidelines as may be
established for the treatment of vacant telephone numbers.
7.2.3. Except as otherwise agreed to by the Parties, when a query
is performed or required to be performed, each Party will
arrange to perform its own queries for PNP calls when a LTNP
database query is performed or required to be performed,
each Party will perform queries on a N-1 basis, where N is
the entity terminating the call to the end user. For
interLATA carrier calls, the interLATA carrier will perform
the query even if that carrier is also the carrier
terminating the call to the end user. In keeping with the
Network Reliability Council recommendations to protect
general network failures from propagating from one network
to another and in the case of failure in Pacific's or ACI's
network which would prevent the querying of LTNP calls, the
Party experiencing the failure will prevent the delivery of
those unqueried calls to the other Party's network via
default routing, except under prior agreement. Pacific and
ACI reserve the right to block default routed calls incoming
to its network in the event of a significant network failure
in order to protect the public switched network from
overload, congestion, or failure propagation.
7.2.4. Upon request, the porting party shall provide the ported-to
Party with credit status data for the ported-to Party's
subscribers whose numbers are porting.
7.2.5. Except as agreed herein, each Party shall recover its costs
for PNP in accordance with FCC or Commission orders.
7.2.6. The Parties agree that Service Provider number portability
using PNP is limited to Pacific's wire center boundaries.
Users who change their physical address location within
that wire center will be able to retain the porting of their
existing telephone numbers.
7.3. REQUIREMENTS FOR INP AND PNP
7.3.1. Cut-Over Process
The Parties shall cooperate in the process of porting numbers
from one carrier to another so as to limit service outages for
the ported subscriber. Such processes may include, but not be
limited to, the porting Party promptly updating its network
element translations following notification by the industry SMS,
or ported-to local service provider, and deploying such
temporary translations as may be required to minimize service
outage, E.G., unconditional triggers. The Parties agree to
comply with such industry guidelines as may be established for
the cut-over process.
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7.3.2. Testing
Both Parties shall cooperate in conducting testing to ensure
interoperability between systems. Each Party shall inform the
other Party of any system updates that may affect the other
Party's network and each Party shall, at the other Party's
request, perform tests to validate the operation of the network.
Additional testing requirements may apply as specified by this
Agreement.
7.3.3. Non-Geographical Numbers
Neither Party shall be required to provide Number Portability
for non-geographic services (i.e., 500, 700 and 900 Service
Access Codes (SACs) and similar services) under this Agreement.
7.3.4. Engineering and Maintenance
Both Parties will cooperate to ensure that performance of
trunking and signaling capacity is engineered and managed at
levels which are at least at parity with that provided by the
other Party to its subscribers and to ensure effective
maintenance testing through activities such as routine testing
practices, network trouble isolation processes and review of
operational elements for translations, routing and network
fault isolation. Additional specific engineering and maintenance
requirements shall apply as specified in this Agreement. For
subscribers ported by INP using DNCF, Flex DID or RI, the
Ported-to Party shall perform appropriate testing to isolate
trouble prior to referring repair requests to the Porting party.
For subscribers ported by PNP, trouble shooting by the Porting
Party shall generally involve verification that a proper location
routing number has been entered into the system, and other
trouble shooting as may be established in industry guidelines.
7.3.5. Treatment of Telephone Line Number Based Calling Cards
7.3.5.1. Pacific shall remove from its Line Information Data
Base (LIDB) all existing Pacific issued Telephone Line
Number (TLN)-based card numbers issued to a customer,
when that customer, when that customer ports the
associated telephone numbers to ACI.
7.3.5.2. Pacific shall continue to allow ACI access to its
LIDB. Other LIDB provisions are specified in this
Agreement.
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8. LOCAL DIALING PARITY [THE ACT, SECTION 271(C)(2)(B)(XII)]
8.1. The Parties agree that they will provide local dialing parity to each
other and will permit each other to have nondiscriminatory access to
telephone numbers, operator services, directory assistance, and
directory listings, with no unreasonable dialing delays. In
addition, Pacific agrees that it will provide nondiscriminatory
access to such services or information as is necessary to allow ACI
to implement local dialing parity in accordance with the requirements
of Section 251(b)(3) of the Act.
8.2. For Local Exchange Traffic between the Parties, neither Party's end
user customers shall be required to dial any access codes or other
special or extra digits to reach the end user customers of the other
Party.
9. RECIPROCAL COMPENSATION ARRANGEMENTS [THE ACT, SECTION 271(C)(2)(B)(XIII)]
9.1. The following describes the arrangement between the Parties for
compensation for facilities established to transport Local Exchange
Traffic between the Parties. The Parties agree to the following
terms based on consideration of the generally balanced use of the
Parties' respective facilities for interconnection. Such
consideration is based on relative facility length and capacity
provided to each other, determined by the comparison of facility
deployment behind the POIs associated with ACI's collocation
arrangements and Pacific's network.
9.1.1. Where the POI for the Local Interconnection Trunk Group is
at a collocation arrangement in the same Pacific Wire Center
as the Pacific switch where the Local Interconnection Trunk
Group terminates, Pacific will pay a monthly charge for the
facility, cross connect, and multiplexing, if any, equal to
one point of termination at DS-1 rates (per DS-1 used for
Local Interconnection Trunks) or DS-3 rates (per DS-3 used
for Local Interconnection Trunks) according to ACI's tariff,
in addition to the Switched Access elements, if any, below.
Pacific may, at its option, choose to pay either the
applicable tariffed DS-1 rates for those DS-1(s) used for
Local Interconnection Trunks in a DS-3 facility, or pay the
applicable tariffed DS-3 rate for each DS-3 facility used
for Local Interconnection Trunks between the Parties.
9.1.2. Where the POI for the Local Interconnection Trunk Group is
at a collocation arrangement other than in the same Pacific
Wire Center as the Pacific switch where the Local
Interconnection Trunk Group terminates, ACI will pay a
monthly charge to Pacific for the facility, cross connect,
and multiplexing, if any, equal to one point of termination
at DS-1 rates
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(per DS-1 used for Local Interconnection Trunks) or DS-3
rates (per DS-3 used for Local Interconnection Trunks)
according to Pacific's tariff, in addition to the Switched
Access elements, if any, above. ACI may, at its option,
choose to pay either the applicable tariffed DS-1 rates for
those DS-1(s) used for Local Interconnection Trunks in a
DS-3 facility, or pay the applicable tariffed DS-3 rate
for each DS-3 facility used for Local Interconnection
Trunks between the Parties.
9.1.3. Where the POI for the Local Interconnection Trunk Group is
at a Mid Span Meet, there shall be no compensation between
the Parties for the local interconnection facilities used.
9.2. The following describes the compensation arrangements for transport
and termination of Local Exchange Traffic between the Parties:
9.2.1. The following compensation rates shall apply for traffic
carried from ACI to Pacific:
9.2.1.1. Local calls
For all local traffic (Zone Usage Measurement ("ZUM")
Zone 1 and ZUM Zone 2, Extended Area Service and ZUM
Zone 3), the Parties agree to "Bill and Keep"
compensation (i.e., mutual traffic exchange without
explicit compensation).
This rate structure shall remain in place until one year
after PNP is implemented throughout those LATAs in which
the Parties both operate. The Parties agree to renegotiate
this rate structure in that time frame in accordance with
the compensation structure set forth in Section 252(d) of
the Act, provided that such negotiations will be completed
by the end of one year after PNP is implemented throughout
those LATAs in which the Parties both operate. During the
renegotiation process, either Party may seek arbitration.
9.2.1.2. Toll Calls
Applicable to intraLATA toll calls based on
intrastate Switched Access rates as described below.
9.2.1.3. For all toll calls, the following rate elements shall
apply:
9.2.1.3.1. Local switching - per minute of use as listed
in Pacific's Schedule Cal. P.U.C. Tariff No.
175-T, Section 6.8.3(A) with the following
sub-elements:
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- Set-up (per call); and
- Minutes of use;
9.2.1.3.2. Network Interconnection Charge - per minute
of use as listed in Pacific's Schedule Cal. P.U.C.
Tariff No. 175-T, Section 6.8.2(D).
Additionally, where such calls are routed through Pacific's
tandem, the following elements shall apply:
9.2.1.3.3. Tandem switched transport as listed in
Pacific's Schedule Cal. P.U.C. Tariff No. 175-T,
Section 6.8.2(C):
- Fixed - per minute of use.
- Variable - per mile per minute of use. Mileage is
calculated based on the airline miles between the
Vertical and Horizontal ("V&H") coordinates of the
POI where the Local Interconnection Trunk Group
terminates and the Pacific end office.
9.2.1.3.4. Tandem switching - per minute of use
Additionally, when the LATA-wide terminating option is selected,
an additional tandem switching and tandem switched
transport-fixed per minute of use rate element shall apply
to all calls terminated through this arrangement. Tandem
switched transport-variable mileage will be calculated as
set forth in subsection 9.2.1.3.3, above.
9.2.1.4. ACI shall pay a transit rate equal to the Tandem
Switching rate plus two times the Common Transport rate
element as specified in the Price List (currently equal to
$.00226 per minute) when ACI uses a Pacific access tandem
to originate a call to a third party LEC, another CLC, a
WSP or another CLC end office. If Pacific enters into an
interconnection agreement with another LEC that provides
for a transit rate lower than $.00226, that transit rate
will be substituted for the rate set in this paragraph
upon the effective date of that agreement. If ACI
receives a call through Pacific's access tandem that
originates from another LEC, ACI will not charge Pacific
any rate elements for this call, regardless of whether the
call is local or toll. ACI will establish
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appropriate billing relationships directly with the other LEC,
CLC or WSP.
9.2.1.5. When ACI uses a Pacific access tandem to transit a
toll call to another LEC end office, and that LEC is a
member of the California Toll Pool ("Pooling LEC"),
Pacific will bill, and ACI will pay, Pacific's local
switching and proportionate local transport rates in
addition to the transit rate above. Pacific will remit
such revenues to the California Toll Pool. When a Pooling
LEC originates a toll call that terminates to a ACI NXX,
ACI will bill and Pacific will pay, ACI local switching
and local transport rates as if the call originated from a
Pacific end office.
9.2.2. The following compensation rates shall apply for traffic
carried from Pacific to ACI:
9.2.2.1. Local calls
For all local traffic (Zone Usage Measurement ("ZUM") Zone 1 and
ZUM Zone 2, Extended Area Service and ZUM Zone 3), the
Parties agree to mutual traffic exchange without explicit
compensation.
9.2.2.2. Toll Rate
Applicable to intraLATA toll calls based on intrastate Switched
Access rates as described below.
For all toll calls, the following rate elements shall apply:
9.2.2.2.1. Local switching - including associated sub-
elements (e.g., set-up (per call) and minutes of
use);
Additionally, where such calls are routed through ACI's tandem
(as designated in Appendix A), the following elements shall
apply:
9.2.2.2.2. Tandem switched transport (e.g., fixed - per
minute of use and variable - per mile per minute of
use). Mileage is calculated based on the airline
miles between the Vertical and Horizontal ("V&H")
coordinates of the POI where the Local
Interconnection Trunk Group terminates and the ACI
end office; and
9.2.2.2.3. Tandem switching - per minute of use.
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The applicable rates for the above elements will be filed in
ACI's Cal. P.U.C. tariff.
9.2.2.3. Pacific shall pay a transit rate equal to the rates
set in the first two sentences of subsection 9.2.1.4,
above, when Pacific uses a ACI switch to originate a call
to a third party LEC, another CLC, a WSP or another Pacific
Central Office.
9.3. For intraLATA Toll Free Service calls where such service is provided
by one of the Parties, the compensation set forth in subsection 9.2,
above, as well as any applicable database query charge set forth in
that Party's tariff, shall be charged by the Party originating the
call rather than the Party terminating the call. The Parties agree
to exchange originating EMR records for intraLATA Toll Free Service
calls provided by one of the Parties.
9.4. Each Party will calculate terminating interconnection minutes of use
based on standard Automatic Message Accounting ("AMA") recordings
made within each Party's network. These recordings are the basis for
each Party to generate bills to the other Party. The Parties agree
that end-office terminated interconnection may require exchange of
originating EMR records. The Parties agree to exchange EMR records
where such terminating records are not available. These records,
whether developed within each Party's network or exchanged between
the Parties, shall form the sole basis for each Party to generate
bills to the other Party. The Parties agree to exchange these
records at no charge.
9.5. Measurement of minutes of use over Local Interconnection Trunk groups
shall be in actual conversation seconds. The total conversation
seconds over each individual Local Interconnection Trunk Group will
be totaled for the entire monthly bill-round and then rounded to the
next whole minute.
9.6. Each Party will provide to the other, within 15 calendar days after
the end of each quarter, a usage report with the following
information regarding traffic terminated over the Local
Interconnection Trunk arrangements:
- Total traffic volume described in terms of minutes and messages and by
call type (local, toll and other) terminated to each other over the
Local Interconnection Trunk Groups, and
- PLU.
9.7. Late payment charges for interconnection charges will be assessed as
described in Pacific's Schedule Cal. P.U.C. Tariff No. 175-T, Section
2.4.1.B. and ACI's Cal. P.U.C. tariff.
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9.8. For California 900 calls (those 900 NXXs shown in the LERG as
Pacific's 900 NXXs), ACI shall deliver calls originated over ACI-
provided exchange services to the Local Interconnection Trunk Groups.
9.9. CCS interconnection charges will be applied based on the option for
CCS interconnection ACI selects, as follows:
9.9.1. If CCS interconnection is from Pacific's STPs to ACI's STPs
solely for the purpose of exchanging signaling for each Party's
Local Exchange Traffic and jointly provided Switched Access
traffic, then no charges will apply for such SS7 links.
9.9.2. If ACI uses a third party CCS provider to connect to
Pacific's STPs, then charges will apply to such SS7 links, to
the third party, as set forth in Pacific's Schedule Cal. P.U.C.
Tariff No. 175-T, Section 6, or as otherwise contracted between
Pacific and that third party.
9.9.3. If ACI connects its end office(s) directly to Pacific's
STPs, then Pacific will apply 50% (one half) of the charges set
forth in Pacific's Schedule Cal. P.U.C. Tariff No. 175-T,
Section 6 for such SS7 links.
9.10. If ACI believes it qualifies for option I(1) I(3), ACI must
notify Pacific of its selection at the time ACI orders SS7
interconnection links. ACI must further notify Pacific at any time
in the future when it uses such SS7 interconnection for the
origination or termination of switched access traffic.
9.11. If ACI elects to use Local Interconnection signaling arrangement
option 9.9.1 or 9.9.3 above, in the future for its own Switched
Access calls (E.G., FGB or FGD), the Parties agree to renegotiate the
rates, terms and conditions prior to such use.
9.12. Each Party shall charge the other Party for BLV and BLVI at the
rates contained in their respective tariffs.
9.13. If either Party terminates Directory Assistance calls over the
Local Interconnection Trunk Groups to the other Party, the
terminating Party shall charge the other Party for such Directory
Assistance calls at the rates contained in its tariff or pursuant to
a separately negotiated contract.
9.14. A Maintenance of Service charge applies whenever either Party
requests the dispatch of the either Party's personnel for the purpose
of performing maintenance activity on the interconnection trunks, and
any of the following conditions exist:
9.14.1. No trouble is found in the interconnection trunks; or
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9.14.2. The trouble condition results from equipment, facilities or
systems not provided by the Party whose personnel were
dispatched; or
9.14.3. Trouble clearance did not otherwise require a dispatch, and
upon dispatch requested for repair verification, the
interconnection trunk does not exceed maintenance limits, as
specified in documentation previously provided to ACI.
If a Maintenance of Service initial charge has been applied and trouble is
subsequently found in the facilities of the Party whose personnel
were dispatched, the charge will be canceled.
Billing for Maintenance of Service is based on each half-hour or fraction
thereof expended to perform the work requested. The time worked is
categorized and billed at one of the following three rates:
- Basic time;
- Overtime; or
- Premium time
as defined for billing Pacific in Pacific's Schedule Cal. P.U.C. Tariff
No. 175-T, Section 13 and in ACI's Cal. P.U.C. tariff.
10. TELECOMMUNICATIONS SERVICES AVAILABLE FOR RESALE [THE ACT SECTION
271(C)(2)(B)(XIV)]
The Parties agree that Pacific will provide telecommunications services to
ACI for resale in accordance with the requirements of Sections 251(c)(4)
and 252(d)(3) of the Act. Pacific's prices charged to ACI for resold
services will be the resale rates determined by the Commission. With
respect to those Pacific resale services for which the Commission has not
yet set a resale discount, the interim price shall be set at 17% below
Pacific's retail rate for the service or such greater discount as is made
available to any other entity. Once the Commission establishes a resale
discount for any such service, that rate will replace the 17% discount,
unless a greater discount is made available to any other entity, in which
case ACI, upon request, will be entitled to that greater discount.
11. COLLOCATION AND MID SPAN MEETS
Pacific shall permit collocation of any type of equipment used or useful
for interconnection or access to unbundled Network Elements, in accordance
with the Act and sections 579 through 582 of the FCC's First
Interconnection Order. Such equipment includes but is not limited to
transmission equipment, such as optical terminating
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equipment and multiplexers, equipment for the termination of basic
transmission facilities, equipment for the termination and multiplexing
of ISDN/xDSL loops, DLC equipment, and such additional types of equipment
that may be agreed to by the Parties or designated in Future FCC or
Commission rulings. If a request by ACI to collocate is denied on the
basis of the equipment to be installed by ACI, Pacific shall prove to the
Commission that such equipment is not "necessary" as defined by the FCC for
interconnection or access to unbundled Network Elements.
11.1. PHYSICAL COLLOCATION.
Pacific will provide for physical collocation of transport and termination
equipment necessary for interconnection of ACI's network facilities
to Pacific's network or access to unbundled network elements at its
Wire Center premises. Such collocation shall be provided on a non-
discriminatory basis according to the rates, terms and conditions
contained in Pacific's Schedule Cal. P.U.C. Tariff No. 175-T, Section
16, as of the Signature Date of this Agreement except as modified
below.
Listed below are the rates that ACI shall pay for physical collocation at
Pacific's Wire Center premises, along with other terms and conditions
that will apply with respect to such physical collocation, beginning
with the effective date of this Agreement:
11.1.1. Rates
11.1.1.1. All monthly rates and nonrecurring charges set forth
in Section 16.7.1(A)(1) shall be charged at 65% of the
rates stated;
11.1.1.2. The monthly rate set forth in Section 16.7.1(B)(1)
shall be charged at 75% of the rate stated;
11.1.1.3. The monthly rates set forth in Section 16.7.1(C)(1)
shall be reduced to zero;
11.1.1.4. The nonrecurring charges set forth in Section
16.7.1(D)(1) shall be charged at the greater of $2,000
or the amount stated in the tariff;
11.1.1.5. The second sentence and the proration chart of
Section 16.3.4 of Pacific's Schedule Cal. P.U.C. Tariff
No. 175-T shall be changed to read:
The costs will be prorated and the prorated share
refunded to previous collocator(s) as additional
collocators use collocated services at that location
within 60 months of when the billing for
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the first collocation space at that location begins,
using the following schedule:
Collocator Nonrecurring Charge Refund
1st 100% NA%
2nd 50% 50%
3rd 33.33% 16.67%
4th 25% 8.33%
5th 20% 5%
6th 16.67% 3.33%
7th 14.29% 2.38%
8th 12.5% 1.79%
9th 11.11% 1.39%
10th 10% 1.11%
11th and beyond 0%
11.1.2. Terms
11.1.2.1. Pacific agrees that it shall continue to make
physical collocation available under the terms of this
Agreement and its tariffs. Any requirement for relocation
or eviction of collocated facilities must allow for
reasonable due process including, but not limited to,
either Party seeking Commission approval if the Parties
cannot reach mutual agreement.
11.1.2.2. Should multiplexing via EISCC between ACI and another
party's collocated network facility in Pacific's Wire
Center be found to be required under the Act or offered
to another party, Pacific will provide this capability to
ACI.
11.1.2.3. Notwithstanding any provisions contained in Pacific's
Schedule Cal. P.U.C. Tariff No. 175-T, Section 16, ACI
may place Digital Loop Carrier of its choosing in its
collocation space, including shared space collocations
described below, for connection of ACI's network to
Pacific's network.
11.1.2.4. Pacific agrees to provide ACI with reasonable advance
notice, under the Notice provisions of this Agreement, of
any proposed modifications to Pacific's tariff regarding
physical collocation, except for the addition of Wire
Centers and new types of EISCCs.
11.2. SHARED SPACE COLLOCATION
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Where sufficient space exists, and upon request, Pacific will provide for
collocation on a shared space basis with each collocator's area
defined within the shared space. However, shared space collocation
will not be made available in Wire Centers where at least one
conventional physical collocation installation has already been
installed. Such defined space shall, at a minimum, be sized to
permit the placement of up to two (2) bays of collocator-provided
equipment. Any equipment allowed under 11.1 for Physical Collocation
will be allowed under Shared Space Collocation. Access to the
collocation space will be via a common entry point and it shall be
the sole responsibility of the collocator to provide for any
additional security measures to protect its equipment. Such security
measures shall be limited to covers or lockable cabinet doors placed
directly on the equipment bays of the collocator.
The following charges shall apply for shared space collocation:
11.2.1. The recurring charge for two (2) bays in a shared space
collocation shall be $265.00 per month.
11.2.2. The nonrecurring charge for two (2) bays in a shared space
collocation shall be $5,300.00.
11.2.3. The infrastructure charge for shared space collocation
shall be $25,000.00 and will be refunded on a prorated basis to
the first five shared space collocators as additional shared
space collocators utilize shared space collocation at that
location within 60 months of when the billing for the first
shared space collocation space at that location begins, based on
the proration schedule set forth above for physical collocation.
If ACI requests and Pacific provides a shared collocation arrangement as
described above, and no other collocator orders and places its
equipment in such shared space arrangement within two (2) years after
ACI collocates in such space, Pacific reserves the right to
reconfigure such space into a suitable single-occupant collocation
space. Upon request by Pacific, ACI will reasonably agree to such
reconfiguration after one year has elapsed from the time ACI has
collocated in such space. The reconfigured space shall only be large
enough to enclose the two bays of equipment placed by ACI, along with
adequate space for access to the cage, and any other safety standards
normally applied to physical collocation facilities by Pacific. ACI
will be charged a pro-rated monthly collocation space charge based on
the square footage of the reconfigured space in proportion to a
standard 10 foot by 10 foot collocation space. ACI will not be
charged for the cost of reconfiguring the space. If, after two years
from the first placement of a shared space collocation arrangement at
ACI's request, such arrangements are on average no more than one-
third occupied, the Parties agree to renegotiate Pacific's obligation
to continue to offer shared space collocation arrangements.
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11.3. MICROWAVE COLLOCATION
Where technically feasible, Pacific will provide for physical
collocation of microwave equipment (limited to transport and
termination equipment) necessary for interconnection of ACI's network
facilities to Pacific's network or access to unbundled network
elements on the roofs of Pacific's Wire Centers. Such collocation
shall be provided in accordance with the rates, terms and conditions
set forth above with respect to physical collocation, plus reasonable
recurring and nonrecurring rates for placement of the microwave
equipment.
11.4. POT BAY ENGINEERING
The Parties agree that ACI will engineer and pre-provision its side
of the POT Bay in physical (including shared space) collocation
arrangements.
11.5. VIRTUAL COLLOCATION
Rates and terms for virtual collocation will be made available on a
reasonable and non-discriminatory basis. Rates for virtual
collocation will be approximately the same as physical collocation.
The Parties agree to cooperate in selecting equipment and
establishing installation and operating procedures for virtual
collocation in the event that the use of virtual collocation becomes
necessary.
11.6. MID-SPAN MEET ARRANGEMENTS
The Parties may also choose to interconnect via a Mid Span Meet. Such
interconnection shall be limited to facilities provided for the
interconnection of any local exchange or jointly provided switched
access traffic between the Parties.
11.6.1. Physical Arrangements of Mid Span Meets: In a Mid Span
Meet, each Party extends its facilities to meet the other
Party. The point where the facilities meet is the Mid Span
point. Each Party bears its own costs to establish and
maintain a Mid Span Meet arrangement. However, the Parties
also agree that a technical arrangement for a Mid Span Meet
may involve one Party placing and extending its fiber
facilities to the Wire Center of the other Party, with
sufficient additional length on the fiber to permit the
receiving Party to terminate the fiber without requiring
splicing of the fiber facilities prior to the terminal
equipment in the receiving Party's Wire Center. In this
situation, the Parties will negotiate reasonable
compensation to be paid to the Party extending the
facilities for the associated labor, materials, and conduit
space used in extending its facilities beyond a negotiated
Mid Span point.
11.6.2. Engineering Specifications: The Parties agree to establish
technical interface specifications for Mid Span Meet
arrangements that permit the
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successful interconnection and completion of traffic routed
over the facilities that interconnect at the Mid Span Meet.
The technical specifications will be designed so that each
Party may, as far as is technically feasible, independently
select the transmission, multiplexing, and fiber terminating
equipment to be used on its side of the Mid Span Meet.
Requirements for such interconnection specifications will be
defined in joint engineering planning sessions between the
Parties. The Parties will use good faith efforts to develop
and agree on these specifications within 90 days of the
determination by the Parties that such specifications shall
be implemented, and in any case, prior to the establishment
of any Mid Span Meet arrangements between them. In the
event the Parties cannot agree on the technical
specifications required, the Parties will, after discussion
at the Vice Presidential level, interconnect with each other
using one of the other interconnection arrangements defined
elsewhere in this Agreement.
11.6.3. Maintenance Responsibilities: Each Party will be
responsible for maintaining its network on its side of the
Mid Span point. In the case where a maintenance problem
must be resolved in the fiber span between the Parties, the
Party with access to the manholes, vaults or conduit space
will dispatch maintenance personnel to perform any necessary
trouble isolation and repair activities. The Party
performing the maintenance activity in the fiber span may
bill the other Party for such activity at one-half the
hourly labor rate specified in the Maintenance of Service
section of this Agreement. Should both Parties have
maintenance access to some portions of the manholes, vaults
or conduit space on the Mid Span Meet facility arrangement,
they will cooperatively determine which Party will perform
any trouble isolation or maintenance activities during
the initial contact between them when a maintenance problem
has occurred.
Prior to the establishment of any Mid Span Meet arrangement, the
Parties agree to jointly develop all additional necessary requirements
for such interconnection, including but not limited to such items as
control and assignment of facilities within the fiber Mid Span Meet
arrangement, network management requirements, and operational testing
and acceptance requirements for installation of Mid Span Meets.
12. MEET POINT BILLING ARRANGEMENTS
12.1. ACI and Pacific will establish meet-point billing ("MPB")
arrangements for jointly provided switched access to an IXC, in
accordance with the Meet Point Billing guidelines adopted by and
contained in the OBF's MECAB and MECOD documents, except as
modified herein. Both Parties will use their best reasonable
efforts, individually and collectively, to maintain provisions in
their respective federal and state access tariffs, and provisions
within the National Exchange
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Carrier Association ("NECA") Tariff No. 4, or any successor
tariff to reflect the MPB arrangements identified in
this Agreement, in MECAB and in MECOD.
12.2. ACI and Pacific will implement the "Multiple Bill/Single Tariff"
option in order to bill any ("IXC") for that portion of the
network elements provided by ACI or Pacific. For all traffic
carried over the MPB arrangement, ACI and Pacific shall each bill
the IXC for its own portion of the applicable elements.
12.3. Each Party shall provide the billing name, billing address, and
carrier identification code ("CIC") of the IXCs that may utilize
any portion of ACI's network in a ACI/Pacific MPB arrangement in
order to comply with the MPB Notification process as outlined in
the MECAB document. Each Party will be entitled to reject a
record that does not contain a CIC code. Such information shall
be provided by each Party to the other Party in the format and
via the medium that the Parties agree.
12.4. The Parties agree to comply with the currently effective MECAB
guidelines as mutually adopted by the Parties from time to time.
12.5. The Parties further agree that in those MPB situations where one
Party sub-tends the other Party's access tandem, the Party
providing the access tandem is only entitled to bill the access
tandem fee and any associated local transport charges. The
Parties also agree that the Party who provides the end office
switching is entitled to bill end office switching fees, local
transport charges, RIC and CCL charges, as appropriate, and such
other applicable charges.
12.6. Pacific and ACI will record and transmit MPB information in
accordance with the standards and in the format set forth in the
MECOD and MECAB documents. Pacific and ACI will coordinate and
exchange the billing account reference ("BAR") and billing
account cross reference ("BACR") numbers for the MPB arrangements
described in this Agreement. Each Party will notify the other if
the level of billing or other BAR/BACR elements change, resulting
in a new BAR/BACR number.
12.7. The initial billing company will provide to the secondary
billing company any necessary AMA records (in standard EMR
format) within fourteen (14) days of the recording date. The
secondary billing company will provide the initial billing
company the necessary summary records with fourteen (14) days of
the initial company's bill date.
12.8. If MPB data is not submitted by either Party within the period
set forth above or is not in the proper format as set forth in
this Agreement, and if as a result the other Party is delayed
in billing the IXC for the appropriate charges it incurs, the
delaying Party shall pay the other Party a late MPB data
delivery charge which will be the total amount of the delayed
charges times the highest interest rate (in decimal value) which
may be levied by law for commercial transactions, compounded
daily for the number of days from the date the MPB charges should
have been received to and including the date the MPB charge
information is actually received.
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12.9. Failure of secondary billing company to provide the necessary
AMA records (in standard EMR format) within 60 days of the
recording date, or of the initial billing company to provide
the necessary summary records within 60 days of the initial
billing company's bill date, will result in the Party failing to
deliver the data to be liable to the other Party for any charges
the other Party is unable to bill the IXC.
12.10. Both Parties will provide the other a single point of contact to
handle any MPB questions.
12.11. DATA FORMAT AND DATA TRANSFER
12.11.1. The tandem Party shall provide to the end office Party,
where requested, the billing name and billing address of
all IXCs originating or terminating traffic at the end
office Party's end office.
12.11.2. Based on the individual call flows that can occur, certain
types of records will have to be exchanged for billing
purposes or the verification of billing. The Parties agree
that the exchange of billing records will utilize the
Bellcore standard EMR 01, 11, 50, and 20 formats. These
records will be exchanged on magnetic tape or via
electronic data transfer (when available).
12.11.3. When ACI and Pacific bill the customer for jointly
provided Switched Access service, the Parties will mutually
agree to the format, time frame, and settlement terms that
will be utilized. The Parties agree to work cooperatively
in the industry fora to establish an industry format to be
used by all carriers.
12.11.4. The end office Party shall provide to the tandem Party the
Switched Access Detail Usage Data (category 1101XX records)
for originating access usage on magnetic tape or via NDM,
on a monthly basis, within fourteen (14) days of the last
day of the billing period.
12.11.5. Upon request, when the tandem Party records terminating
access usage or IXC Toll Free Service usage on behalf of
the end office Party, the tandem Party will send the end
office Party Switched Access Summary Usage Data (category
1150XX records) for usage validation.
12.12. Errors may be discovered by ACI, the IXC or Pacific. Each Party
agrees to provide the other Party with notification of any
discovered errors within ten (10) business days of the discovery.
The other Party shall correct the error within twenty (20)
business days of notification and resubmit the data.
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12.13. In the event of a loss of data, both Parties shall cooperate to
reconstruct the lost data and if such reconstruction is not
possible, shall accept a reasonable estimate of the lost data
based upon three (3) to twelve (12) months of prior usage data.
12.14. All data associated with the processing and settlement of
messages under this Agreement shall be maintained by the Parties
for the period currently used by each Party for such information
in compliance with legal and/or regulatory rulings. Different
data retention periods require the agreement of the Parties.
13. LOCAL INTERCONNECTION DATA EXCHANGE FOR BILLING
There are certain types of calls or types of interconnection that require
exchange of billing records between the Parties, including, for example,
alternate billed and Toll Free Service calls. The Parties agree that all
call types must be routed between the networks, accounted for, and settled
among the parties. Certain calls will be handled via the Parties'
respective operator service platforms. The Parties agree to utilize,
where possible and appropriate, existing accounting and settlement systems
to bill, exchange records and settle revenue.
13.1. The exchange of billing records for alternate billed calls
(E.G., calling card, bill-to-third, and collect) will be
distributed through the existing CMDS processes, unless otherwise
separately agreed to by the Parties.
13.2. Inter-Company Settlements ("ICS") revenues will be settled
through the Calling Card and Third Number Settlement System
("CATS"). Each Party will provide for its own arrangements for
participation in the CATS processes, through direct participation
or a hosting arrangement with a direct participant.
13.3. Non-ICS revenue is defined as collect calls, calling card calls,
and billed to third number calls which originate on one service
provider's network and terminate on another service provider's
network in the same Local Access Transport Area ("LATA"). The
Parties agree to negotiate and execute an Agreement within 30
days of the execution of this Agreement for settlement of
non-ICS revenue. This separate arrangement is necessary since
existing CATS processes do not permit the use of CATS for non-ICS
revenue. The Parties agree that the CMDS system can be used to
transport the call records for this traffic.
13.4. Both Parties will provide the appropriate call records to the
intraLATA Toll Free Service Provider, thus permitting the Service
Provider to bill its subscribers for the inbound Toll Free
Service. No adjustments to bills via tapes, disks or NDM will be
made without the mutual agreement of the Parties.
14. AUDIT PROCESS
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"Audit" shall mean the comprehensive review of services performed under
this Agreement. This Audit shall take place under the following
conditions:
14.1. Either Party may request to perform an Audit.
14.2. The Audit shall occur upon 10 business days written notice by the
requesting Party to the non-requesting Party.
14.3. The Audit shall occur during normal business hours.
14.4. There shall be no more than one Audit requested by each Party under
this Agreement in any 12-month period.
14.5. The requesting Party may review the non-requesting Party's records,
books and documents, as may reasonably contain information relevant
to the operation of this Agreement.
14.6. The location of the Audit shall be the location where the requested
records, books and documents are retained in the normal course of
business.
14.7. All transactions under this Agreement which are over 24 months old
will be considered accepted and no longer subject to Audit.
14.8. Each Party shall bear its own expenses occasioned by the Audit,
provided that the expense of any special data collection shall be
born by the requesting Party.
14.9. The Party requesting the Audit may request that an Audit be
conducted by a mutually agreed-to independent auditor. Under this
circumstance, the costs of the independent auditor shall be paid
for by the Party requesting the Audit.
14.10. In the event that the non-requesting Party requests that the Audit
be performed by an independent auditor, the Parties shall mutually
agree to the selection of the independent auditor. Under this
circumstance, the costs of the independent auditor shall be shared
equally by the Parties.
14.11. The Parties agree that if an Audit discloses error(s), the Party
responsible for the error(s) shall, timely manner, undertake
corrective action such errors.
14.12. All information received or reviewed by the requesting Party or the
independent auditor in connection with the Audit is to be considered
Proprietary Information as defined by this Agreement. The non-
requesting Party reserves the right to require any non-employee who
is involved directly or indirectly in any Audit or the resolution of
its findings as described above to execute a nondisclosure agreement
satisfactory to the non-requesting Party.
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15. AUDIOTEXT AND MASS ANNOUNCEMENT SERVICES
The Parties agree that access to the audiotext, mass announcement and
information services of each Party should be made available to the other
Party upon execution of an agreement defining terms for billing and
compensation of such calls. Services included in this category include
976 calls, whether flat rated or usage sensitive, intra-LATA 900 services
and other intra-LATA 976-like services. Such calls will be routed over
the Local Interconnection Trunks.
ACI and Pacific will work together in good faith to negotiate and execute
the agreement for billing and compensation for these services within 90
days of the execution of this Agreement. The Parties agree that their
separate agreement on audiotext and mass announcement services will
include details concerning the creation, exchange and rating of records,
all of which will occur without any explicit charge between the Parties,
as well as a process for the handling of uncollectibles so that the
originating Party does not have any responsibility for uncollectibles.
Until such time that such an agreement is executed, ACI may choose to
block such calls, or ACI will agree to back-bill and compensate
retroactively for such calls once the subsequent agreement is executed
retroactive to the effective date of this Agreement.
15.1. USAGE SENSITIVE COMPENSATION.
All audiotext and mass announcement calls shall be considered toll
calls for purposes of reciprocal compensation between the Parties.
Compensation will be paid based on the toll rates set forth in this
Agreement with respect to reciprocal compensation between the
Parties, except that such compensation shall be paid by the Party
terminating the call, rather than the Party originating the call.
15.2. BILLING AND COLLECTION COMPENSATION.
Billing and collection compensation will be paid by the terminating
Party to the originating Party at the rate of 5 cents per call.
16. BRANDING
Services offered by ACI that incorporate Network Elements made available
to ACI pursuant to this Agreement, and Local Services that ACI offer for
resale shall be branded as agreed by the Parties, subject to technical
feasibility. In no event shall Pacific personnel installing or repairing
ACI Local Service or Network Elements initiate a conversation with the end
user customers to market Pacific products or services. Pacific personnel
shall respond to any inquiries from end users or consumers concerning
Pacific's products or services by providing a telephone number to call for
information.
17. MOST FAVORABLE TERMS AND TREATMENT
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Pacific agrees that it shall make available to ACI any interconnection,
service or Network Element provided under an agreement approved under
Section 252 of the Act to which it is a party upon the same terms and
conditions as provided in that agreement.
18. DISPUTE RESOLUTION AND BINDING ARBITRATION
The Parties agree that in the event of a default or violation hereunder,
or for any dispute arising under this Agreement or related agreements the
Parties may have which are described in this Agreement, the Parties shall
first confer to discuss the dispute and seek resolution prior to taking
any action before any court or regulator, or before authorizing any public
statement about or authorizing disclosure of the nature of the dispute to
any third party. Such conference shall occur at least at the Vice
President level for each Party. In the case of Pacific, its Vice
President for Local Competition, or equivalent officer, shall participate
in the meet and confer meeting, and ACI Vice President of Network
Operations, or equivalent officer, shall participate. In the event the
Parties cannot resolve the dispute, they will employ the following
procedure:
18.1. Any controversy or claims arising out of or relating to Agreement or
any breach hereof, shall be settled by arbitration in accord with the
Commercial Arbitration Rules of the American Arbitration Association
("AAA"). Such arbitration shall be held in San Francisco, California
or any other location to which the Parties agree. Written notice of
intent to arbitrate shall be served on the opposing Party at least
twenty (20) business days prior to the filing of such notice at the
appropriate AAA regional office.
18.2. The Parties agree to request an expedited hearing before the AAA and,
if the AAA can arrange such, the hearing shall commence within sixty
(60) days of the filing of the arbitration claim. If the AAA is not
able to arrange for the hearing to be held within sixty (60) days of
such filing, then the hearing shall commence on the AAA's first
available date thereafter, but with ninety (90) days of the original
filing of the arbitration claim.
18.3. The AAA panel shall award costs, including reasonable attorney's
fees, to the successful Party at the conclusion of the hearing.
Should any party refuse to arbitrate controversies or claims as
required by this Agreement, or delays the course of arbitration
proceedings beyond the times set, or permitted by the AAA panel, then
such Party shall pay all costs, including reasonable attorney fees,
of the other Party, incurred with respect to the entire arbitration
and/or litigation process, even though such refusing or delaying
Party may ultimately be the successful Party in the arbitration
and/or litigation.
18.4. The judgment upon the award rendered may be entered in the
highest Court of the forum capable of rendering such judgment, either
State or Federal, having jurisdiction and shall be deemed final and
binding on both of the Parties.
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19. FORCE MAJEURE
Neither Party shall be responsible for delays or failures in performance
resulting from acts or occurrences beyond the reasonable control of such
Party, regardless of whether such delays or failures in performance were
foreseen or foreseeable as of the date of this Agreement, including,
without limitation: fire, explosion, acts of God, war, revolution, civil
commotion, or acts of public enemies; any law, order, regulation, or
ordinance of any government or legal body; strikes; or delays caused by
the other Party or any other circumstances beyond the Party's reasonable
control. In such event, the Party affected shall, upon giving prompt
notice to the other Party, be excused from such performance on a day-to-
day basis to the extent of such interference (and the other Party shall
likewise be excused from performance of its obligations on a day-for-day
basis to the extent such Party's obligations relate to the performance so
interfered with). The affected Party shall act in good faith to avoid or
remove the cause of non-performance and both Parties shall proceed to
perform with dispatch once the causes are removed or cease.
20. REGULATORY DECISION
This Agreement shall at all times be subject to such review by the
Commission or FCC as permitted by the Act. If any such review renders the
Agreement inoperable or creates any ambiguity or requirement for further
amendment to the Agreement, the Parties will negotiate in good faith to
agree upon any necessary amendments to the Agreement.
21. REGULATORY APPROVAL
In the event that any final and nonappealable legislative, regulatory,
judicial or other legal action renders this Agreement or any Attachment
hereto inoperable, materially affects any material terms of this
Agreement, or materially affects the ability of ACI or Pacific to perform
any material terms of this Agreement, ACI or Pacific may, on thirty (30)
days written notice (delivered not later than 30 days following the date
on which such action has become legally binding and has otherwise become
final and nonappealable) require that such terms be renegotiated, and the
parties shall renegotiate in good faith such mutually acceptable new terms
as may be required. In the event that such new terms are not renegotiated
within ninety (90) days after such notice, the Dispute shall be referred
to the Dispute Resolution procedures set forth in this Agreement.
22. INTEGRATION
The Parties have negotiated this Agreement as an integrated document. All
of the terms in this Agreement are dependent upon the other terms of the
Agreement and no part of this Agreement would have been entered into by
the Parties without the other terms of this Agreement. No portion of this
Agreement is intended to be severable from any other part of the
Agreement. If any provision of this Agreement, or the application thereof
to any person, place, or circumstance, shall be held by a court of
competent jurisdiction to
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be invalid, unenforceable, or void, the remainder of this Agreement and
such provisions as applied to other persons, places, and circumstances
shall remain in full force and effect.
23. TERM OF AGREEMENT
This Agreement shall be for a period of three (3) years after the
effective date, and thereafter the Agreement shall continue in force and
effect unless and until a new agreement, addressing all of the terms of
this Agreement, becomes effective between the Parties. The Parties agree
to commence negotiations on a new agreement, upon request of either Party,
at any time after one year from the Effective Date of this Agreement.
24. EFFECTIVE DATE
This Agreement shall become effective upon approval by the Commission.
25. AMENDMENT OF AGREEMENT
ACI and Pacific may mutually agree to amend this Agreement in writing.
Since it is possible that amendments to this Agreement may be needed to
fully satisfy the purposes and objectives of this Agreement, the Parties
agree to work cooperatively, promptly and in good faith to negotiate and
implement any such additions, changes and corrections to this Agreement.
26. LIMITATION OF LIABILITY
Except as otherwise provided herein, neither Party shall be liable to the
other in connection with the provision or use of services offered under
this Agreement for indirect, incidental, consequential, special damages,
including (without limitation) damages for lost profits, regardless of the
form of action, whether in contract, indemnity, warranty, strict
liability, or tort.
27. INTELLECTUAL PROPERTY
ACI is responsible for obtaining any license or right to use agreement
associated with an Unbundled Network Element purchased from Pacific.
Pacific will provide a list of all known and necessary licenses or right
to use agreements applicable to the subject Network Element(s) within
seven days of a request for such a list by ACI. Pacific agrees to use its
best efforts to facilitate the obtaining of any necessary license or right
to use agreement. Pacific makes no warranties, express or implied,
concerning Pacific's (or any third party's) rights with respect to
intellectual property (including with limitation, patent, copyright, and
trade secret rights) or contract rights associated with ACI's rights to
interconnect with Pacific's network and to Unbundled Network Elements.
28. INDEMNITY
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Each Party shall indemnify and hold the other harmless from any
liabilities, claims or demands (including the costs, expenses and
reasonable attorney's fees on account thereof) that may be made by third
parties for:
28.1.1. personal injuries, including death, or
28.1.2. damage to tangible property
resulting from the sole negligence and/or sole willful misconduct of that
Party, its employees or agents in the performance of this Agreement. Each
Party shall defend the other at the other's request against any such
liability, claim or demand. Each Party shall notify the other promptly of
written claims or demands against such Party of which the other Party is
solely responsible hereunder.
Pacific shall be indemnified, defended, and held harmless by ACI for
claims for patent, trademark, infringement or other infringement or
intellectual property rights, arising from ACI's use of services or
unbundled elements provided under this Agreement.
29. ASSIGNMENT
This Agreement may be assigned by either Party upon sixty (60) days
advance written notice to the other Party.
30. CONTROLLING LAW
This Agreement was negotiated by the Parties in accordance with the terms
of the Act and the laws of the State of California. It shall be
interpreted solely in accordance with the terms of the Act and California
law.
31. DEFAULT
If either Party believes the other is in breach of the Agreement or
otherwise in violation of law, it shall first give sixty (60) days' notice
of such breach or violation and an opportunity for the allegedly
defaulting Party to cure. Thereafter, the Parties shall employ the
Dispute Resolution and Arbitration procedures set forth in this Agreement.
32. NONDISCLOSURE
32.1. All information, including but not limited to specifications,
microfilm, photocopies, magnetic disks, magnetic tapes,
drawings, sketches, models, samples, tools, technical
information, data, employee records, maps, financial reports,
and market data, (i) furnished by one Party to the other Party
dealing with customer specific, facility specific, or usage
specific information, other than customer information
communicated for the purpose of publication of directory
database inclusion, or (ii) in written, graphic,
electromagnetic, or other tangible form and marked at the time
of delivery as "Confidential" or "Proprietary", or (iii)
communicated orally and declared to the receiving Party at the
time of delivery, or
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by written notice given to the receiving Party within ten (10)
days after delivery, to be "Confidential" or "Proprietary"
(collectively referred to as "Proprietary Information"), shall
remain the property of the disclosing Party.
32.2. Upon request by the disclosing Party, the receiving Party
shall return all tangible copies of Proprietary Information,
whether written, graphic or otherwise, except that the
receiving Party may retain one copy for archival purposes.
32.3. Each Party shall keep all of the other Party's Proprietary
Information confidential and shall use the other Party's
Proprietary Information only for performing the covenants
contained in the Agreement. Neither Party shall use the other
Party's Proprietary Information for any other purpose except
upon such terms and conditions as may be agreed upon between
the Parties in writing.
32.4. Unless otherwise agreed, the obligations of confidentiality
and non-use set forth in this Agreement do not apply to such
Proprietary Information as:
32.4.1. was at the time of receipt already known to the
receiving Party free of any obligation to keep it
confidential evidenced by written records prepared
prior to delivery by the disclosing Party; or
32.4.2. is or becomes publicly known through no wrongful act
of the receiving Party; or
32.4.3. is rightfully received from a third person having no
direct or indirect secrecy or confidentiality
obligation to the disclosing Party with respect to
such information; or
32.4.4. is independently developed by an employee, agent, or
contractor of the receiving Party which individual
is not involved in any manner with the provision of
services pursuant to the Agreement and does not have
any direct or indirect access to the Proprietary
Information; or
32.4.5. is disclosed to a third person by the disclosing Party
without similar restrictions on such third person's
rights; or
32.4.6. is approved for release by written authorization of the
disclosing Party; or
32.4.7. is required to be made public by the receiving Party
pursuant to applicable law or regulation provided
that the receiving Party shall give sufficient
notice of the requirement to the disclosing Party to
enable the disclosing Party to seek protective
orders.
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32.5. Effective Date Of This Section. Notwithstanding any other
provision of this Agreement, the Proprietary Information
provisions of this Agreement shall apply to all information
furnished by either Party to the other in furtherance of the
purpose of this Agreement, even if furnished before the date
of this Agreement.
33. EXECUTION IN DUPLICATE
This Agreement may be executed in duplicate copies, and, upon said
execution, shall be treated as an executed document.
34. NOTICES
Any notices required by or concerning this Agreement shall be sent to the
Parties at the addresses shown below:
Pacific Bell
Theresa Cabral, Senior Counsel
2600 Camino Ramon, Rm. 2W806
San Ramon, CA 94583
Accelerated Connections, Inc.
Eric Geis, Vice President
7979 Ivanhoe Ave., Suite 550
La Jolla, CA 92037
Each Party shall inform the other of any changes in the above addresses.
35. GOOD FAITH PERFORMANCE
In the performance of their obligations under this Agreement, the Parties
shall act in good faith and consistently with the intent of the Act.
Where notice, approval or similar action by a Party is permitted or
required by any provision of this Agreement (including, without limitation
of the obligation of the Parties to further negotiate the resolution of
new or open issues under this Agreement), such action shall not be
unreasonably delayed, withheld or conditioned.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed by their respective duty authorized representatives.
/s/ LEE BAUMAN /s/ ERIC GEIS
- ------------------------------- --------------------------------
Lee Bauman Eric Geis
Vice President Vice President
Local Competition Accelerated Connections, Inc.
Pacific Bell
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APPENDIX A
INTERCONNECTION ARRANGEMENTS CHART
<PAGE>
APPENDIX A
APPENDIX A - INTERCONNECTION ARRANGEMENTS*
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ACI Switch ACI Routing Point POI PACIFIC Central Office
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------
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*To Be Determined
<PAGE>
APPENDIX B
BILATERAL AGREEMENT WORKSHEET
<PAGE>
APPENDIX B--PAGE 1
LO: INTERCONNECTION
ACI:
Worksheet Current As Of:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
TOPIC PACIFIC BELL REFERENCE(S) ACI REFERENCE(S) NOTES / STATUS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 Internetwork provisioning CLC Handbook, Section 16.5,
information and guidelines. PROVISIONS OF LISA.
-----------------------------------------------------------------------
CLC Handbook, Appendix F1,
CLC ISR USERS' GUIDE.
-----------------------------------------------------------------------
Interconnection Agreement
between ________ and Pacific,
________ 1996.
- -----------------------------------------------------------------------------------------------------------
2 SS7 & other critical CLC Operations Handbook-SS7,
internetwork compatibility Section 16.7.3.2 & .3,
testing. PRE-SERVICE & PROTOCOL TESTING.
-----------------------------------------------------------------------
CCS Network Interface, Section 6.3,
PROTOCOL COMPATIBILITY TESTING.
-----------------------------------------------------------------------
NOF Handbook, Section III, 3G, SS7
COMPATIBILITY TESTING.
- -----------------------------------------------------------------------------------------------------------
3 Special protocol CCS Network Interface, Section 2.3,
implementation agreements. INTERFACE PROTOCOL MESSAGES.
-----------------------------------------------------------------------
TR-246, T1.114 (SCCP) & T1.116 (SCCP);
GR-317 and GR-394.
-----------------------------------------------------------------------
CCS Questionnaire, Section IV, D-2
SWITCH PARAMETERS.
- -----------------------------------------------------------------------------------------------------------
4 Diversity requirements. CCS Network Interface, Section 4.1,
DIVERSITY DEFINITION.
-----------------------------------------------------------------------
NOF Handbook, Section III, 2D, LINK
RESPONSIBILITIES - DIVERSITY.
-----------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
BILATERAL AGREEMENT TEMPLATE
APPENDIX B--PAGE 2
<TABLE>
<CAPTION>
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BILATERAL AGREEMENT PACIFIC BELL REFERENCE(S) ACI REFERENCE(S) NOTES / STATUS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5 Installation, maintenance CLC Operations Handbook-LISA,
guidelines and Section 16.6.2,
responsibilities. RESPONSIBILITIES.
-----------------------------------------------------------------------
CLC Operations Handbook-SS7,
Section 16.7.2,
RESPONSIBILITIES.
-----------------------------------------------------------------------
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6 Network security CLC Operations HB-LISA,
requirements. Section 16.6.11 & .12, CALL
TRACE (EMERGENCY & FRAUD).
-----------------------------------------------------------------------
-----------------------------------------------------------------------
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7 Performance standards and LISA Interface Specification,
service level agreements. Section 4, PERFORMANCE.
-----------------------------------------------------------------------
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8 Specific versions/issues of CCS Network Interface,
protocol or interface Section 1.4, RELATED
specification. DOCUMENTS.
-----------------------------------------------------------------------
-----------------------------------------------------------------------
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9 Maintenance CLC Operations Handbook-LISA,
procedures,including Section 16.6.4, MAINTENANCE
trouble reporting, status, -----------------------------------------------------------------------
etc. CLC Operations Handbook-SS7,
Section 16.7.4, MAINTENANCE
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</TABLE>
2
<PAGE>
BILATERAL AGREEMENT TEMPLATE
APPENDIX B--PAGE 3
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
BILATERAL AGREEMENT PACIFIC BELL REFERENCE(S) ACI REFERENCE(S) NOTES / STATUS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 Internetwork trouble CLC Operations HB-LISA,
resolution and escalation Section 16.6.4 & .6,
procedures. SECTIONALIZATION; ESCALATIONS.
-----------------------------------------------------------------------
CLC Operations HB-SS7,
Section 16.7.4 & .6,
SECTIONALIZATION; ESCALATIONS.
-----------------------------------------------------------------------
Interconnection Agreement between
______ and Pacific, ______ 1996.
- -----------------------------------------------------------------------------------------------------------
11 In-depth root cause S.I. 131 - CUSTOMER SERVICE
analysis of significant QUALITY FAILURE REPORT
failures. (ANALYSIS).
-----------------------------------------------------------------------
-----------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
12 Explicit forecasting CLC HB, Appendix C,
information re: direct and INTERCONNECTION FORECASTS.
subtending traffic.
-----------------------------------------------------------------------
-----------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
13 Explicit expectations CLC Operations Handbook-SS7,
regarding interoperabiliy Section 16.7.3.3 & .4, PROTOCOL/
testing. ACCEPTANCE TESTS.
-----------------------------------------------------------------------
CCS Network Interface, Section 6.3,
PROTOCOL COMPATIBILITY TESTING.
-----------------------------------------------------------------------
CLC Operations Handbook-LISA,
Section 16.6.3.3 ACCEPTANCE TESTS.
- -----------------------------------------------------------------------------------------------------------
14 Network management. CLC Operations HB-LISA, Section
16.6.2.5, NETWORK MANAGEMENT
GUIDELINES.
-----------------------------------------------------------------------
NOF Handbook, Section VI, NETWORK
MANAGEMENT GUIDELINES.
-----------------------------------------------------------------------
Interconnection Agreement between
_______ and Pacific, _______ 1996.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
BILATERAL AGREEMENT TEMPLATE
APPENDIX B--PAGE 4
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
BILATERAL AGREEMENT PACIFIC BELL REFERENCE(S) ACI REFERENCE(S) NOTES / STATUS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
15 Operating procedures. CLC Operations Handbook - LISA
(all sections).
-----------------------------------------------------------------------
CLC Operations Handbook - SS7,
(all sections).
-----------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
16 Routing and screening LISA Interface Specification,
administration. Section 2.2, ROUTING & SCREENING.
-----------------------------------------------------------------------
CCS Network Interface, Section
2.2, ROUTING & SCREENING
(MTP/SCCP).
-----------------------------------------------------------------------
Interconnection Agreement between
_______ and Pacific, _______ 1996.
- -----------------------------------------------------------------------------------------------------------
17 Synchronization design and CLC Operations Handbook-SS7,
Company-wide Section 16.7.3.5, SYNCHRONIZATION.
coordinator(s).
-----------------------------------------------------------------------
-----------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
18 Performance requirements. LISA Interface Specification,
Section 4, PERFORMANCE.
-----------------------------------------------------------------------
CCS Network Interface, Section 5,
PERFORMANCE
-----------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
19 Responsibility assignment CLC Operations Handbook - LISA
(testing, control, etc.). (throughout).
-----------------------------------------------------------------------
CLC Operations Handbook - SS7,
(throughout).
-----------------------------------------------------------------------
Interconnection Agreement between
_______ and Pacific, _______ 1996.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
BILATERAL AGREEMENT TEMPLATE
APPENDIX B--PAGE 5
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
BILATERAL AGREEMENT PACIFIC BELL REFERENCE(S) ACI REFERENCE(S) NOTES / STATUS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
20 Information sharing for CLC Oprs HB-LISA, Section
analysis and problem 16.6.4.3 & 16.6.5
identification. SECTIONALIZATION &
INTERCARRIER TESTING.
-----------------------------------------------------------------------
NOF Handbook, Section VII,
INFORMATION SHARING.
-----------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
21 Network transition and CLC Operations Handbook-LISA,
service rearrangement Section 16.6.3.7,
management. REARRANGEMENTS.
-----------------------------------------------------------------------
CLC Operations HB-SS7,
Section 16.7.3.9, SIGNALING
LINK REARRANGEMENTS.
-----------------------------------------------------------------------
CCS Questionnaire, Section III,
2 TRUNK CONVERSION
CONSIDERATIONS.
- -----------------------------------------------------------------------------------------------------------
22 Calling Party Number CLC HB-LISA, Section 16.5.6,
privacy management. PREREQUISITES,LIMITATIONS &
RESTRICTIONS.
-----------------------------------------------------------------------
Interconnection Agreement between
_______ and Pacific, _______ 1996.
-----------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
23 Traffic engineering design Interconnection Agreement between
criteria and capacity _______ and Pacific, _______ 1996.
management.
-----------------------------------------------------------------------
-----------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
24 Tones and announcements for CLC Operations HB-LISA, Section
unsuccessful call attempts. 16.6.9.4, TONES AND ANNOUNCEMENTS.
-----------------------------------------------------------------------
CCS Network Interface, Section 3.4,
TONES AND ANNOUNCEMENTS.
-----------------------------------------------------------------------
NOF Handbook, Section III, Pg 17,
TONES AND ANNOUNCEMENTS.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
BILATERAL AGREEMENT TEMPLATE
APPENDIX B--PAGE 5
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
BILATERAL AGREEMENT PACIFIC BELL REFERENCE(S) ACI REFERENCE(S) NOTES / STATUS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
25 Mutual aid agreement(s). CLC Handbook, Section 48,
EMERGENCY PREPAREDNESS.
-----------------------------------------------------------------------
AGREEMENT BETWEEN BCCS FOR
NAT'L SECTIONURITY
EMERGENCY PREPAREDNESS.
-----------------------------------------------------------------------
MUTUAL AID AGREEMENT AMONG
IEC AND LEC CARRIERS IN
CALIFORNIA...
- -----------------------------------------------------------------------------------------------------------
26 Emergency communications Emergency Preparedness &
plan. Response Program, Tab 4,
COMMUNICATIONS.
-----------------------------------------------------------------------
NOF Handbook, Section III,
Pg 16, EMERGENCY COMMUNICATIONS.
-----------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
27 Billing records data
exchange.
-----------------------------------------------------------------------
-----------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
28 Pre-cutover internetwork CCS Network Interface, Section 6.3,
trunk testing. PROTOCOL COMPATIBILITY TESTING.
-----------------------------------------------------------------------
CLC Operations HB-LISA, Section
16.6.3.2 & .3, PRE-SERVICE/
ACCEPTANCE TESTS.
-----------------------------------------------------------------------
CLC Operations HB-SS7, Section
16.7.3.4 & .5, PROTOCOL/
ACCEPTANCE TESTS.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
APPENDIX C
SERVICE PERFORMANCE MEASURES AND
LIQUIDATED DAMAGES
<PAGE>
APPENDIX C
Page 1
INTRODUCTION
I. Pursuant to Section 1.12 of this Agreement, Section A of this
Appendix C sets forth the service standards, measurements, and
performance applicable to Local Services or Network Elements
provided under this Agreement.
Section B of this Appendix C sets forth liquidated damages to be
paid in the event that specified failures of performance occur.
As experience is acquired under this Agreement with the new
business processes established, the Parties expect to learn which
measurements set forth in Section A are more or less useful than
others. The Parties also expect that experience will show whether
new measurements are needed or whether certain existing
measurements are not needed. Accordingly, while this Agreement is
in effect, either Party may, from time to time, request the
addition, deletion or modification of the measures set forth in
Section A. In the event the Parties cannot agree on such addition,
deletion or modification they will resolve such dispute pursuant
to Section 17 of the Agreement.
Unless otherwise stated, Pacific shall make monthly reports to ACI
for all performance measures. Should a dispute arise concerning
the accuracy of any of Pacific's measurements, ACI may audit them
under procedures set out in Section 14 of the Agreement.
II. "Parity" Defined: Pacific shall provide services to ACI that, for
any relevant period of measurement, have substantially the same
characteristics of timeliness and performance as Pacific provides
at retail and, for such purpose, those services shall be deemed to
have substantially the same characteristics for any population of
thirty (30) or more observations if it has the same statistical
distribution at the 90% confidence interval. Service Parity is
achieved when Pacific's service performance, as defined by the
designated comparable measures, is within 1.65 standard deviations
(90% confidence level) of the average retail performance for the
equivalent retail product or service, subject to the definitions
contained within this Appendix C. The calculation of 1.65 standard
deviations will be based on the most recent two full calendar
quarters of actual performance and revised quarterly. As used in
the preceding sentence, Pacific's "average retail performance for
the equivalent retail product or service" shall be calculated using
all available observations of Pacific performance, rather than any
form of sampling. "Pacific's service performance" for ACI shall,
similarly, be calculated using all available observations. Average
performance will be measured and reported monthly for each
comparable measure. Liquidated damages will apply when performance
is not at parity.
Service Parity applies to the comparable measures only. Other
agreed to performance measures will be based on specified service
standards and liquidated damages will apply as defined in this
Appendix C.
<PAGE>
APPENDIX C
Page 2
Section A
A.1 PROVISIONING SERVICE PERFORMANCE MEASURES
1. % INSTALLATION APPOINTMENTS COMMITMENT MET
DEFINITION:
This measures the percent of service orders where the completion
date matches the committed due date. (E.G., The due date is
4/01/97 am, service is installed and the order is completed 4/01/97
am).
METHOD OF CALCULATION:
As a Measurement of Comparable Service, this metric will be in
parity with Pacific's comparable services. This measure excludes
disconnect orders. This measure will be calculated separately for
each Pacific region. These regions are Los Angeles, Bay, North and
South. Measurements will be calculated by Business (Single and
Multi-line, Centrex, PBX Trunks), Residence, LINK, and ISDN.
- -------------------------------------------------------------------------------
TOTAL NUMBER OF ORDERS COMPLETED ON TIME
TOTAL NUMBER OF ORDERS COMPLETED X 100
- -------------------------------------------------------------------------------
REPORTING PERIOD:
Monthly, and sorted by Business (Single and Multi-line, Centrex,
PBX Trunks), Residence, LINK, and ISDN.
2. % INSTALLATION REPORTS
DEFINITION:
This measures the number of trouble reports that occur within the
first thirty (30) days of service installation (E.G., Service is
installed on 4/01/97, a trouble is reported on 4/05/97).
METHOD OF CALCULATION:
As a Measurement of Comparable Service, this metric will be in
parity with Pacific's comparable services. This measure will be
calculated separately for each Pacific region. These regions are
Los Angeles, Bay, North and South. This measure only includes
Pacific Network Troubles. Measurements will be calculated by
Business (Single and Multi-line, Centrex, PBX Trunks), Residence,
LINK, and ISDN.
- -------------------------------------------------------------------------------
TOTAL NUMBER OF INSTALLATIONS WITH TROUBLE REPORTED WITHIN 30 DAYS
FROM COMPLETION.
TOTAL NUMBER OF SERVICE ORDERS COMPLETED X 100
- -------------------------------------------------------------------------------
<PAGE>
APPENDIX C
Page 3
REPORTING PERIOD:
Monthly, and sorted by Business (Single and Multi-line, Centrex,
PBX Trunks), Residence, LINK, and ISDN.
3. FIRM ORDER CONFIRMATION QUALITY - % ACCURATE AND COMPLETE
DEFINITION:
Measures percent of Firm Order Confirmations that are accurate and
complete.
METHOD OF CALCULATION:
As a measurement of Performance Standards, this metric will comply
with the specific performance level shown below. Measurements will
be calculated by Business (Single and Multi-line, Centrex, PBX
Trunks), Residence, LINK, and ISDN.
- -------------------------------------------------------------------------------
TOTAL NUMBER OF FOC'S RETURNED ACCURATE AND COMPLETE
TOTAL NUMBER OF FOC'S TO BE RETURNED FOR THE MONTH X 100 = 95%
- -------------------------------------------------------------------------------
REPORTING PERIOD:
Monthly, and sorted by Business (Single and Multi-line, Centrex,
PBX Trunks) ISDN, Residence, LINK.
4. LSP TO LSP MIGRATION NOTIFICATION - % ON TIME
DEFINITION:
Measures the percent of migration notifications sent to the
outgoing ACI within 48 hours of receipt of the migration order.
METHOD OF CALCULATION:
As a measurement of Performance Standards, this metric will comply
with the specific performance level shown below. Measurements will
be calculated by Business (Single and Multi-line, Centrex, PBX
Trunks), Residence, LINK, and ISDN.
- -------------------------------------------------------------------------------
TOTAL NUMBER OF MIGRATION NOTIFICATIONS RETURNED LESS THAN 48 HOURS
TOTAL NUMBER OF MIGRATION NOTIFICATIONS RETURNED FOR
THE MONTH X 100 = 95%
- -------------------------------------------------------------------------------
REPORTING PERIOD:
Monthly, and sorted by Business (Single and Multi-line, Centrex,
PBX Trunks), ISDN, Residence.
5. REQUESTS FOR CUSTOMER SERVICE RECORDS (CSR)
<PAGE>
APPENDIX C
Page 4
DEFINITION:
Measures the percent of Customer Service Records sent to ACI
within 4 hours of receiving the request and appropriate LOA. This
measurement applies to less than twenty (20) Basic Exchange lines
billed under one number and less than six (6) Centrex lines or six
(6) PBX trunks, or six (6) ISDN lines, billed under one number.
Measurements will be calculated by Business (Single and Multi-line,
Centrex, PBX Trunks), Residence, LINK, and ISDN.
METHOD OF CALCULATION:
As a measurement of Performance Standards, this metric will comply
with the specific performance level shown below.
- -------------------------------------------------------------------------------
NUMBER OF CSRS RECEIVED less than 4 HOURS
TOTAL NUMBER OF REQUESTS FOR CSR X 100 = 95%
- -------------------------------------------------------------------------------
REPORTING PERIOD:
When available, these reports will be provided monthly, and sorted
by Business (Single and Multi-line, Centrex, PBX Trunks) ISDN,
Residence
6. LOCAL PIC CHANGE - % ON TIME
DEFINITION:
Measures the percent of local PIC changes initiated by the ACI
that are processed within twenty-four (24) hours of receipt of the
order. This interval will stay in parity with interLATA PICs.
METHOD OF CALCULATION:
As a measurement of Performance Standards, this metric will comply
with the specific performance level shown below. Measurements will
be calculated by Business (Single and Multi-line, Centrex, PBX
Trunks), Residence, LINK, and ISDN.
- -------------------------------------------------------------------------------
TOTAL NUMBER OF PIC CHANGES COMPLETED WITHIN 24 HOURS
TOTAL NUMBER OF PIC CHANGE REQUESTS X 100 = 95%
- -------------------------------------------------------------------------------
REPORTING PERIOD:
- Monthly, and sorted by Business (Single and Multi-line, Centrex,
PBX Trunks) ISDN, Residence.
7. SERVICE ORDER DISCREPANCY
<PAGE>
APPENDIX C
Page 5
DEFINITION:
Measures percent of Orders initiated by ACI that result in a
discrepancy. The discrepancy is a result of ACI issuance. An order
will be considered to be discrepant if at any time after receipt of
the order Pacific has to either reject the order or request a
supplement of the order from the ACI as a result of incomplete or
inaccurate information, as defined in Pacific's Resale Access Line
Request Forms Instruction Guide (GUIDE), Version 4, dated April 8,
1996. If ACI service orders conform to the Guide, rejects or
requests to supplement such service orders will be excluded from
this measurement and will not incur Liquidated Damages, as defined
in Section B of this Appendix. ACI and Pacific will mutually agree
on revisions to the Guide that effect service order form or
content. If they are unable to agree, they will resolve the
dispute pursuant to Section 17 of the Agreement.
METHOD OF CALCULATION:
As a measurement of Performance Standards, this metric will comply
with the specific performance level shown below. Measurements will
be calculated by Business (Single and Multi-line, Centrex, PBX
Trunks), Residence, LINK, and ISDN.
- -------------------------------------------------------------------------------
TOTAL NUMBER OF ORDERS ISSUED WITHOUT DISCREPANCY
TOTAL NUMBER OF ORDERS ISSUED X 100 = 90%
- -------------------------------------------------------------------------------
REPORTING PERIOD:
Monthly, and sorted by Business (Single and Multi-line, Centrex,
PBX Trunks) ISDN, Residence, LINK.
8. TRUNK ORDERS INSTALLED ON TIME
DEFINITION:
Measures the percent of local interconnection trunks that are
completed on or before the due date. The comparative performance
measure is Feature Group B & D Switched Access.
METHOD OF CALCULATION:
As a Measurement of Comparable Service, this metric will be in
parity with Pacific's comparable services. The comparative measure
is Feature Group B & D switched access.
- -------------------------------------------------------------------------------
TOTAL NUMBER OF ORDERS COMPLETED ON TIME
TOTAL NUMBER OF ORDERS COMPLETED X 100
- -------------------------------------------------------------------------------
REPORTING PERIOD:
Monthly
9. TRUNK FIRM ORDER CONFIRMATION TIMELINESS
<PAGE>
APPENDIX C
Page 6
DEFINITION:
Measures percent FOC sent to ACI within the specified time
(equivalent to Feature Group B & D Switched Access.)
METHOD OF CALCULATION:
As a Measurement of Comparable Service, this metric will be in
parity with Pacific's comparable services. The comparative measure
is Feature Group B & D Switched Access.
REPORTING PERIOD:
Monthly
10. TRUNK SERVICE ORDER DISCREPANCY
DEFINITION:
Measures percent of Interconnection Service Request (ISR) initiated
by ACI that result in a discrepancy. An order will be considered
to be discrepant if at any time after receipt of the order Pacific
has to either reject the order or request a supplement of the order
from ACI as a result of incomplete or inaccurate information, as
defined in Pacific's CLC Handbook. If ACI service orders conform to
the CLC Handbook, currently Section 16.0, rejected Trunk Service
Orders or requests to supplement such service orders will be
excluded from the Trunk Service Order Discrepancy measurement and
will not incur Liquidated Damages, as defined in Section B of this
Appendix. ACI and Pacific will mutually agree on revisions to the
Handbook that effect service order form or content. If they are
unable to agree, they will resolve the dispute pursuant to Section
17 of the Agreement.
METHOD OF CALCULATION:
As a measurement of Performance Standards, this metric will comply
with the specific performance level shown below
- -------------------------------------------------------------------------------
TOTAL NUMBER OF ORDERS ISSUED WITHOUT DISCREPANCY
TOTAL NUMBER OF ORDERS ISSUED X 100 = 90%
- -------------------------------------------------------------------------------
REPORTING PERIOD:
Monthly
11. FORECASTING
DEFINITION:
Measures the accuracy of forecasted volumes of LINK or Residence,
Business (Single and Multi-line, Centrex, PBX Trunks), ISDN resale
service orders.
METHOD OF CALCULATION:
<PAGE>
APPENDIX C
Page 7
Forecasts are accurate within 20% +/- in any calendar month of the
forecast period (measurement excludes Interconnection Trunks)
REPORTING PERIOD:
Monthly
12. AVERAGE DELAY DAYS
DEFINITION:
Measures the average number of days a service order is delayed
due to an appointment being missed.
METHOD OF CALCULATION:
As a measurement of Comparable Service, this metric will be in
parity with Pacific's comparable services. Measurements will be
calculated by Business (Single and Multi-line, Centrex, PBX
Trunks), Residence, LINK, and ISDN.
TOTAL DELAYED DAYS
------------------
Total orders missed
<PAGE>
APPENDIX C
Page 8
A.2 MAINTENANCE SERVICE PERFORMANCE MEASURES
1. % MAINTENANCE APPOINTMENTS MET
------------------------------
DEFINITION:
----------
This measures the number of troubles that are cleared on or before the
committed date and time.
METHOD OF CALCULATION:
---------------------
As a Measurement of Comparable Service, this metric will be in parity with
Pacific's comparable services. This measure includes Pacific network
Troubles only. This measure will be calculated separately for each Pacific
region. These regions are Los Angeles, Bay, North and South. Measurements
will be calculated by Business (Single and Multi-line, Centrex, PBX
Trunks), Residence, LINK, and ISDN.
NUMBER OF TROUBLE REPORTS WITH APPOINTMENTS MET
------------------------------------------------
NUMBER OF TROUBLE REPORTS COMPLETED x 100
REPORTING PERIOD:
----------------
Monthly, and sorted by Business (Single and Multi-line, Centrex, PBX
Trunks), Residence, LINK, and ISDN.
2. % REPEAT TROUBLES WITHIN 30 DAYS
--------------------------------
DEFINITION:
-----------
This Measures the percent of trouble reports on the same telephone line
where there was a previous trouble within the last thirty days.
METHOD OF CALCULATION:
---------------------
As a Measurement of Comparable Service, this metric will be in parity with
Pacific's comparable services. This measure includes Pacific Network
troubles only. This measure will be calculated separately for each Pacific
region. These regions are Los Angeles, Bay, North and South. Measurements
will be calculated by Business (Single and Multi-line, Centrex, PBX
Trunks), Residence, LINK, and ISDN.
NUMBER OF REPEAT TROUBLE REPORTS
--------------------------------
NUMBER OF TROUBLE REPORTS COMPLETED
<PAGE>
APPENDIX C
Page 9
REPORTING PERIOD:
-----------------
Monthly, and sorted by Business (Single and Multi-line, Centrex, PBX
Trunks), Residence, LINK, and ISDN.
3. REPORT RATE
DEFINITION:
-----------
The metric measures the number of troubles per one hundred (100) lines in
service per month.
METHOD OF CALCULATION:
----------------------
As a Measurement of Comparable Service, this metric will be in parity with
Pacific's comparable services. This measure includes Pacific Network
troubles only. This measure will be calculated separately for each Pacific
region. These regions are Los Angeles, Bay, North and South. Measurements
will be calculated by Business (Single and Multi-line, Centrex, PBX
Trunks), Residence, LINK, and ISDN.
NUMBER OF TROUBLE REPORTS PER MONTH
-----------------------------------
NUMBER OF LINES
REPORTING PERIOD:
-----------------
Monthly, and sorted by Business (Single and Multi-line, Centrex, PBX
Trunks), Residence, LINK, and ISDN.
4. RECEIPT TO CLEAR DURATION
-------------------------
DEFINITION:
-----------
Measures the average duration in hours and minutes of all trouble reports
from receipt to clear.
METHOD OF CALCULATION:
----------------------
As a Measurement of Comparable Service, this metric will be in parity with
Pacific's comparable services. This measure includes Pacific Network
troubles only. This measure will be calculated separately for each Pacific
region. These regions are Los Angeles, Bay, North and South. Measurements
will be calculated by Business (Single and Multi-line, Centrex, PBX
Trunks), Residence, LINK, and ISDN.
TOTAL NUMBER OF TROUBLE HOURS AND MINUTES
-----------------------------------------
TOTAL NUMBER OF TROUBLE REPORTS
<PAGE>
APPENDIX C
Page 10
REPORTING PERIOD:
-----------------
Monthly, and sorted by Business (Single and Multi-line, Centrex, PBX
Trunks), Residence, LINK, and ISDN.
A.3 LOCAL WHOLESALE BILLING
1. TIMELINESS OF MECHANIZED LOCAL BILL DELIVERY
DEFINITION:
-----------
Measures the number of days from bill date to delivery.
METHOD OF CALCULATION:
----------------------
NUMBER OF MECHANIZED CABS BILLS ON TIME
---------------------------------------
TOTAL NUMBER OF BILLS RECEIVED x 100
2. TIMELINESS OF LOCAL SERVICE ORDER BILLING
-----------------------------------------
DEFINITION:
----------
Measures the number of Local Service Orders billed within the current bill
cycle.
CALCULATION:
-----------
Will be based on a statistically valid sample of billed orders.
NUMBER OF LOCAL ORDERS BILLED IN THE CORRECT BILL PERIOD
--------------------------------------------------------
TOTAL SERVICE ORDERS x 100
3. ACCURACY OF MECHANIZED CABS BILL FORMAT
---------------------------------------
DEFINITION:
----------
Measures the number of bills that pass agreed upon validation edits
(format) the first time.
CALCULATION:
-----------
NUMBER OF ACCURATELY FORMATTED CABS MECHANIZED BILLS
----------------------------------------------------
TOTAL NUMBER OF CABS MECHANIZED BILLS x 100
<PAGE>
APPENDIX C
Page 11
4. FINANCIAL ACCURACY OF LOCAL OTHER CHARGES AND CREDITS
-----------------------------------------------------
DEFINITION:
----------
Measures the accuracy of the OC&C Local Charges
CALCULATION:
-----------
Will be based on a statistically valid sample of OC&C Charges
100 - (TOTAL ESTIMATED NET CONSEQUENCES OF $ REC & NRC OC&C)
-------------------------------------------------------------
TOTAL NET OC&C BILLED $ x 100
5. TIMELINESS OF CORRECTION/ADJUSTMENT DOLLARS
-------------------------------------------
DEFINITION:
-----------
Measures the number of adjustments corrected within the agreed upon time
frames.
CALCULATION:
------------
NUMBER OF ERRORS CORRECTED IN AGREED TIME FRAME
-----------------------------------------------
TOTAL NUMBER OF ERRORS x 100
6. BILL PERIOD CLOSURE
-------------------
DEFINITION:
-----------
Measures the review of each bill within agreed upon time frames.
No Calculation Required
A.4 USAGE DATA TRANSFER
PERFORMANCE MEASURES
GENERAL DESCRIPTION:
Pacific will provide Local Usage Information detail in an accurate timely
manner. The format and content is described in the Bellcore EXCHANGE
MESSAGE RECORD (EMR) document in effect as of the Effective Date of this
Agreement and the Local Resale Data Transfer Requirements.
Because these processes are new, ACI and Pacific agree to jointly review
and revise these performance standards as Local Resale is fully implemented
to ensure that:
- the processes are stabilized and that agreed upon in-service volumes
are met,
<PAGE>
APPENDIX C
Page 12
- comparative measures of parity with Pacific's retail processes are
established, where appropriate,
- the standards reflect elements required by ACI to bill end users,
- an accurate baseline using some historical data for resale is in
place.
1. FILE TRANSFER
DEFINITION:
-----------
Pacific will initiate and transmit files that are error free and without
loss of signal.
METHOD OF CALCULATION:
----------------------
NUMBER OF FILES RECEIVED
--------------------------------
NUMBER OF FILES SENT x 100 = > 95%
-
NOTE: All measurements will be on a calendar month. Joint review of
performance and value for this standard will be done after six months from
Effective Date. No comparative measure applies.
REPORTING PERIOD:
-----------------
Monthly
2. % TIMELINESS
------------
DEFINITION:
-----------
Pacific will mechanically transmit, via CONNECT: Direct, all available
usage records to ACI's Message Processing Center once a day, Monday through
Friday, or as negotiated. ACI and/or Pacific's Data Center Holidays are
excluded. ACI and Pacific will exchange schedules of designated holidays.
Parity is the time that it takes for usage to be processed and ready for billing
of Pacific's end user customers. Parity and delivery of usage are measured at
three specific points:
5 days delay
10 days delay
30 days delay
REPORTING PERIOD:
-----------------
Monthly
3. % RECORDED USAGE DATA COMPLETE (A SELF-REPORTING MEASUREMENT)
--------------------------------------------------------------
<PAGE>
APPENDIX C
Page 13
DEFINITION:
-----------
Pacific will provide all required Recorded Usage Data and ensure that it is
processed and transmitted as required in the Agreement.
In-service volume thresholds will be determined using accepted statistical
algorithms to provide a basis for comparison with Pacific's retail
performance. Because messages that are held in Pacific's error file are
usually not uniquely identified, ACI and Pacific agree to invoke auditing
procedures, as defined in Section 14 of the Agreement, to ensure that the
rate of unbillable messages is in parity with the rate of unbillable
messages experienced in Pacific's retail business.
METHOD OF CALCULATION:
----------------------
TOTAL NUMBER OF RECORDED USAGE DATA RECORDS DELIVERED DURING CURRENT MONTH
MINUS NUMBER OF USAGE CALL RECORDS HELD IN ERROR FILE AT END OF MONTH
-----------------------------------------------------------------------
TOTAL NUMBER OF RECORDED USAGE DATA RECORDS DELIVERED x 100 = 99.98%
4. % ACCURACY
----------
DEFINITION:
-----------
Pacific will provide Recorded Usage Data in the format and with the content
as defined in the Bellcore document. These measures relate only to
Unbillable unrated local and local toll messages due to critical edit
failures (format errors).
METHOD OF CALCULATION:
----------------------
TOTAL NUMBER OF UNRATED LOCAL MESSAGES TRANSMITTED CORRECTLY
--------------------------------------------------------------
TOTAL NUMBER OF UNRATED LOCAL MESSAGES TRANSMITTED x 100 => 98%
-
Note: No comparative measure applies.
REPORTING PERIOD:
-----------------
Monthly
5. % ERROR FREE DATA PACKS
-----------------------
DEFINITION:
-----------
Pacific will initiate and transmit all packs that are error free in the
format agreed, as defined in the ACI Local Resale Requirements.
METHOD OF CALCULATION:
----------------------
<PAGE>
APPENDIX C
Page 14
NUMBER OF PACKS RECEIVED
------------------------
NUMBER OF PACKS SENT X 100 = 95%
Note: Joint review of performance and value for this standard will be
done after six months from the Effective Date.
REPORTING PERIOD:
-----------------
Monthly
6. % RECORDED USAGE DATA ERROR RESOLVED
-------------------------------------
DEFINITION:
-----------
Pacific will ensure that the Recorded Usage Data is transmitted to ACI
error free, the level of detail includes but not limited to: detail
required to Rating the call, Duration, Correct Originating/Terminating
information, etc. The error is reported to Pacific as a Modification
Request (MR). Performance is measure at two levels--Severity 1 or
Severity 2.
METHOD OF CALCULATION:
----------------------
SEVERITY 1: INCLUDES MESSAGES THAT ARE BILL AFFECTING AND REPRESENTS 1% OF
THE CURRENT CUSTOMER BASE. CONTACT TO BE MADE BY TELEPHONE.
NUMBER OF SEVERITY 1 MR'S FIXED < 24 HOURS
------------------------------------------
NUMBER OF SEVERITY 1 MR'S X 100 = > 90%
100% OF ALL SEVERITY 1 MR TO BE FIXED WITHIN FIVE (5) DAYS
SEVERITY 2: NON-BILL AFFECTING ERRORS. CONTACT MAY BE BY PHONE, FAX,
E-MAIL, ETC.
NUMBER OF SEVERITY 2 MR FIXED < 3 DAYS
--------------------------------------
NUMBER OF SEVERITY 2 MR X 100 = > 90%
100% OF ALL SEVERITY 2 MR TO BE FIXED WITHIN TEN (10) DAYS
7. % INQUIRIES RESPONSIVENESS
--------------------------
DEFINITION:
-----------
<PAGE>
APPENDIX C
Page 15
Pacific will respond to all usage inquiries within twenty-four (24) hours
of ACI request for information, Monday through Friday. Severity 1 MR will
be responded to on a seven (7) day a week basis. ACI will receive
continuous status reports until the request for information is satisfied.
METHOD OF CALCULATION:
----------------------
NUMBER OF BILLING INQUIRIES RESPONDED TO WITHIN 24 HOURS
--------------------------------------------------------
NUMBER OF BILLING INQUIRIES x 100 = 98%
<PAGE>
APPENDIX C
Page 16
SECTION B LIQUIDATED DAMAGES
------------------------------
For certain delays or failures of either Party under this Agreement,
effective six months after the Effective Date of this Agreement and there are
at least thirty (30) occurrences per month per Functional Activity, and on a
Region Basis, as appropriate, the non-performing Party shall pay the other
Party the amounts calculated as provided below.
Average Non-Recurring Charges -
The Average Non-Recurring Charge is the sum of all non-recurring charges
applied to service orders issued by ACI and for which there were performance
defects (E.G., Installation Appointment Missed, Late CSR, Service Order
Discrepancy, etc.) divided by the total number of defects within the
measurement period. These calculations will be made by Functional Activity
and product (Business-Single/Multi-line, Centrex, PBX Trunks), Residence,
LINK, and ISDN.
Average Recurring Charges -
The Average Recurring Charge is the sum of all recurring charges applied to
service orders issued by ACI and for which there were performance defects
(E.G. Maintenance Appointment Missed, Repeat Trouble, etc.) divided by the
total number of defects within the measurement period. These calculations
will be made by Functional Activity and product (Business-Single/Multi-line,
Centrex, PBX Trunks), Residence, LINK, and ISDN.
Below are listed selected functional activities which are critical to customer
satisfaction and the remedy payable by the non-performing Party for specific
lack of performance as described in the following table:
<TABLE>
<CAPTION>
FUNCTIONAL ACTIVITY THRESHOLD LIQUIDATED DAMAGE
<S> <C> <C>
1) % Installation Appointment When results fall below parity Waiver of an average non-recurring
Met. (A.1.1) installation charge for the number
2) % Installation Reports. of lines ordered and not installed
(A.1.2) on time OR orders found to have a
Pacific trouble within 30 days after
installation. The waiver would be
for the amount of orders below the
comparable measurement in retail.
1) % Maintenance Appointments When results fall below parity One month's average recurring
Met. charges per line out of service that
2) % Repeat Troubles within 30 falls below parity. The waiver
days. would be for the amount of lines out
3) Report Rate. of service below the comparable
4) Receipt To Clear Duration. measurements in retail within the
described (4) Pacific Regions.
Note: If our maintenance performance
for a given month fails to meet two
or more assurance measures as
described in Section A, Pacific will
be liable for the category
liquidated damages that results in
the highest amount.
FOC Complete and Accurate Less than 85% of FOCs returned 20% of an Average Non-Recurring
are complete/accurate charge.
Migration Notification Less than 85% of Migration Credit PIC Change Charge.
Notifications sent in 48
hours.
LSP PIC Change Less than 85% of LSP PIC Credit PIC Change Charge.
changes completed within 24
hours
Service Order Discrepancy Less than 80% of orders 20% of a Average Non-Recurring
submitted without material charge (Paid by ACI)
errors.
<PAGE>
Customer Service Record Less than 85% of CSRs are sent 5% of a Average NonRecurring charge
within 4 hours for each CSR for which there is a
subsequent service order issued.
Trunk Orders Completed on Time When results fall below parity 100% of the total non-recurring
charges for equivalent products (FG
B or D trunks), as specified in CPUC
175-T, Section 6.
Trunk Firm Order Confirmation When results fall below parity 20% of the total non-recurring
Delivered on Time. charge for equivalent products (FG B
or D trunks), as specified in CPUC
175-T, Section 6
Trunk Service Order Discrepancy Less than 80% of orders are 20% of the total non-recurring
submitted without material charge for equivalent products (FG B
errors. or D trunks), as specified in CPUC
175-T, Section 6.
Forecasting (Excludes When product volumes exceeds $10.00 per line or trunk for the
Interconnection Trunks) or falls below the +/- 20% of amount ordered between 20% and 30%
the forecast amount. under the forecast.
$20.00 per line or trunk for the
amount ordered between 31% and 40%
under the forecast.
$35.00 per line or trunk for the
amount ordered between 41% or more
under the forecast.
When volumes for products exceed the
forecast by 20%, all remedies
associated with preordering,
ordering, provisioning and
maintenance will not apply.
Recorded Usage Data Each instance delivery of Annual interest rate of 8%
(AKA Usage Data Transfer as Recorded Usage Data exceeds compounded daily will be applied on
described in Section A.5) parity as defined. net revenues for 50% of all messages
delayed to ACI beyond the then
Parity of performance standard prevailing performance standard and
as defined in the benchmark until Recorded Usage Resale Data is
audit and analysis which, once delivered, or sixty days from when
defined, shall prevail over a) message(s) was recorded, whichever
above. comes first. Said interest shall be
applied on net revenues for 100% of
all messages for which ACI
demonstrates actual delayed billing
occurred as a result of late receipt
of Recorded Usage Data.
Pacific will absorb all costs and
not charge ACI for any Recorded
Usage Data not delivered to ACI
within sixty days from when the data
was recorded by Pacific.
Conditions that will be exempt from
the above Credit application will be
identified during the benchmark
audit and analysis.
</TABLE>
<PAGE>
APPENDIX D
BUSINESS ZONES
<PAGE>
BUSINESS ZONES
<TABLE>
<CAPTION>
Zone Zone Zone
1 2 3
<S> <C> <C>
ANXMCA17
1 ANHMCAO1, 02 1 116 AGORCA11 2 248 ACTNCA11 3
2 ANHMCA11 1 117 ALBYCA11 2 249 AGDLCA11 3
3 BRBNCA11, 13 1 118 ALHBCA01 2 250 ALGHCA11 3
4 BRLNCA01 1 119 ALMDCA11 2 251 ALPICA12 3
5 BSRNCA70 1 120 ANHMCA12 2 252 ANCMCA01 3
6 BVHLCA01 1 121 ANTCCA11 2 253 ANGWCA11 3
7 CLCYCA11 1 122 ARCDCA11 2 254 ANNPCA11 3
8 CMTNCA01 1 123 ARTNCA11 2 255 APTSCA12 3
9 CNCRCA01 1 124 AUBNCA01 2 256 ARCTCA11 3
10 CNPKCA01 1 125 BALBCA01 2 257 ARGRCA12 3
11 CRDMCA11 1 126 BELLCA11 2 258 ARMSCA11 3
12 CSMSCA11 1 127 BKFDCA12 2 259 ARNLCA11 3
13 ELSGCA12 1 128 BKFDCA14 2 260 ARSNCA11 3
14 ELTRCA11 1 129 BKLYCA01 2 261 ARVNCA11 3
15 FRMTCA11 1 130 BNCICA11 2 262 ASMTCA11 3
16 FRMTCA12 1 131 BNPKCA11 2 263 ATSCCA11 3
17 FROKCA11 1 132 BREACA12 2 264 ATWRCA12 3
18 FUTNCA01 1 133 CHICCA01 2 265 AUBNCA11 3
19 GLDLCA11 1 134 CHVSCA11 2 266 AVBHCA11 3
20 GRDNCA01 1 135 CLVSCA11 2 267 AVLNCA11 3
21 HLWDCA01 1 136 COLACA01 2 268 AVNLCA12 3
22 HNPKCA01 1 137 CORNCA11 2 269 BAKRCA11 3
23 HWTHCA01 1 138 COTNCA11 2 270 BCWYCA11 3
24 HYWRCA01 1 139 CRLSCA11 2 271 BDBACA11 3
25 HYWRCA11 1 140 CRLSCA12 2 272 BEALCA11 3
26 IGWDCA01 1 141 CRNDCA11 2 273 BGGSCA11 3
27 IRVNCA01 1 142 DAVLCA12 2 274 BGSRCA11 3
28 IRVNCA11 1 143 DAVLCA13 2 275 BGVLCA11 3
29 IRVNCA12 1 144 DAVSCA11 2 276 BKFDCA11 3
30 LACNCA11 1 145 DLMRCA12 2 277 BKFDCA13 3
31 LAMSCA01 1 146 ELCJCA11 2 278 BKFDCA15 3
32 LSANCA02, 01, 03, 04 1 147 ELCNCA01 2 279 BKFDCA17 3
33 LSANCA07 1 148 ELMNCA01 2 280 BKFDCA19 3
34 LSANCA08 1 149 ELSBCA11 2 281 BLCKCA11 3
35 LSANCA09 1 150 ENCTCA12 2 282 BLLKCA11 3
36 LSANCA10 1 151 ESCNCA01 2 283 BLRSCA12 3
37 LSANCA11 1 152 EURKCA01 2 284 BNGRCA11 3
38 LSANCA12 1 153 FLSMCA12 2 285 BNLMCA11 3
39 LSANCA15 1 154 FLSMCA13 2 286 BNVLCA11 3
40 LSANCA29 1 155 FLSMCA14 2 287 BRDLCA91 3
41 LSANCA34 1 156 FNTACA11 2 288 BRSPCA11 3
42 LSANCA35 1 157 FRFDCA01 2 289 BRWDCA12 3
43 MLBRCA11 1 158 FRSNCA01 2 290 BRWLCA11 3
44 MLPSCA11 1 159 FRSNCA11 2 291 BTCYCA11 3
45 MTVWCA11 1 160 FRSNCA12 2 292 BTISCA11 3
46 NHWDCA01 1 161 FRSNCA13 2 293 BURLCA11 3
47 NHWDCA02 1 162 FRSNCA14 2 294 BVLYCA11 3
48 NORGCA11 1 163 GRGVCA01 2 295 BVSPCA11 3
49 NSCRCA11 1 164 HRCLCA11 2 296 BYPKCA11 3
50 OKLDCA03 1 165 IMBHCA11 2 297 CAMPCA11 3
51 OKLDCA11 1 166 LACRCA11 2 298 CBMTCA11 3
52 OKLDCA12 1 167 LAJLCA11 2 299 CHLNCA11 3
53 ORNGCA11 1 168 LGNGCA12 2 300 CHLRCA11 3
54 ORNGCA13 1 169 LODICA01 2 301 CHVSCA12 3
55 ORNGCA14 1 170 LOMTCA11 2 302 CHWCCA11 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Zone Zone Zone
1 2 3
<S> <C> <C>
56 PLALCA02 1 171 LSANCA04 2 303 [ILLEGIBLE] 3
57 PLALCA12 1 172 LSANCA05 2 304 CLBSCA50 3
58 PLTNCA12 1 173 LSANCA06 2 305 CLNGCA01 3
59 PLTNCA13 1 174 LSANCA13 2 306 CLOKCA11 3
60 PRMTCA01 1 175 LSANCA14 2 307 CLPTCA11 3
61 PSDNCA11 1 176 LSANCA23 2 308 CLSTCA11 3
62 PSDNCA12 1 177 LSANCA38 2 309 CLXCCA12 3
63 RDCYCA01 1 178 LSANCA56 2 310 CMBACA11 3
64 RESDCA01 1 179 LSATCA11 2 311 CMNLCA11 3
65 RILTCA11 1 180 LVMRCA11 2 312 CMPDCA01 3
66 ROSMCA11 1 181 MCLNCABC 2 313 CMPVCA11 3
67 RVSDCA01 1 182 MDSTCA02, 5 2 314 CNVYCA11 3
68 SCRMCA01 1 183 MLVYCA01 2 315 CODLCA11 3
69 SCRMCA02 1 184 MNPKCA11 2 316 CORDCA12 3
70 SCRMCA03 1 185 MRCDCA01 2 317 CRCTCA02 3
71 SCRMCA11 1 186 MRTZCA11 2 318 CRMLCA11 3
72 SCRMCA12 1 187 MSVJCA60 2 319 CRNGCA12 3
73 SGATCA01 1 188 MTRYCA01 2 320 CRPLCA11 3
74 SHOKCA01, 04 1 189 NAPACA01 2 321 CRTHCA11 3
75 SNANCA01 1 190 NHLDCA11 2 322 CRVYCA11 3
76 SNANCA11 1 191 NSCRCA12 2 323 CSTCCA11 3
77 SNBUCA02 1 192 NTCYCA11 2 324 CSVLCA11 3
78 SNCRCA11 1 193 OCSDCA11 2 325 CTTICA12 3
79 SNDGCA01 1 194 OKLDCA04 2 326 CTVLCA11 3
80 SNDGCA02 1 195 OKLDCA13 2 327 CTWDCA11 3
81 SNDGCA03 1 196 PCBHCA01 2 328 CWLDCA12 3
82 SNDGCA06 1 197 PCBHCA11 2 329 CYCSCA11 3
83 SNDGCA11 1 198 PLCNCA11 2 330 CYTNCA11 3
84 SNDGCA14 1 199 PSBGCA11 2 331 CYWLCA11 3
85 SNDGCA15 1 200 PTLMCA01 2 332 DELNCA11 3
86 SNDGCA16 1 201 RBRNCA11 2 333 DINBCA01 3
87 SNFCCA01 1 202 RCMDCA11 2 334 DIXNCA11 3
88 SNFCCA04, 64 1 203 RDNGCA02 2 335 DLRYCA11 3
89 SNFCCA05 1 204 RDNGCA11 2 336 DLZRCA11 3
90 SNFCCA13 1 205 RNPSCA11 2 337 DNGNCA12 3
91 SNFCCA14 1 206 RNSDCA11 2 338 DNSMCA11 3
92 SNFCCA19, 12 1 207 RTPKCA11 2 339 DTFLCA11 3
93 SNFCCA21 1 208 SANTCA01 2 340 DWNVCA11 3
94 SNJSCA02 1 209 SCRMCA13 2 341 EDWRCA01 3
95 SNJSCA11 1 210 SIMICA11 2 342 EKCKCA11 3
96 SNJSCA12 1 211 SJCPCA12 2 343 ELK-CA11 3
97 SNJSCA13 1 212 SKTNCA01 2 344 ERLMCA11 3
98 SNJSCA14 1 213 SKTNCA11 2 345 ESCLCA11 3
99 SNJSCA21 1 214 SLNSCA01 2 346 ESPRCA11 3
100 SNLNCA11 1 215 SLNSCA11 2 347 FETNCA11 3
101 SNMTCA11 1 216 SNANCA12 2 348 FLBKCA12 3
102 SNPDCA01 1 217 SNCLCA12 2 349 FLMRCA11 3
103 SNRMCA11 1 218 SNCZCA01 2 350 FRBHCA11 3
104 SNTCCA01 1 219 SNCZCA11 2 351 FRCKCA11 3
105 SNTCCA11 1 220 SNDGCA05 2 352 FRGLCA11 3
106 SNVACA01 1 221 SNDGCA12 2 353 FRSNCA15 3
107 SNVACA11 1 222 SNFCCA06 2 354 FRVLCA11 3
108 TRNCCA11 1 223 SNFCCA17 2 355 FSVLCA11 3
109 TUSTCA70 1 224 SNGBCA01 2 356 FTBRCA02 3
110 UNCYCA11 1 225 SNJSCA15 2 357 FTUNCA11 3
111 VNNYCA02 1 226 SNLOCA01 2 358 FVPNCA11 3
112 WLANCA01 1 227 SNMCCA11 2 359 FZPKCA11 3
113 WLMGCA01 1 228 SNRFCA01 2 360 GALTCA11 3
114 WNCKCA11 1 229 SNRFCA11 2 361 GNFDCA11 3
115 WSCRCA11 1 230 SNRSCA01 2 362 GNZLCA11 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Zone Zone Zone
1 2 3
<S> <C> <C>
231 [ILLEGIBLE] 2 363 [ILLEGIBLE] 3
232 SONMCA12 2 364 GRDLCA11 3
233 SPSDCA11 2 365 GRNDCA13 3
234 SSLTCA11 2 366 GRTWCA11 3
235 TBRNCA11 2 367 GRVYCA01 3
236 TRACCA11 2 368 GRVYCA11 3
237 TUSTCA11 2 369 GRVYCA12 3
238 VCVLCA12 2 370 GSHNCA11 3
239 VISLCA11 2 371 GULLCA11 3
240 VISTCA12 2 372 GUSTCA11 3
241 VLLJCA01 2 373 GUVLCA11 3
242 VNTRCA02 2 374 GVLDCA11 3
243 VNTRCA11 2 375 GYVLCA11 3
244 WDLDCA11 2 376 GZLLCA11 3
245 WTVLCA01 2 377 HERLCA11 3
246 YBCYCA01 2 378 HGLDCA11 3
247 YRLNCA11 2 379 HGSNCA11 3
380 HLBGCA11 3
381 HLSTCA11 3
382 HLVLCA11 3
383 HMBACA12 3
384 HMCYCA11 3
385 HMWDCA11 3
386 HNFRCA01 3
387 HPLDCA12 3
388 HRBKCA11 3
389 HURNCA11 3
390 HYVLCA11 3
391 IGNCCA12 3
392 IMPRCA11 3
393 INVRCA11 3
394 IONECA11 3
395 IVNHCA11 3
396 JAMLCA60 3
397 JCMBCA11 3
398 JCSNCA01 3
399 JMTWCA11 3
400 JULNCA12 3
401 KGBGCA11 3
402 KGCYCA11 3
403 KLVLCA12 3
404 KNFYCA11 3
405 KYBRCA11 3
406 LAHNCA11 3
407 LAMTCA11 3
408 LATNCA11 3
409 LCFRCA11 3
410 LEBCCA11 3
411 LEBCCA12 3
412 LEMRCA11 3
413 LEMRCA12 3
414 LFYTCA11 3
415 LGRDCA11 3
416 LGRNCA12 3
417 LXBRCA11 3
418 LKLACA11 3
419 LKPTCA02 3
420 LKSDCA12 3
421 LLTNCA11 3
422 LNCLCA11 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Zone Zone Zone
1 2 3
<S> <C> <C>
423 [ILLEGIBLE] 3
424 LOLTCA11 3
425 LOMSCA11 3
426 LSBNCA12 3
427 LSLMCA11 3
428 LSTNCA11 3
429 LTRKCA11 3
430 LVOKCA11 3
431 LWLKCA11 3
432 MADRCA11 3
433 MADRCA12 3
434 MARNCA11 3
435 MCCSCA11 3
436 MDSTCA03 3
437 MDSTCA04 3
438 MDSTCA05 3
439 MDTWCA11 3
440 MKHLCA12 3
441 MKVLCA11 3
442 MLTNCA12 3
443 MNDCCA11 3
444 MNDTCA11 3
445 MNRICA11 3
446 MOJVCA01 3
447 MORGCA12 3
448 MRBACA11 3
449 MRDNCA11 3
450 MRNDCA11 3
451 MRPHCA11 3
452 MRPKCA12 3
453 MSBHCA11 3
454 MTAGCA11 3
455 MTPSCA11 3
456 MTSHCA12 3
457 MYVICA01 3
458 NCLSCA12 3
459 NHLLCA01 3
460 NICECA11 3
461 NICSCA11 3
462 NILDCA11 3
463 NILDCA12 3
464 NIPMCA11 3
465 NSJNCA11 3
466 NVCYCA11 3
467 NWCSCA11 3
468 NWMNCA12 3
469 NYUBCA11 3
470 OCDNCA11 3
471 OJAICA11 3
472 OKDLCA11 3
473 OKLYCA11 3
474 OKVWCA11 3
475 OLDLCA11 3
476 ORCVCA11 3
477 ORLDCA11 3
478 ORNDCA11 3
479 ORSICA11 3
480 ORVACA11 3
481 ORVLCA11 3
482 ORVLCA12 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Zone Zone Zone
1 2 3
<S> <C> <C>
483 [ILLEGIBLE] 3
484 [ILLEGIBLE] 3
485 PCFCCA11 3
486 PDLYCA11 3
487 PIRUCA11 3
488 PLDLCA01 3
489 PLGVCA12 3
490 PLMOCA11 3
491 PLNDCA11 3
492 PLVLCA11 3
493 PLVLCA12 3
494 PNARCA11 3
495 PNCRCA11 3
496 PNVYCA11 3
497 POWYCA11 3
498 PPWDCA11 3
499 PRDSCA11 3
500 PRDSCA12 3
501 PRLRGA11 3
502 PRSNCA11 3
503 PSBGCA01 3
504 PSBHCA11 3
505 PSCDCA11 3
506 PSKNCA11 3
507 PSRBCA01 3
508 PTOLCA01 3
509 PTVLCA11 3
510 PTVYCA11 3
511 PXLYCA11 3
512 QNCYCA12 3
513 RAMNCA11 3
514 RCKLCA11 3
515 RCVACA11 3
516 RDBLCA01 3
517 RIDECA11 3
518 RILNCA12 3
519 RNMRCA11 3
520 RSFECA12 3
521 RSMDCA11 3
522 RSMGCA11 3
523 RVDLCA11 3
524 RVRBCA11 3
525 RVSDCA11 3
526 SAGSCA11 3
527 SATCCA12 3
528 SBSTCA11 3
529 SCVYCA01 3
530 SDSPCA11 3
531 SELMCA11 3
532 SESDCA11 3
533 SGSPCA11 3
534 SHFTCA11 3
535 SHLKCA01 3
536 SHSHCA11 3
537 SKTNCA12 3
538 SKTNCA14 3
539 SLDDCA11 3
540 SLMNCA11 3
541 SLNSCA12 3
542 SLNSCA13 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Zone Zone Zone
1 2 3
<S> <C> <C>
543 [ILLEGIBLE] 3
544 [ILLEGIBLE] 3
545 SMAVCA11 3
546 SNADCA11 3
547 SNARCA11 3
548 SNGNCA11 3
549 SNJNCA11 3
550 SNJSCA18 3
551 SNJSCA20 3
552 SNLCCA11 3
553 SNMACA11 3
554 SNMICA11 3
555 SNRACA13 3
556 SNRSCA11 3
557 SPVLCA11 3
558 SRCYCA11 3
559 SRFRCA11 3
560 SRVLCA11 3
561 STAHCA01 3
562 STAHCA12 3
563 STAHCA13 3
564 STBHCA11 3
565 STCKCA11 3
566 STFRCA11 3
567 STHNCA11 3
568 SUISCA11 3
569 SUNLCA11 3
570 THCHCA01 3
571 THCYCA01 3
572 THRRCA11 3
573 THTNCA11 3
574 TMLSCA12 3
575 TMTNCA11 3
576 TPTNCA11 3
577 TRBLCA11 3
578 TRLCCA11 3
579 TRNDCA11 3
580 TRPSCA11 3
581 TRUCCA11 3
582 TRUCCA12 3
583 TULRCA11 3
584 TWHRCA11 3
585 UKIHCA01 3
586 UKIHCA12 3
587 UPLKCA11 3
588 VINACA12 3
589 VLCTCA11 3
590 VYFRCA11 3
591 VYSPCA11 3
592 WANACA11 3
593 WASCCA01 3
594 WDLKCA11 3
595 WEEDCA01 3
596 WEOTCA11 3
597 WLBSCA11 3
598 WLLCCA11 3
599 WLTSCA12 3
600 WLWSCA11 3
601 WNDSCA11 3
602 WNSPCA12 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Zone Zone Zone
1 2 3
<S> <C> <C>
603 [ILLEGIBLE] 3
604 WTFRCA11 3
605 WTLDCA12 3
606 YNVLCA11 3
607 YREKCA11 3
608 YRLNCA12 3
609 YSMTCA11 3
610 YSMTCA12 3
</TABLE>
<PAGE>
APPENDIX E
RESIDENCE ZONES
<PAGE>
WIRECENTER
<TABLE>
<CAPTION>
ZONE 3 ZONE 2 ZONE 1
LEAST DENSE MIDDLE DENSITY MOST DENSE
<S> <C> <C>
ANHACA17
1 ACTNCA11 3 421 ARCDCA11 2 524 ALBYCA11 1
2 AGDKCA11 3 422 ARTNCA11 2 525 ALHBCA01 1
3 AGORCA11 3 423 BKFDCA12 2 526 ALMDCA11 1
4 ALGHCA11 3 424 BNPKCA11 2 527 ANHMCA01, 02 1
5 ALPICA12 3 425 BREACA12 2 528 ANHMCA11 1
6 ANCMCA01 3 426 BRLNCA01 2 529 ANHMCA12 1
7 ANGWCA11 3 427 CHVSCA11 2 530 BALBCA01 1
8 ANNPCA11 3 428 CNCRCA01 2 531 BELLCA11 1
9 ANTCCA11 3 429 CNPKCA01 2 532 BKLYCA01 1
10 APTSCA12 3 430 COTNCA11 2 533 BRBNCA11, 13 1
11 ARCTCA11 3 431 CRDMCA11 2 534 BSRNCA70 1
12 ARGRCA12 3 432 CRLSCA11 2 535 BVHLCA01 1
13 ARMSCA11 3 433 CRLSCA12 2 536 CLCYCA11 1
14 ARNLCA11 3 434 CRNDCA11 2 537 CMTNCA01 1
15 ARSNCA11 3 435 DLMRCA12 2 538 COLACA01 1
16 ARVNCA11 3 436 ELCJCA11 2 539 CSMSCA11 1
17 ASMTCA11 3 437 ELMNCA01 2 540 ELSGCA12 1
18 ATSCCA11 3 438 ELSBCA11 2 541 GLDLCA11 1
19 ATWRCA12 3 439 ELTRCA11 2 542 GRDNCA01 1
20 AUBNCA01 3 440 ENCTCA12 2 543 GRGVCA01 1
21 AUBNCA11 3 441 FLSMCA14 2 544 HLWDCA01 1
22 AVBHCA11 3 442 FRMTCA11 2 545 HNPKCA01 1
23 AVLNCA11 3 443 FRMTCA12 2 546 HWTHCA01 1
24 AVNLCA12 3 444 FROKCA11 2 547 IGWDCA01 1
25 BAKRCA11 3 445 FRSNCA11 2 548 IRVNCA11 1
26 BCWYCA11 3 446 FRSNCA12 2 549 LACNCA11 1
27 BDBACA11 3 447 FRSNCA13 2 550 LOMTCA11 1
28 BEALCA11 3 448 FUTNCA01 2 551 LSANCA02, 01, 03, 04 1
29 BGGSCA11 3 449 HRCLCA11 2 552 LSANCA05 1
30 BGSRCA11 3 450 HYWRCA11 2 553 LSANCA06 1
31 BGVLCA11 3 451 IMBHCA11 2 554 LSANCA07 1
32 BKFDCA11 3 452 IRVNCA01 2 555 LSANCA08 1
33 BKFDCA13 3 453 IRVNCA12 2 556 LSANCA09 1
34 BKFDCA14 3 454 LACRCA11 2 557 LSANCA10 1
35 BKFDCA15 3 455 LAJLCA11 2 558 LSANCA11 1
36 BKFDCA17 3 456 LAMSCA01 2 559 LSANCA12 1
37 BKFDCA19 3 457 LGNGCA12 2 560 LSANCA13 1
38 BLCKCA11 3 458 LRKSCA11 2 561 LSANCA14 1
39 BLLKCA11 3 459 LSANCA23 2 562 LSANCA15 1
40 BLRSCA12 3 460 MCLNCABC 2 563 LSANCA29 1
41 BNCICA11 3 461 MLVYCA01 2 564 LSANCA34 1
42 BNGRCA11 3 462 MSVJCA60 2 565 LSANCA35 1
43 BNLMCA11 3 463 MTRYCA01 2 566 LSANCA38 1
44 BNVLCA11 3 464 MTVWCA11 2 567 LSANCA56 1
45 BRDLCA91 3 465 NHLDCA11 2 568 MLBRCA11 1
46 BRSPCA11 3 466 NHWDCA01 2 569 NHWDCA02 1
47 BRWDCA12 3 467 NORGCA11 2 570 NSCRCA11 1
48 BRWLCA11 3 468 NTCYCA11 2 571 OKLDCA03 1
49 BTCYCA11 3 469 OCSDCA11 2 572 OKLDCA04 1
50 BTISCA11 3 470 OKLDCA12 2 573 OKLDCA11 1
51 BURLCA11 3 471 OKLDCA13 2 574 ORNGCA14 1
52 BVLYCA11 3 472 ORNGCA11 2 575 PLALCA02 1
53 BVSPCA11 3 473 ORNGCA12 2 576 PLTNCA13 1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ZONE 3 ZONE 2 ZONE 1
LEAST DENSE MIDDLE DENSITY MOST DENSE
<S> <C> <C>
54 BYPKCA11 3 474 ORVACA11 2 577 PRMTCA01 1
55 CAMPCA11 3 475 PCBHCA01 2 578 ROSMCA11 1
56 CBMTCA11 3 476 PCBHCA11 2 579 SCRMCA01 1
57 CHICCA01 3 477 PCFCCA11 2 580 SCRMCA11 1
58 CHLNCA11 3 478 PLALCA12 2 581 SGATCA01 1
59 CHLRCA11 3 479 PLCNCA11 2 582 SHOKCA01,04 1
60 CHVSCA12 3 480 PLTNCA12 2 583 SNANCA01 1
61 CHWCCA11 3 481 PSDNCA12 2 584 SNANCA11 1
62 CLBSCA11 3 482 RBRNCA11 2 585 SNBUCA02 1
63 CLBSCA50 3 483 RCKLCA11 2 586 SNDGCA01 1
64 CLNGCA01 3 484 RCMDCA11 2 587 SNDGCA02 1
65 CLOKCA11 3 485 RDCYCA01 2 588 SNDGCA06 1
66 CLPTCA11 3 486 RESDCA01 2 589 SNFCCA01 1
67 CLSTCA11 3 487 RILTCA11 2 590 SNFCCA04,64 1
68 CLVSCA11 3 488 RNPSCA11 2 591 SNFCCA05 1
69 CLXCCA12 3 489 RNSDCA11 2 592 SNFCCA06 1
70 CMBACA11 3 490 RVSDCA01 2 593 SNFCCA13 1
71 CMNLCA11 3 491 SCRMCA02 2 594 SNFCCA14 1
72 CMPDCA01 3 492 SCRMCA03 2 595 SNFCCA19,12 1
73 CMPVCA11 3 493 SCRMCA12 2 596 SNFCCA21 1
74 CNVYCA11 3 494 SCRMCA13 2 597 SNGBCA01 1
75 CODLCA11 3 495 SNANCA12 2 598 SNJSCA02 1
76 CORDCA12 3 496 SNCLCA12 2 599 SNJSCA14 1
77 CORNCA11 3 497 SNCRCA11 2 600 SNJSCA21 1
78 CRCTCA02 3 498 SNCZCA11 2 601 SNMTCA11 1
79 CRMLCA11 3 499 SNDGCA03 2 602 SNTCCA01 1
80 CRNGCA12 3 500 SNDGCA05 2 603 SNTCCA11 1
81 CRPLCA11 3 501 SNDGCA11 2 604 SNVACA01 1
82 CRTHCA11 3 502 SNDGCA12 2 605 SNVACA11 1
83 CRVYCA11 3 503 SNDGCA14 2 606 SPSDCA11 1
84 CSTCCA11 3 504 SNDGCA15 2 607 TRNCCA11 1
85 CSVLCA11 3 505 SNDGCA16 2 608 TUSTCA70 1
86 CTTICA12 3 506 SNFCCA17 2 609 VNNYCA02 1
87 CTVLCA11 3 507 SNJSCA11 2 610 WLANCA01 1
88 CTWDCA11 3 508 SNJSCA12 2
89 CWLDCA12 3 509 SNJSCA13 2
90 CYCSCA11 3 510 SNLNCA11 2
91 CYTNCA11 3 511 SNPDCA11 2
92 CYWLCA11 3 512 SNRFCA01 2
93 DAVLCA13 3 513 SNRFCA11 2
94 DAVLCA12 3 514 SNRMCA11 2
95 DAVSCA11 3 515 SNYSCA12 2
96 DELNCA11 3 516 SSLTCA11 2
97 DINBCA01 3 517 TBRNCA11 2
98 DIXNCA11 3 518 TUSTCA11 2
99 DLRYCA11 3 519 UNCYCA11 2
100 DLZRCA11 3 520 VISTCA12 2
101 DNGNCA12 3 521 VNTRCA11 2
102 DNSMCA11 3 522 WLMGCA01 2
103 DTFLCA11 3 523 WNCKCA11 2
104 DWNVCA11 3
105 EDWRCA01 3
106 EKCKCA11 3
107 ELCNCA01 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ZONE 3 ZONE 2 ZONE 1
LEAST DENSE MIDDLE DENSITY MOST DENSE
<S> <C> <C>
108 ELK-CA11 3
109 ERLMCA11 3
110 ESCLCA11 3
111 ESCNCA01 3
112 ESPRCA11 3
113 EURKCA01 3
114 FETNCA11 3
115 FLBKCA12 3
116 FLMRCA11 3
117 FLSMCA12 3
118 FLSMCA13 3
119 FNTACA11 3
120 FRBHCA11 3
121 FRCKCA11 3
122 FRFDCA01 3
123 FRGLCA11 3
124 FRSNCA01 3
125 FRSNCA14 3
126 FRSNCA15 3
127 FRVLCA11 3
128 FSVLCA11 3
129 FTBRCA02 3
130 FTUNCA11 3
131 FVPNCA11 3
132 FZPKCA11 3
133 GALTCA11 3
134 GNFDCA11 3
135 GNZLCA11 3
136 GRBRCA11 3
137 GRDLCA11 3
138 GRNDCA13 3
139 GRTWCA11 3
140 GRVYCA01 3
141 GRVYCA11 3
142 GRVYCA12 3
143 GSHNCA11 3
144 GULLCA11 3
145 GUSTCA11 3
146 GUVLCA11 3
147 GVLDCA11 3
148 GYVLCA11 3
149 GZLLCA11 3
150 HERLCA11 3
151 HGLDCA11 3
152 HGSNCA11 3
153 HLBGCA11 3
154 HLSTCA11 3
155 HLVLCA11 3
156 HMBACA12 3
157 HMCYCA11 3
158 HMWDCA11 3
159 HNFRCA01 3
160 HPLDCA12 3
161 HPBKCA11 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ZONE 3 ZONE 2 ZONE 1
LEAST DENSE MIDDLE DENSITY MOST DENSE
<S> <C> <C>
162 HURNCA11 3
163 HYVLCA11 3
164 HYWRCA01 3
165 IGNCCA12 3
166 IMPRCA11 3
167 INVRCA12 3
168 IONECA11 3
169 IVNHCA11 3
170 JAMLCA60 3
171 JCMBCA11 3
172 JCSNCA01 3
173 JMTWCA11 3
174 JULNCA12 3
175 KGBGCA11 3
176 KGCYCA11 3
177 KLVLCA12 3
178 KNFYCA11 3
179 KYBRCA11 3
180 LAHNCA11 3
181 LAMTCA11 3
182 LATNCA11 3
183 LCFRCA11 3
184 LEBCCA11 3
185 LEBCCA12 3
186 LEMRCA12 3
187 LEMRCA12 3
188 LFYTCA11 3
189 LGRDCA11 3
190 LGRNCA12 3
191 LKBRCA11 3
192 LKLACA11 3
193 LKPTCA02 3
194 LKSDCA12 3
195 LLTNCA11 3
196 LNCLCA11 3
197 LNVYCA11 3
198 LODICA01 3
199 LOLTCA11 3
200 LOMSCA11 3
201 LSATCA11 3
202 LSBNCA12 3
203 LSMLCA11 3
204 LSTNCA11 3
205 LTRKCA11 3
206 LVMRCA11 3
207 LVOKCA11 3
208 LWLKCA11 3
209 MADRCA11 3
210 MADRCA12 3
211 MARNCA11 3
212 MCCSCA11 3
213 MDSTCA02,52 3
214 MDSTCA03 3
215 MDSTCA04 3
216 MDSTCA05 3
217 MDTWCA11 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ZONE 3 ZONE 2 ZONE 1
LEAST DENSE MIDDLE DENSITY MOST DENSE
<S> <C> <C>
218 MKHLCA12 3
219 MKVLCA11 3
220 MLPSCA11 3
221 MLTNCA12 3
222 MNDCCA11 3
223 MNDTCA11 3
224 MNPKCA11 3
225 MNRICA11 3
226 MOJVCA01 3
227 MORGCA12 3
228 MRBACA11 3
229 MRCDCA01 3
230 MRDNCA11 3
231 MRNDCA11 3
232 MRPHCA11 3
233 MRPKCA12 3
234 MRTZCA11 3
235 MSBHCA11 3
236 MTAGCA11 3
237 MTPSCA11 3
238 MTSHCA12 3
239 MYVICA01 3
240 NPAPCA01 3
241 NCLSCA12 3
242 NHLLCA01 3
243 NICECA11 3
244 NICSCA11 3
245 NILDCA11 3
246 NILDCA12 3
247 NIPMCA11 3
248 NSCRCA12 3
249 NSJNCA11 3
250 NVCYCA11 3
251 NWCSCA11 3
252 NWMNCA12 3
253 NYUBCA11 3
254 OCDNCA11 3
255 OJAICA11 3
256 OKDLCA11 3
257 OKLYCA11 3
258 OKVWCA11 3
259 OLDLCA11 3
260 ORCVCA11 3
261 ORLDCA11 3
262 ORNDCA11 3
263 ORSICA11 3
264 ORVLCA11 3
265 ORVLCA12 3
266 OTMSCA11 3
267 PALACA11 3
268 PDLYCA11 3
269 [ILLEGIBLE] 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ZONE 3 ZONE 2 ZONE 1
LEAST DENSE MIDDLE DENSITY MOST DENSE
<S> <C> <C>
270 PLDLCA01 3
271 PLGVCA12 3
272 PLMOCA11 3
273 PLNDCA11 3
274 PLVLCA11 3
275 PLVLCA12 3
276 PNARCA11 3
277 PNCRCA11 3
278 PNVYCA11 3
279 POWYCA11 3
280 PPWDCA11 3
281 PRDSCA11 3
282 PRDSCA12 3
283 PRLRCA11 3
284 PRSNCA11 3
285 PSBGCA01 3
286 PSBGCA11 3
287 PSBHCA11 3
288 PSCDCA11 3
289 PSDNCA11 3
290 PSKNCA11 3
291 PSRBCA01 3
292 PTLMCA01 3
293 PTOLCA01 3
294 PTVLCA11 3
295 PTVYCA11 3
296 PXLYCA11 3
297 ONCYCA12 3
298 RAMNCA11 3
299 RCVACA11 3
300 RDBLCA01 3
301 RDNGCA02 3
302 RDNGCA11 3
303 RIDECA11 3
304 RILNCA12 3
305 RNMRCA11 3
306 RSFECA12 3
307 RSMDCA11 3
308 RSMGCA11 3
309 RTPKCA11 3
310 RVDLCA11 3
311 RVRBCA11 3
312 RVSDCA11 3
313 SAGSCA11 3
314 SANTCA01 3
315 SATCCA12 3
316 SBSTCA11 3
317 SCVYCA01 3
318 SDSPCA11 3
319 SELMCA11 3
320 SESDCA11 3
321 SGSPCA11 3
322 SHFTCA11 3
323 [ILLEGIBLE] 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ZONE 3 ZONE 2 ZONE 1
LEAST DENSE MIDDLE DENSITY MOST DENSE
<S> <C> <C>
324 SHSHCA11 3
325 SIMICA11 3
326 SJCPCA12 3
327 SKTNCA01 3
328 SKTNCA11 3
329 SKTNCA12 3
330 SKTNCA14 3
331 SLDDCA11 3
332 SLMNCA11 3
333 SLNSCA01 3
334 SLNSCA11 3
335 SLNSCA12 3
336 SLNSCA13 3
337 SLNSCA14 3
338 SLVRCA11 3
339 SMAVCA11 3
340 SNADCA11 3
341 SNARCA11 3
342 SNCZCA01 3
343 SNGNCA11 3
344 SNJNCA11 3
345 SNJSCA15 3
346 SNJSCA18 3
347 SNJSCA20 3
348 SNLCCA11 3
349 SNLOCA01 3
350 SNMACA11 3
351 SNMCCA11 3
352 SNMICA11 3
353 SNRACA13 3
354 SNRSCA01 3
355 SNRSCA11 3
356 SONMCA12 3
357 SPVLCA11 3
358 SRCYCA11 3
359 SRFRCA11 3
360 SRVLCA11 3
361 STAHCA01 3
362 STAHCA12 3
363 STAHCA13 3
364 STBHCA11 3
365 STCKCA11 3
366 STFRCA11 3
367 STHNCA11 3
368 SUISCA11 3
369 SUNLCA11 3
370 THCHCA01 3
371 THCYCA01 3
372 THRRCA11 3
373 THTNCA11 3
374 TMLSCA12 3
375 TMTNCA11 3
376 TPTNCA11 3
377 TRACCA11 3
378 TRBLCA11 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ZONE 3 ZONE 2 ZONE 1
LEAST DENSE MIDDLE DENSITY MOST DENSE
<S> <C> <C>
379 TRLCCA11 3
380 TRNDCA11 3
381 TRPSCA11 3
382 TRUCCA11 3
383 TRUCCA12 3
384 TULRCA11 3
385 TWHRCA11 3
386 UKIHCA01 3
387 UKIHCA12 3
388 UPLKCA11 3
389 VCVLCA12 3
390 VINACA12 3
391 VISLCA11 3
392 VLCTCA11 3
393 VLLJCA01 3
394 VNTRCA02 3
395 VYFRCA11 3
396 VYSPCA11 3
397 WANACA11 3
398 WASCCA01 3
399 WDLDCA11 3
400 WDLKCA11 3
401 WEEDCA01 3
402 WEOTCA11 3
403 WLBSCA11 3
404 WLLCCA11 3
405 WLTSCA12 3
406 WLWSCA11 3
407 WNDSCA11 3
408 WNSPCA12 3
409 WNTRCA11 3
410 WSCRCA11 3
411 WTFRCA11 3
412 WTLDCA12 3
413 WTVLCA01 3
414 YBCYCA01 3
415 YNVLCA11 3
416 YREKCA11 3
417 YRLNCA11 3
418 YRLNCA12 3
419 YSMTCA11 3
420 YSMTCA12 3
</TABLE>
<PAGE>
APPENDIX F
UNBUNDLED SWITCHING AND TRANSPORT
<PAGE>
APPENDIX F
In this Appendix, rates for certain services and Network Elements are specified
as "To Be Determined" (TBD). In addition, numerous provisions of this
Agreement refer to prices set forth in this Appendix. In the event of such a
reference in this Agreement where there is no corresponding price in this
Appendix, it shall be deemed to be TBD. With respect to all TBD prices, prior
to ACI ordering any such TBD items, the Parties shall meet and confer to
establish a price.
1 UNBUNDLED SWITCHING
1.1 Unbundled Local Switching Network Element (LSNE): Pacific shall make
available unbundled switching capacity, including dial tone, digit
reception, access to signaling, deployed AIN supporting capabilities,
and vertical features, with routing to interoffice trunks and
interoffice transport provided by Pacific or to designated trunk
groups specified and purchased by ACI. Pacific designates this
service "Local Switching Network Element" (LSNE). In purchasing
LSNE, ACI must obtain a line side port (including a telephone number
and, at ACI's option, a directory listing) for access to the
switching functions and vertical features provided by the switch, and
some designation of trunking for completion of calls, with the
exception of intra-switch calls. All intra-switch calls are
completed using Pacific's switch and no trunk designation is made for
completion of such calls.
1.1.1 Types of charges
1.1.1.1 Line Port charges are as set forth in this Appendix,
Attachment 1 ("Price Sheet").
1.1.1.2 Nothing in this Section 1 means that the vertical
features are included or excluded from the prices for
switching. The issue of the appropriate charges for
vertical features, if any, shall be as specified in the
Price Sheet.
1.1.1.3 Any applicable directory assistance or operator
assistance charges are as set forth in the Price Sheet.
1.1.1.4 Usage sensitive (per minute of use) local switching
charges are as set forth in the Price Sheet. Usage
will be recorded in one second increments. Usage
seconds will be totaled for the entire monthly bill
and then rounded to the next whole minute. Usage
sensitive local switching charges will be on a per
minute of use basis and applied to all originating
and terminating traffic, including, but not limited to
local, toll, E911 calls, calls to time and weather
announcements, etc. Pacific will (where feasible)
measure and charge for all non-conversation time (e.g.,
ringing, calls to busy lines, intercept). Where non-
conversation time cannot be measured the Parties will
mutually agree on the appropriate measure and charge.
Where measurement of terminating minutes to the LSNE is
not possible, the number of minutes billed for
terminating usage will be equal to the number of
originating minutes. The Parties will mutually agree
on a method and procedure to periodically sample and
validate or adjust the ratio of originating to
terminating minutes for billing purposes. At ACI's
request, an initial review will be concluded within
six (6) months of the initial in-service date for ACI's
LSNEs.
<PAGE>
1.1.1.5 Charges for completion of interconnection traffic
(local and toll) shall be determined pursuant to this
Appendix at the rates set forth in the Price Sheet.
1.1.2 Form of Line Port Access: Access to unbundled Local
Switching, as specified in Section 1.1.3 may occur in the
following manner:
1.1.2.1 LSNE Access, Cross-Connection Through Collocation:
From ACI's collocation space, ACI may purchase an EISCC
cross-connection to Pacific's line side Port to obtain
access to LSNE.
1.1.3 Types of LSNE: Pacific will provide LSNE to ACI using
routing options A, B, and C, as described below. LSNEs will
be provided with any available end user-level routing
functions in a particular switch. In addition, Pacific will
provide the switch-level routing options described below.
In a particular Pacific switch, Pacific's current design for
LSNE will permit ACI to select one of the three options for
all of its originating traffic using LSNE in that switch.
Prices for LSNE are set forth on the Price Sheet.
1.1.3.1 Option A: Pacific-Provided Interoffice Transport and
Pacific-Provided Operator and Directory Assistance
Services: In this configuration, ACI purchases a line
Port and receives a telephone number and directory
listing, switching capacity, switch features including
deployed AIN supporting capabilities and completion to
Pacific's interoffice trunks for all multiple-switch
Local Calls, calls to operator and directory assistance
services, E911, intraLATA toll calls and Switched
Access calls. In this configuration, intra-switch
calls are also provided through Pacific's switch.
Pacific will be solely responsible for design and
engineering of the trunks under this option. In
addition, Pacific will provide all O-, operator and
directory assistance services under this option.
Pacific's switching capacity will be programmed to
allow routing to and from ACI's line ports, including
operator and directory assistance calls, to Pacific's
network.
1.1.3.2 Option B: Pacific-Provided Interoffice Transport with
Customized Routing-Simple and with Operator and/or
Directory Assistance (DA) Services Unbundled from
Pacific's Line Port Switching Capacity: In this
configuration, ACI purchases a Line Port and receives
a telephone number and a directory listing, switching
capacity, switch features (including deployed AIN
supporting capabilities) and completion to Pacific's
interoffice trunks for all multiple-switch Local
Calls, E911 calls, intraLATA toll and Switched Access
calls. In this configuration, intra-switch calls are
also provided through Pacific's switch. With the
exception of trunks for operator and/or directory
assistance services, or both, Pacific will be solely
responsible for design and engineering of its
interoffice trunks. ACI will be required to order
separate trunks for operator services provided by
itself or a third party identified by ACI to provide
such services. Transport facilities may be purchased
from Pacific, or connected to ACI's facilities through
a collocation cage by obtaining a cross connection
from Pacific. ACI will be responsible for design and
engineering of the operator and/or directory
assistance trunks under this option, and shall also be
responsible for designating the transport facilities it
desires, if any, from Pacific and the points where
these facilities shall terminate. In addition, ACI
shall be responsible for providing all operator and/or
directory assistance services. Pacific's switching
capacity will be programmed on a per-switch basis to
route all LSNE-originated calls to Pacific's shared
network, except operator and/or directory assistance
calls will be routed to the trunks designated by ACI.
-3-
<PAGE>
In this configuration, the following charges specified
in Appendix A Price Sheet will apply:
1.1.3.2.1 Non recurring switch programming charges as
specified in the Price Sheet.
1.1.3.2.2 Trunk Port Cross Connect Charge (EISCC)
1.1.3.2.2.1 If ACI provides its own dedicated
transport to ACI designated DA and/or
operator platform, a cross-connection
charge from the unbundled switch element
to ACI's designated collocation cage
located in the same office shall apply at
the rates set forth in the Price Sheet.
1.1.3.2.2.2 There will be no cross-connect charge if
ACI selects dedicated transport from
Pacific's intrastate Special Access tariffs
or Pacific's unbundled dedicated transport
tariff for connection to ACI's designated
POI.
1.1.3.3 Option C: Customized Routing - Complex for ACI Traffic
Using Routes Designated by ACI: This option is
customized routing for ACI traffic in the manner
designated by ACI, and it requires that special
customized routing programming be provided by Pacific
pursuant to ACI's instructions. This option will
include all of the features listed in Options A and B.
However, with this Option, ACI may direct all LSNE-
originated traffic on a dialed NPA-NXX basis to a
trunk port other than the standard used for Pacific's
routing. In this configuration, ACI obtains one or
more line ports and receives a telephone number and
directory listing, switching capacity, switch features,
including deployed AIN supporting capabilities, and
transport, that will permit the completion of multiple-
switch Local Calls, calls to either operator or
directory assistance services, or both, E911 calls,
intraLATA toll calls, and Switched Access calls. In
this configuration, intra-switch calls will be provided
through Pacific's switch. Inter-switch calls will be
provided from either shared or designated common or
dedicated transport facilities. ACI will be solely
responsible for design and engineering of any dedicated
transport under this option. Pacific will be solely
responsible for design and engineering of any Pacific-
provided shared or common transport used under this
option. Dedicated transport may be purchased from
Pacific or ACI may provide its own.
1.1.4 Forecasts
1.1.4.1 For the first six months after ACI's first order for
LSNE, ACI shall provide to Pacific forecasts of the
number of such LSNE arrangements at a LATA level.
Thereafter, ACI shall make a good faith effort to
provide such forecasts to Pacific at a wire center
level. ACI shall provide such forecasts to Pacific
on a semi-annual basis.
1.1.5 Implementation Schedule
1.1.5.1 Subject to technical feasibility and order interval
requirements, Pacific will make Option A available on
the date Pacific makes Option A available to another
ACI or upon a date thereafter mutually agreed by the
Parties. Pacific will deploy Option A within 45 days
after ACI's order for a particular switch, provided
that ACI places orders for no more than fifty (50)
switches for Option A in any thirty day period.
-4-
<PAGE>
1.1.5.2 Subject to technical feasibility and order interval
requirements, Pacific will make Option B available on
the date Pacific makes Option B available to another
ACI or upon a date thereafter mutually agreed by the
Parties. Deployment of Option B will be on a project
specific basis as mutually agreed by the Parties.
1.1.5.3 Option C: The Parties will confer in an effort to
define ACI's custom routing requirements and find a
solution endorsed by the switch suppliers, which can
be implemented by Pacific to provide the customized
routing configurations specified by ACI within a
mutually agreed time frame. Deployment will be on a
project-specific basis as mutually agreed by the
Parties. In the event the Parties are unable to agree
on a solution within 45 days of ACI's initial request
for Option C, the Parties shall submit any dispute to
Alternative Dispute Resolution as set forth in the
Agreement.
1.2 Tandem Switching
1.2.1 General Description and Specifications of the Unbundled
Element: Pacific will provide, subject to the terms and
conditions specified herein, the following unbundled tandem
switching:
1.2.1.1 Standard Tandem Switching: Tandem switching allows
use of the tandem switch itself for the transmission of
calls between two switches connected to that tandem,
without any customized routing. Pacific's unbundled
tandem switching will permit access to the tandem
switch to originate a call to, or terminate a call
from, a ACI to a Pacific end office, another LEC,
Wireless Service Provider, or another switch, using
the normal routing established in Pacific's tandem.
1.2.2 Forecasts
1.2.2.1 For the first six months after ACI's first order for
Tandem Switching, ACI shall provide to Pacific
forecasts of the number of such Tandem Switching
arrangements at a LATA level. Thereafter, ACI shall
make a good faith effort to provide such forecasts to
Pacific at a wire center level. ACI shall provide such
forecasts to Pacific on a semi-annual basis.
1.2.3 Implementation Schedule
1.2.3.1 Standard Tandem Switching as described herein will be
available on the date it is made available to another
ACI or upon a date thereafter mutually agreed by the
Parties.
1.2.4 Tandem switching rates are as specified in the Price Sheet.
2 UNBUNDLED INTEROFFICE TRANSMISSION FACILITIES (TRANSPORT)
2.1 General Description and Specifications of the Unbundled Element
Transport: Pacific will make available, subject to the terms and
conditions specified herein, the following unbundled transport
facilities:
2.1.1 Entrance Facilities: Pacific will make available the
following entrance facilities, pursuant to the charges set
forth in the A Price Sheet, upon request of ACI:
2.1.1.1 Connections between Pacific's Wire Center that serves
a ACI Wire Center and the ACI Network.
2.1.1.2 Connections between Pacific's serving wire center and
the point of presence of ACI's IXC switch.
-5-
<PAGE>
2.1.2 Dedicated Transport: Is an interoffice transmission path
between ACI designated locations. Such locations may
include Pacific central offices or other equipment
locations, ACI network components, other carrier network
components or customer premises. Digital Cross-Connect
System (DCS) functionality is available as an option which
can be used in connection with Dedicated Transport. Pacific
will make available the following dedicated connections,
upon request of ACI:
2.1.2.1 Connections between Pacific Wire Centers;
2.1.2.2 Connections between a Pacific central office and a
Pacific EISCC to a ACI collocation space located in a
distant Pacific Wire Center.
2.1.3 Common Transport: Common transport will be available
between a subtending end office and Pacific's Tandem Switch.
2.1.4 Shared Interoffice Transport: Shared transport will only
be available where ACI purchases LSNE. Shared transport
provides call completion from a Pacific end office where
LSNE is purchased and the terminating Pacific end office
or POI where the call leaves Pacific's network.
2.1.4.1 Use of the tandem is included in the Shared
Interoffice Transport charges set forth in the Price
Sheet.
2.2 Form of Access
2.2.1 Entrance Facilities: ACI may order Entrance Facilities
from EISCC, USCC, unbundled Switch Trunk Ports, or Dedicated
Transport.
2.2.2 Dedicated Transport: ACI may order dedicated transport
from the EISCC, USCC, unbundled Switch Trunk Ports, or
Entrance Facilities.
2.2.3 Common Transport: Access to common transport will be
available through interconnection at the access tandem.
2.2.4 Shared Interoffice Transport: Access to shared transport
will only be available where ACI purchases LSNE. The
Parties acknowledge that there is no physical shared
transport to unbundle between Pacific's End Office Switches
and Pacific's end offices and tandem switches, and ACI's
interest is in the shared use of transport between Pacific's
switches and the associated underlying performance
characteristics. Pacific will make available to ACI shared
transport as currently implemented within Pacific's
interoffice network. Pacific will engineer, provision and
maintain such shared interoffice transport facilities and
equipment under existing methods and procedures.
2.2.5 Use of DCS
Pacific will make available the use of unbundled DCS
equipment, in the same manner as it is available to all
IECs. When unbundled DCS is provided with unbundled
transport as a combination, it shall be available on the
date Pacific makes it available to another ACI upon a date
thereafter mutually agreed by the Parties.
2.2.6 ACI may connect Links at Pacific's MDF to unbundled
transport through multiplexing, e.g., D4 channel bank, DCS
or Unbundled Services Cross Connect (USCC).
2.3 General Terms and Conditions
2.3.1 For dedicated transport, Pacific will provide transport
unbundled from switching and other services. Such
transport services will allow ACI to send individual or
multiplexed switched and dedicated services between
Pacific's Wire Centers.
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<PAGE>
2.3.2 Dedicated transport will be available with the following
functionality or optional services:
2.3.2.1 Protection and restoration of equipment and interfaces
at parity with levels Pacific maintains for its own
transport facilities;
2.3.2.2 Compliance with Bellcore and industry standards to the
extent implemented in Pacific's transport network;
2.3.2.3 Redundant power supply or battery back-up to the
extent implemented in Pacific's transport network;
2.3.2.4 Provisioning and maintenance performed to the same
extent such provisioning and maintenance is performed
on Pacific's own transport network.
2.3.3 Where deployed, Pacific will make available interoffice
transport services capable of interfacing on copper,
coaxial cable, and optical fiber facilities. Consistent
with current bundled offerings, the interoffice transport
services will be capable of handling transmission rates
ranging from voice grade up through Optical Carrier
("OC")-48.
2.3.4 Transmission Levels: Where deployed, Pacific will make
dedicated transport available at the following speeds:
DS0, DS1, DS3, and commercially available Optical Carrier
levels (e.g., OC-3/12/48/n).
2.4 Forecasts
2.4.1 For the first six months after ACI's first order for
Unbundled Transport, ACI shall provide to Pacific
forecasts of the number of such Unbundled Transport
arrangements at a LATA level. Thereafter, ACI shall
make a good faith effort to provide such forecasts to
Pacific at a wire center level. ACI shall provide such
forecasts to Pacific on a semi-annual basis.
2.5 Implementation Schedule: Unbundled transport will be available on
the date Pacific makes it available to another ACI or upon a date
thereafter mutually agreed by the Parties, except that unbundled
transport combined with LSNE will be available simultaneously with
the availability of the particular LSNE Option pursuant to the LSNE
implementation schedule specified in this Attachment.
2.6 Rates: Rates for transport are specified in the Price Sheet
-7-
<PAGE>
3. The following compensation terms shall apply in all cases where ACI
purchases Pacific's LSNE. Unless otherwise stated, all charges are as
specified in the Price Sheet.
3.1. For Local intra-switch calls where ACI has purchased Pacific's LSNE,
the Parties agree to impose no call termination charges on each
other. Where the call is:
3.1.1. Originated by ACI's end user customer and completed to a
Pacific customer:
3.1.1.1. For use of the local switch
- Local Switching Capacity charge at the
originating office.
3.1.2. Originated by ACI's end user customer and completed to the
customer of a third party carrier (not affiliated with ACI)
using Pacific's LSNE:
3.1.2.1. For use of the local switch
- Local Switching Capacity charge at the
originating office.
3.1.3. Originated by ACI's end user customer and completed to
another of ACI's end user customers using Pacific's LSNE:
3.1.3.1. For use of the local switch
- Local Switching Capacity charge at the
originating office.
3.1.4. Originated by a Pacific customer and terminated to ACI's
LSNE:
- No Local Switching Capacity charge will apply.
3.1.5. Originated by the customer of a third party carrier (not
affiliated with ACI) using Pacific's LSNE and terminated to
ACI's LSNE:
- No Local Switching Capacity charge will apply to ACI.
- The Local Switching Capacity charge on the originating
end will be imposed on the third-party carrier.
3.2. For Local inter-switch calls where ACI has purchased Pacific's LSNE,
the Parties agree to impose no call termination charges on each
other. Unless otherwise specified, Pacific's charges will apply to
ACI as described below where the call is:
3.2.1. Originated by ACI's end-user customer and completed to a
Pacific end user:
3.2.1.1. For use of the local switch
- Local Switching Capacity charge at the
originating office.
- A mileage-based transport charge will apply
when ACI uses Pacific's transport.
<PAGE>
3.2.2. Originated by ACI's end-user customer and completed to the
LSNE of a third party carrier (not affiliated with ACI):
3.2.2.1. For use of the local switch
- Local Switching Capacity charge at the
originating office.
- A mileage-based transport charge will apply
when ACI uses Pacific's transport.
3.2.3. Originated by ACI's end-user customer and completed to the
interconnected network of a third party carrier (not
affiliated with ACI):
3.2.3.1. For use of the local switch:
- Local Switching Capacity charge at the
originating office.
- A mileage-based transport charge will apply
when ACI uses Pacific's transport, and
mileage shall be measured between the
originating office and the POI with the
third party's network.
3.2.3.2. For call termination:
- Tandem Transit Switching rate
- Local Switching Capacity charge at the
terminating office.
3.2.4. Originated by ACI's end-user customer and completed to
ACI's LSNE:
3.2.4.1. For use of the local switch:
- Local Switching Capacity charge at the
originating office.
- A mileage-based transport charge will apply
when ACI uses Pacific's transport.
- Local Switching Capacity charge at the
terminating office.
3.2.5. Originated by a Pacific end-user customer and terminated to
ACI's LSNE:
3.2.5.1. For use of the local switch:
- Local Switching Capacity Charge at the
terminating office.
3.2.6. Originated by a customer of a third-party carrier (not
affiliated with ACI) using Pacific's LSNE and terminated to
ACI's LSNE:
3.2.6.1. For use of the local switch:
- Local Switching Capacity charge at the
terminating office.
3.2.7. Originated by an end-user customer on the interconnected
network of a third-party carrier (not affiliated with ACI)
and terminated to ACI's LSNE:
9
<PAGE>
3.2.7.1. For use of the local switch:
- Local Switching Capacity charge at the
terminating office.
- A mileage-based transport charge will apply
when ACI uses Pacific's transport, and
mileage shall be measured between the POI
with the third party's network and the
terminating office.
3.2.7.2. For call termination:
- ACI charges to Pacific Pacific's Local
Switching Capacity charge at the
terminating office.
3.3. For intraLATA toll calls where ACI has purchased Pacific's LSNE the
charges which follow shall apply. All references to "NIC", "Local
Switching", "Tandem Transit Rate", RIC", and "ACI" shall refer to
Pacific's intrastate or interstate switched access rates as
appropriate :
3.3.1. Originated by ACI's end-user customer and completed to a
Pacific end user customer:
3.3.1.1. For use of the local switch:
- Local Switching Capacity charge at the originating
office.
- A mileage-based transport charge between the two
offices will apply when ACI uses Pacific's transport.
3.3.1.2. Switched Access charges, per Pacific's Schedule
C.P.U.C. Tariff No. 175-T ("Switched Access
Charges"), shall apply as follows:
- NIC
3.3.1.3. For call termination at the terminating office,
Switched Access Charges shall apply as follows:
- Local Switching
- NIC
3.3.2. Originated by ACI's end-user customer and completed to the
customer of a third-party carrier (not affiliated with ACI)
using Pacific's LSNE in a distant end office:
3.3.2.1. For use of the local switch:
- Local Switching Capacity charge at the
originating office.
- A mileage-based transport charge between the
two offices will apply when ACI uses
Pacific's transport.
- NIC at the originating office
3.3.2.2. For call termination:
10
<PAGE>
- Local Switching Capacity at the terminating
office per the Price Sheet.
3.3.3. Originated by ACI's end-user customer and completed to the
network of third-party carrier (not affiliated with ACI)
interconnected with Pacific's network:
3.3.3.1. For use of the local switch:
- Local Switching Capacity charge at the
originating office.
- A mileage-based transport charge will apply
when ACI uses Pacific's transport, and
mileage shall be measured between the
originating office and the POI with the third
party's network.
- NIC at the originating office
- Tandem Transit rate
3.3.3.2. For call termination:
- Local Switching
- NIC
- Tandem Switching (if charged by the third
party)
3.3.4. Originated by ACI's end-user customer and completed to
another of ACI's customers being served through Pacific's
LSNE in a distant office:
3.3.4.1. For use of the local switch:
- Local Switching Capacity charge at the
originating office.
- A mileage-based transport charge between the
two offices will apply when ACI uses
Pacific's transport.
- NIC at the originating office
- Local Switching Capacity charge at the
terminating office.
- NIC at the terminating office
3.3.5. Originated by a Pacific customer and terminated to ACI's
end-user customer.
3.3.5.1. For use of the local switch:
- Local Switching Capacity charge at the
terminating office.
- NIC at the terminating office
3.3.5.2. For call termination ACI will charge to Pacific
Pacific's Switched Access Charges at the
terminating office:
- Local Switching
11
<PAGE>
- NIC
3.3.6. Originated by the customer of a third-party carrier (not
affiliated with ACI) using Pacific's LSNE in a distant end
office and terminated to ACI's LSNE:
3.3.6.1. For use of the local switch:
- Local Switching Capacity charge at the
terminating office.
- NIC at the terminating office
3.3.6.2. For call termination:
- ACI will charge to Pacific Pacific's Local
Switching Capacity charge per Appendix A
Price Sheet
3.3.7. Originated by a customer on the network of a third-party
carrier (not affiliated with ACI) interconnected with
Pacific's network and terminated to ACI's LSNE.
3.3.7.1. For use of the local switch:
- Local Switching Capacity charge at the
terminating office.
- NIC at the terminating office
- A mileage-based transport charge will apply
when ACI uses Pacific's transport, and
mileage shall be measured between the POI
with the third party and the terminating
office.
3.3.7.2. For call termination ACI will charge to Pacific
Pacific's Switched Access charges:
- Local Switching
- NIC
3.4. For intrastate Switched Access calls where ACI is using Pacific's
LSNE for calls originated from or terminated to an IXC for
completion:
3.4.1. For calls originated from ACI's end-user customer to ACI's
own IXC switch (or that of an affiliate) for completion:
3.4.1.1. For use of the local switch:
- Local Switching Capacity charge at the
originating office.
- NIC at the originating office
- Pacific will charge ACI's IXC affiliate
appropriate Switched Access elements.
3.4.2. For calls originated from ACI's end-user customer to an
IXC's switch not affiliated with ACI.
12
<PAGE>
3.4.2.1. For use of the local switch:
- Local Switching Capacity charge at the
originating office.
- NIC at the originating office
- Pacific and ACI shall charge the IXC for
originating Switched Access on a Meet Point
basis per the Agreement.
3.4.3. For calls terminating to ACI's end-user customer from ACI's
own IXC switch (or that of an affiliate) for completion.
3.4.3.1. For use of the local switch:
- Local Switching Capacity charge at the
terminating office.
- NIC at the terminating office
- Pacific shall charge ACI's IXC (affiliate)
appropriate Switched Access elements
3.4.4. For calls terminating to ACI's end-user customer from an
IXC switch not affiliated with ACI.
3.4.4.1. For use of the local switch:
- Local Switching Capacity charge at the
terminating office.
- NIC at the terminating office
- Pacific and ACI shall charge the IXC
terminating Switched Access on a Meet Point
basis per the Agreement
3.4.5. For interstate Switched Access calls where ACI is using
Pacific's LSNE for calls originated from or terminated to
an IXC for completion:
3.4.5.1. For calls originated from ACI's end-user customer
to ACI's own IXC switch (or that of an affiliate)
for completion.
3.4.5.1.1. For use of the local switch:
- Local Switching Capacity charge at the
originating office.
- RIC and CCLC at the originating office.
- Pacific shall charge ACI's IXC (affiliate)
appropriate Switched Access elements.
3.4.6. For calls originated from ACI's end-user customer to an
IXC's switch not affiliated with ACI.
3.4.6.1. For use of the local switch:
- Local Switching Capacity charge at the
originating office.
13
<PAGE>
- RIC and CCLC at the originating office
- Pacific and ACI shall charge the IXC for
originating Switched Access on a Meet Point
basis per the Agreement.
3.4.7. For calls terminating to ACI's end-user customer from ACI's
own IXC switch (or that of an affiliate) for completion.
3.4.7.1. For use of the local switch:
- Local Switching Capacity charge at the
terminating office.
- RIC and CCLC at the terminating office
- Pacific shall charge ACI's IXC (affiliate)
appropriate Switched Access elements.
3.4.8. For calls terminating to ACI's end-user customer from an
IXC's switch not affiliated with ACI.
3.4.8.1. For use of the local switch:
- Local Switching Capacity charge at the
terminating office.
- RIC and CCLC at the terminating office
- Pacific and ACI shall charge the IXC for
terminating Switched Access on a Meet Point
basis per the Agreement.
14
<PAGE>
4. COMPENSATION FOR CALL TERMINATION
4.1. In all cases, resale lines (whether purchased by ACI or a third
party) in Pacific's switches will be treated in the same manner as
Pacific's end user customers for the purposes of call termination
charges.
4.2. For calls that originate from or terminate to a ACI Local Switching
Network Element ("LSNE"), bound for or terminated from a third party
LEC, the Parties agree that Pacific shall make arrangements directly
with that third party for any compensation owed in connection with
such calls on ACI's behalf.
4.3. Pacific agrees to bill any facilities-based third party referred to
in Section 3.2, above, unless, after thirty (30) days' notice in
writing to Pacific, ACI requests otherwise. To compensate Pacific
for this service, ACI agrees to pay $ .005 (one-half cent) per
message.
4.4. For calls that originate from a facilities-based third party and
terminate to a ACI LSNE, Pacific will compensate ACI on behalf of
that third party. For calls that terminate to a facilities-based
third party from a ACI LSNE, Pacific has agreed to charge ACI as if
the call terminated in Pacific's network, using Pacific's rates as
described below. In the event ACI elects not to use Pacific's
billing service described in Section 3.4, above, ACI shall deal
directly with third parties regarding compensation for call
termination.
PRICE SHEET
<TABLE>
<CAPTION>
SERVICE ORDER CONNECT DISCONNECT
MONTHLY -------------------------- -------------------------- --------------------------
NETWORK ELEMENTS RECURRING INITIAL ADDITIONAL INITIAL ADDITIONAL INITIAL ADDITIONAL
- -------------------- ---------- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
SIGNALING SYSTEM 7
(SS7)
STP Port FCC Tariff 128
SS7 Link FCC Tariff 128
Link Mileage FCC Tariff 128
800 Database FCC Tariff 128
LIDB Query FCC Tariff 128
Transit Signalling TBD
OPERATOR SERVICES
Directory Assistance
Per Call $ 0.38 N/A N/A N/A N/A N/A N/A
Operator Services
per Work Sec $ 0.02967 N/A N/A N/A N/A N/A N/A
COLLOCATION
EISCC
Basic $ 1.17 $36.57 $7.31 $120.22 $94.70 $79.59 $79.59
DS-0 $ 17.52 $36.57 $7.31 $141.84 $116.32 $83.33 $83.33
DS-1 $ 17.96 $36.57 $7.31 $193.24 $167.72 $89.62 $89.62
DS-3 $ 88.80 $36.57 $7.31 $189.54 $164.02 $88.29 $88.29
ENTRANCE FACILITIES
2-Wire Voice $ 59.95 $54.40 $54.40 $161.52 $161.52 $94.63 $94.63
4-Wire Voice TBD TBD TBD TBD TBD TBD TBD
DS-1 $ 98.60 $33.79 $33.79 346.84 $346.84 $215.34 $215.34
DS-3 w/ equip $ 1,068.65 $54.39 $54.39 $411.06 $411.06 $141.95 $141.95
DS-3 w/o equip $ 395.91 $54.39 $54.39 $396.85 $396.85 $141.95 $141.95
<CAPTION>
CHANGE ORDER
--------------------------------
NETWORK ELEMENTS INITIAL ADDITIONAL
- -------------------- ------------- --------------
<S> <C> <C>
SIGNALING SYSTEM 7
(SS7)
STP Port
SS7 Link
Link Mileage
800 Database
LIDB Query
Transit Signalling
OPERATOR SERVICES
Directory Assistance
Per Call N/A N/A
Operator Services
per Work Sec N/A N/A
COLLOCATION
EISCC
Basic $0.00 $0.00
DS-0 $0.00 $0.00
DS-1 $0.00 $0.00
DS-3 $0.00 $0.00
ENTRANCE FACILITIES
2-Wire Voice $21.51 $21.51
4-Wire Voice TBD TBD
DS-1 $0.00 $0.00
DS-3 w/ equip $0.00 $0.00
DS-3 w/o equip $0.00 $0.00
</TABLE>
15
<PAGE>
PRICE SHEET
<TABLE>
<CAPTION>
SERVICE ORDER CONNECT DISCONNECT
MONTHLY -------------------------- -------------------------- ---------------------------
NETWORK ELEMENTS RECURRING INITIAL ADDITIONAL INITIAL ADDITIONAL INITIAL ADDITIONAL
- -------------------- ---------- ----------- ------------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
LOCAL SWITCHING
CAPABILITY
PORTS
2-Wire Port $3.49 $45.87 $6.80 $91.49 $46.38 $64.15 $7.31
Coin Port $3.58 $45.87 $6.80 $91.49 $46.38 $64.15 $7.31
Centrex Port $6.94 TBD TBD TBD TBD TBD TBD
Centrex System N/A $0.00 N/A $54.38 N/A $27.18 $27.18
Establishment
ISDN Port $16.76 TBD TBD TBD TBD TBD TBD
DID Port $6.08 TBD TBD TBD TBD TBD TBD
DID Number Block $1.47 N/A N/A $15.44 $15.44 $4.38 $4.38
Hunting-Business $0.30 $4.84 $4.84 $1.37 $1.37 $2.58 $0.74
DS-1 Line Port TBD TBD TBD TBD TBD TBD TBD
VERTICAL FEATURES
(WEIGHTED AVG)
Call Forwarding $0.84 $0.82 $0.00 $1.37 $1.37 $1.46 $0.74
Variable
Busy Call Forwarding $0.83 $0.82 $0.00 $1.37 $1.37 $1.46 $0.74
Delayed Call
Forwarding $0.84 $0.82 $0.00 $1.37 $1.37 $1.46 $0.74
Call Waiting $0.84 $0.82 $0.00 $1.37 $1.37 $1.46 $0.74
Three Way Calling $0.84 $0.82 $0.00 $1.37 $1.37 $1.46 $0.74
Call Screen $0.86 $0.82 $0.00 $1.37 $1.37 $1.46 $0.74
Message Waiting
Indicator $0.84 $0.82 $0.00 $1.37 $1.37 $1.46 $0.74
Repeat Dialing $0.84 $0.82 $0.00 $1.37 $1.37 $1.46 $0.74
Call Return $0.84 $0.82 $0.00 $1.37 $1.37 $1.46 $0.74
Call Forwarding
Busy/Delay $0.84 $0.82 $0.00 $1.37 $1.37 $1.46 $0.74
Remote Call
Forwarding
(Weighted Avg) $1.76 $10.54 $2.11 $3.44 $3.44 $6.09 $6.09
Other Vertical
Features TBD TBD TBD TBD TBD TBD TBD
BASIC SWITCHING
FUNCTIONS
Interoffice -
Originating
Setup per Attempt $0.006863
MOU $0.000875
Interoffice -
Terminating
Setup per Call $0.007006
MOU $0.000900
Intraoffice
Setup per Call $0.016156
MOU $0.000900
Tandem Switching
Setup per Call $0.002943
MOU $0.000964
INTEROFFICE
TRANSMISSION
TRUNK PORT
TERMINATION
End Office Dedicated $18.01 $47.87 TBD $277.45 TBD $126.17 $2.04
DS-1 Port
Tandem Dedicated $18.01 TBD TBD TBD TBD TBD TBD
DS-1 Port
CLC Switched
Service
Establishment
1AESS N/A TBD TBD TBD TBD TBD TBD
5ESS N/A TBD TBD TBD TBD TBD TBD
DMS100 N/A TBD TBD TBD TBD TBD TBD
<CAPTION>
CHANGE ORDER
-------------------------------
NETWORK ELEMENTS INITIAL ADDITIONAL
- -------------------- ------------- ---------------
<S> <C> <C>
LOCAL SWITCHING
CAPABILITY
PORTS
2-Wire Port $124.12 $52.23
Coin Port $124.12 $52.23
Centrex Port TBD TBD
Centrex System $41.71 $41.71
Establishment
ISDN Port TBD TBD
DID Port TBD TBD
DID Number Block $6.97 $6.97
Hunting-Business $10.86 $2.78
DS-1 Line Port TBD TBD
VERTICAL FEATURES
(WEIGHTED AVG)
Call Forwarding $8.15 $2.78
Variable
Busy Call Forwarding $8.15 $2.78
Delayed Call
Forwarding $8.15 $2.78
Call Waiting $8.15 $2.78
Three Way Calling $8.15 $2.78
Call Screen $8.15 $2.78
Message Waiting $8.15 $2.78
Indicator
Repeat Dialing $8.15 $2.78
Call Return $8.15 $2.78
Call Forwarding $8.15 $2.78
Busy/Delay
Remote Call $9.24 $9.24
Forwarding
(Weighted Avg)
Other Vertical TBD TBD
Features
BASIC SWITCHING
FUNCTIONS
Interoffice -
Originating
Setup per Attempt
MOU
Interoffice -
Terminating
Setup per Call
MOU
Intraoffice
Setup per Call
MOU
Tandem Switching
Setup per Call
MOU
INTEROFFICE
TRANSMISSION
TRUNK PORT
TERMINATION
End Office Dedicated $288.29 $4.67
DS-1 Port
Tandem Dedicated TBD TBD
DS-1 Port
CLC Switched
Service
Establishment
1AESS TBD TBD
5ESS TBD TBD
DMS100 TBD TBD
</TABLE>
16
<PAGE>
NET
<TABLE>
<CAPTION>
SERVICE ORDER CONNECT DISCONNECT
MONTHLY -------------------------- -------------------------- ---------------------------
NETWORK ELEMENTS RECURRING INITIAL ADDITIONAL INITIAL ADDITIONAL INITIAL ADDITIONAL
- -------------------- ---------- ----------- ------------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMON TRANSPORT
Zone 1
Fixed Mileage $0.000472 N/A N/A N/A N/A N/A N/A
Variable Mileage $0.000015
Zone 2
Fixed Mileage $0.000472 N/A N/A N/A N/A N/A N/A
Variable Mileage $0.000019
Zone 3
Fixed Mileage $0.000479 N/A N/A N/A N/A N/A N/A
Variable Mileage $0.000020
Zone 4
Fixed Mileage $0.000506 N/A N/A N/A N/A N/A N/A
Variable Mileage $0.000024
DEDICATED TRANSPORT
VOICE GRADE
DEDICATED TRANSPORT
Zone 1
Fixed Mileage $2.75 TBD TBD TBD TBD TBD TBD
Variable Mileage $0.14
Zone 2
Fixed Mileage $2.76 TBD TBD TBD TBD TBD TBD
Variable Mileage $0.16
Zone 3
Fixed Mileage $2.81 TBD TBD TBD TBD TBD TBD
Variable Mileage $0.17
Zone 4
Fixed Mileage $3.05 TBD TBD TBD TBD TBD TBD
Variable Mileage $0.22
DS-1 DEDICATED
TRANSPORT
Zone 1
Fixed Mileage $28.00 $47.87 TBD $393.97 TBD $234.55 $0.20
Variable Mileage $1.22
Zone 2
Fixed Mileage $28.01 $47.87 TBD $393.97 TBD $234.55 $0.20
Variable Mileage $1.54
Zone 3
Fixed Mileage $28.48 $47.87 TBD $393.97 TBD $234.55 $0.20
Variable Mileage $1.69
Zone 4
Fixed Mileage $30.53 $47.87 TBD $393.97 TBD $234.55 $0.20
Variable Mileage $2.03
DS-3 DEDICATED
TRANSPORT
Zone 1
Fixed Mileage $300.47 $47.87 TBD $393.97 TBD $234.55 $0.20
Variable Mileage $21.99
Zone 2
Fixed Mileage $302.56 $47.87 TBD $393.97 TBD $234.55 $0.20
Variable Mileage $30.06
Zone 3
Fixed Mileage $308.17 $47.87 TBD $393.97 TBD $234.55 $0.20
Variable Mileage $34.22
Zone 4
Fixed Mileage $357.83 $47.87 TBD $393.97 TBD $234.55 $0.20
Variable Mileage $41.54
<CAPTION>
CHANGE ORDER
----------------------------
NETWORK ELEMENTS INITIAL ADDITIONAL
- -------------------- ----------- --------------
<S> <C> <C>
COMMON TRANSPORT
Zone 1
Fixed Mileage N/A N/A
Variable Mileage
Zone 2
Fixed Mileage N/A N/A
Variable Mileage
Zone 3
Fixed Mileage N/A N/A
Variable Mileage
Zone 4
Fixed Mileage N/A N/A
Variable Mileage
DEDICATED TRANSPORT
VOICE GRADE
DEDICATED TRANSPORT
Zone 1
Fixed Mileage TBD TBD
Variable Mileage
Zone 2
Fixed Mileage TBD TBD
Variable Mileage
Zone 3
Fixed Mileage TBD TBD
Variable Mileage
Zone 4
Fixed Mileage TBD TBD
Variable Mileage
DS-1 DEDICATED
TRANSPORT
Zone 1
Fixed Mileage $448.66 $1.23
Variable Mileage
Zone 2
Fixed Mileage $448.66 $1.23
Variable Mileage
Zone 3
Fixed Mileage $448.66 $1.23
Variable Mileage
Zone 4
Fixed Mileage $448.66 $1.23
Variable Mileage
DS-3 DEDICATED
TRANSPORT
Zone 1
Fixed Mileage $448.66 $1.23
Variable Mileage
Zone 2
Fixed Mileage $448.66 $1.23
Variable Mileage
Zone 3
Fixed Mileage $448.66 $1.23
Variable Mileage
Zone 4
Fixed Mileage $448.66 $1.23
Variable Mileage
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SERVICE ORDER CONNECT DISCONNECT
MONTHLY -------------------------- -------------------------- ---------------------------
NETWORK ELEMENTS RECURRING INITIAL ADDITIONAL INITIAL ADDITIONAL INITIAL ADDITIONAL
- -------------------- ---------- ----------- ------------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHARED TRANSPORT
Zone 1
Fixed Mileage $0.000883 N/A N/A N/A N/A N/A N/A
Variable Mileage $0.000015
Zone 2
Fixed Mileage $0.000883 N/A N/A N/A N/A N/A N/A
Variable Mileage $0.000019
Zone 3
Fixed Mileage $0.000890 N/A N/A N/A N/A N/A N/A
Variable Mileage $0.000020
Zone 4
Fixed Mileage $0.000922 N/A N/A N/A N/A N/A N/A
Variable Mileage $0.000024
With Option C LSNE ICB
MULTIPLEXING
DS-0/DS-1 MUX $235.71 $47.87 N/A $453.20 N/A $226.44 $226.44
DS-1/DS-3 MUX $260.30 $47.87 N/A $466.59 N/A $228.47 $228.47
DCS TBD TBD TBD TBD TBD TBD TBD
USCC $20.95 TBD TBD TBD TBD TBD TBD
<CAPTION>
CHANGE ORDER
--------------------------------
NETWORK ELEMENTS INITIAL ADDITIONAL
- -------------------- ------------- ----------------
<S> <C> <C>
SHARED TRANSPORT
Zone 1
Fixed Mileage N/A N/A
Variable Mileage
Zone 2
Fixed Mileage N/A N/A
Variable Mileage
Zone 3
Fixed Mileage N/A N/A
Variable Mileage
Zone 4
Fixed Mileage N/A N/A
Variable Mileage
With Option C LSNE
MULTIPLEXING
DS-0/DS-1 MUX $0.00 $0.00
DS-1/DS-3 MUX $0.00 $0.00
DCS TBD TBD
USCC TBD TBD
</TABLE>
18
<PAGE>
INTERCONNECTION AGREEMENT UNDER SECTIONS 251 AND 252 OF THE
TELECOMMUNICATIONS ACT OF 1996
DATED AS OF JUNE 5, 1998
BY AND BETWEEN
BELL ATLANTIC - PENNSYLVANIA, INC.
AND
ACCELERATED
CONNECTIONS,
INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1.0 DEFINITIONS 2
2.0 INTERPRETATION AND CONSTRUCTION 11
3.0 INTERCONNECTION ACTIVATION DATES AND IMPLEMENTATION SCHEDULE 11
4.0 INTERCONNECTION PURSUANT TO SECTION 251(c)(2) 12
4.1 Scope 12
4.2 Physical Architectures 14
4.3 Mid-Span Meets 15
4.4 Interconnection in Additional LATAs 16
4.5 Interconnection Points for Different Types of Traffic 17
5.0 TRANSMISSION AND ROUTING OF TELEPHONE EXCHANGE SERVICE TRAFFIC
PURSUANT TO SECTION 251(c)(2) 17
5.1 Scope of Traffic 17
5.2 Trunk Group Connections and Ordering 17
5.3 Additional Switching System Hierarchy and Trunking Requirements 18
5.4 Signaling 18
5.5 Grades of Service 18
5.6 Measurement and Billing 18
5.7 Reciprocal Compensation Arrangements -- Section 251(b)(5) 19
6.0 TRANSMISSION AND ROUTING OF EXCHANGE ACCESS TRAFFIC
PURSUANT TO 251(c)(2) 20
6.1 Scope of Traffic 20
6.2 Trunk Group Architecture and Traffic Routing 20
6.3 Meet-Point Billing Arrangements 21
6.4 800/888 Traffic 24
7.0 TRANSPORT AND TERMINATION OF OTHER TYPES OF TRAFFIC 25
7.1 Information Services Traffic 25
7.2 LSV/VCI Traffic 26
7.3 Transit Service 27
7.4 911/E911 Arrangements 28
7.5 Ancillary Traffic Generally 30
8.0 NUMBER RESOURCES, RATE CENTERS, AND RATING POINTS 30
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9.0 NETWORK MAINTENANCE AND MANAGEMENT; OUTAGES 31
9.3 Interference or Impairment 31
9.4 Repeated or Willful Noncompliance 31
9.5 Outage Repair Standard 32
9.6 Notice of Changes -- Section 251(c)(5) 32
10.0 JOINT NETWORK IMPLEMENTATION AND GROOMING PROCESS;
INSTALLATION, MAINTENANCE, TESTING AND REPAIR 32
10.1 Joint Network Implementation and Grooming Process 32
10.2 Installation, Maintenance, Testing and Repair 33
10.3 Forecasting Requirements for Trunk Provisioning 33
11.0 UNBUNDLED ACCESS -- SECTION 251(c)(3) 34
11.1 Available Network Elements 35
11.2 Unbundled Local Loop (ULL) Transmission Types 35
11.3 Network Interface Device 37
11.4 Unbundled Switching Elements 37
11.5 Interoffice Transmission Facilities 37
11.6 Operations Support Systems 37
11.7 Limitations on Unbundled Access 37
11.8 Availability of Other Network Elements on an Unbundled Basis 38
11.9 Provisioning of Unbundled Local Loops 39
11.10 Maintenance of Unbundled Local Loops 40
11.11 Rates and Charges 40
12.0 RESALE -- SECTIONS 251(c)(4) and 251(b)(1) 41
12.1 Availability of Retail Rates for Resale 41
12.2 Availability of Wholesale Rates for Resale 41
12.3 Availability of Support Services for Resale 41
12.4 Restrictions on Resale and Use of BA Services 41
13.0 COLLOCATION -- SECTION 251(c)(6) 42
14.0 NUMBER PORTABILITY -- SECTION 251(b)(2) 44
14.1 Scope 44
14.2 Procedures for Providing INP Through Remote Call Forwarding 44
14.3 Procedures for Providing INP Through Direct Inward Dial
Trunks (Flex-DID) 46
14.4 Procedures for Providing LTNP Through Full NXX Code Migration 46
14.5 Receipt of Terminating Compensation on Traffic to INP'ed Numbers 46
14.6 Recovery of INP Costs Pursuant to FCC Order and Rulemaking 47
15.0 DIALING PARITY -- SECTION 251(b)(3) 47
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16.0 ACCESS TO RIGHTS-OF-WAY -- SECTION 251(b)(4) 48
17.0 DATABASES AND SIGNALING 48
18.0 COORDINATED SERVICE ARRANGEMENTS 50
18.1 Intercept and Referral Announcements 50
18.2 Coordinated Repair Calls 50
18.3 Customer Authorization 50
19.0 DIRECTORY SERVICES ARRANGEMENTS 51
19.1 Directory Listings and Directory Distributions 51
19.2 Yellow Pages Maintenance 53
19.3 Service Information Pages 53
19.4 Directory Assistance (DA); Call Completion 54
20.0 COORDINATION WITH TARIFF TERMS 54
21.0 INSURANCE 55
22.0 TERM AND TERMINATION 55
23.0 DISCLAIMER OF REPRESENTATIONS AND WARRANTIES 56
24.0 CANCELLATION CHARGES 56
25.0 INDEMNIFICATION 57
26.0 LIMITATION OF LIABILITY 57
27.0 PERFORMANCE STANDARDS FOR SPECIFIED ACTIVITIES 58
27.1 Performance Standards 58
27.2 Performance Reporting 58
27.3 Performance Remedies 59
28.0 COMPLIANCE WITH LAWS; REGULATORY APPROVAL 59
29.0 MISCELLANEOUS 60
29.1 Authorization 60
29.2 Independent Contractor 60
29.3 Force Majeure 61
29.4 Confidentiality 61
29.5 Choice of Law 62
29.6 Taxes 62
29.7 Assignment 65
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29.8 Billing and Payment; Disputed Amounts 65
29.9 Dispute Resolution 66
29.10 Notices 66
29.11 Section 252(i) Obligations 67
29.12 Joint Work Product 68
29.13 No Third Party Beneficiaries; Disclaimer of Agency 68
29.14 No License 69
29.15 Technology Upgrades 69
29.16 Survival 69
29.17 Entire Agreement 70
29.18 Counterparts 70
29.19 Modification, Amendment, Supplement or Waiver 70
29.20 Successors and Assigns 70
29.21 Publicity 70
</TABLE>
LIST OF SCHEDULES AND EXHIBITS
<TABLE>
<CAPTION>
Schedules
- ---------
<S> <C>
Schedule 1.0 Deleted by Mutual Agreement of the Parties
Schedule 3.0 Initial Network Implementation Schedule
Schedule 4.0 Interconnection Points in LATA
Schedule 4.5 Interconnection Points for Different Types of Traffic
Schedule 6.3 Rate Elements Under Meet Point Billing
Schedule 11.3 Access to Network Interface Device
Schedule 11.4 Unbundled Switching Elements
Schedule 12.3 Support Services for Resale
Schedule 13.6 Non-Recurring Charge Installment Payment Option for Collocation
and Central Office Switch Dialing Plans
Schedule 27.0 Performance Monitoring Reports, Standards and Remedies
Exhibits
- --------
Exhibit A Detailed Schedule of Itemized Charges
Exhibit B Network Element Bona Fide Request
Exhibit C Directory Assistance and Call Completion Services Agreement
Exhibit D IntraLATA Telecommunications Services Settlement Agreement
</TABLE>
iv
<PAGE>
INTERCONNECTION AGREEMENT UNDER SECTIONS 251 AND 252 OF THE
TELECOMMUNICATIONS ACT OF 1996
This Interconnection Agreement under Sections 251 and 252 of the
Telecommunications Act of 1996, is effective as of the 5th day of June, 1998
(the "Effective Date"), by and between Bell Atlantic - Pennsylvania, Inc.
("BA"), a Pennsylvania corporation with offices at 1717 Arch Street, 32nd Floor,
Philadelphia, Pennsylvania 19103, and ACI Corp. d/b/a Accelerated Connections,
Inc., a Delaware corporation with offices at 7337 South Revere Parkway,
Englewood, Colorado, 80112.
WHEREAS, BA and ACI (individually, a "Party" and collectively, the
"Parties") want to interconnect their networks at mutually agreed upon points
of interconnection to provide Telephone Exchange Services, Switched Exchange
Access Services, and other Telecommunications Services (all as defined below) to
their respective customers;
WHEREAS, the Parties are entering into this Agreement to set forth the
respective obligations of the Parties and the terms and conditions under which
the Parties will interconnect their networks and provide other services as
required by the Act (as defined below) and additional services as set forth
herein; and
WHEREAS, Sections 251 and 252 of the Telecommunications Act of 1996 have
specific requirements for interconnection, unbundling and service resale;
NOW, THEREFORE, in consideration of the mutual provisions contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, ACI and BA hereby agree as follows:
This Agreement sets forth the terms, conditions and pricing under which
BA and ACI (individually, a "Party" and collectively, the "Parties") will offer
and provide other network Interconnection, access to Network Elements,
ancillary services, and wholesale Telecommunications Services available for
resale within each LATA in which they both operate within Pennsylvania. This
Agreement also sets forth the terms, conditions and pricing under which ACI
agrees to offer and provide to BA network Interconnection. As such, this
Agreement is an integrated package that reflects compromises made by both
Parties. It will be submitted to the Pennsylvania Public Utility Commission,
and the Parties will specifically request that the Commission refrain from
taking any action to change, suspend or otherwise delay implementation of the
Agreement. So long as the Agreement remains in effect, neither Party shall
advocate before any legislative, regulatory, or other public forum that any term
of this Agreement be modified or eliminated, unless mutually agreed to by the
Parties.
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1.0 DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
specified below in this Section 1. For convenience of reference only, the
following terms are defined for use in this Agreement. Terms that are defined
or explained in the Act (as defined below) shall have the meaning given them in
the Act. Where industry standard sources, such as Bellcore materials are
referenced in a definition, that definition shall incorporate any additional
explanations or standards set forth in those sources.
1.1 "Act" means the Communications Act of 1934 (47 U.S.C. 151 ET.
SEQ.), as amended by the Telecommunications Act of 1996, and as from time to
time interpreted in the duly authorized rules and regulations of the FCC or the
Commission.
1.2 "ADSL" or "Asymmetrical Digital Subscriber Line" means a
transmission technology which transmits an asymmetrical digital signal of up to
6 mbps to the Customer and up to 640 kbps from the Customer.
1.3 "Agreement" means this Interconnection Agreement under Sections
251 and 252 of the Act and all Exhibits, Schedules, addenda, and attachments
referenced herein and/or appended hereto.
1.4 "Ancillary Traffic," means all traffic that is destined for
ancillary services, or that may have special billing requirements, including but
not limited to the following: LSV/VCI, Directory Assistance, 911/E911, Operator
Services (IntraLATA call completion), IntraLATA third party, collect and calling
card, 800/888 database query, LIDB, and information services requiring special
billing.
1.5 "Applicable Laws" means all laws, regulations, and orders
applicable to each Party's performance of its obligations hereunder.
1.6 "As Defined in the Act" means as specifically defined by the Act
and as from time to time interpreted in the duly authorized rules and
regulations of the FCC or the Commission.
1.7 "As Described in the Act" means as described in or required by the
Act and as from time to time interpreted in the duly authorized rules and
regulations of the FCC or the Commission.
1.8 "Automatic Number Identification" or "ANI" means a signaling
parameter which refers to the number transmitted through a network identifying
the billing number of the calling party.
1.8.A "Bona Fide Request" or "BFR" means the process described on
Exhibit B that prescribes the terms and conditions relating to a Party's request
that the other Party provide a BFR Item (as defined in Exhibit B) not otherwise
provided by the terms of this Agreement.
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<PAGE>
1.9 "Calling Party Number" or "CPN" is a Common Channel Signaling
("CCS") parameter which refers to the number transmitted through a network
identifying the calling party.
1.10 "Central Office Switch" means a switch used to provide
Telecommunications Services, including, but not limited to:
(a) "End Office Switch" or "End Office" is a switching entity
that is used to terminate Customer station Loops for the purpose of
interconnection to each other and to trunks; and
(b) "Tandem Switch" or "Tandem Office" or "Tandem" is a
switching entity that has billing and recording capabilities and is used to
connect and switch trunk circuits between and among End Office Switches and
between and among End Office Switches and carriers' aggregation points, points
of termination, or points of presence, and to provide Switched Exchange Access
Services.
A Central Office Switch may also be employed as a combination End
Office/Tandem Office Switch.
1.11 "CLASS Features" means certain CCS-based features available to
Customers including, but not limited to: Automatic Call Back; Call Trace;
Caller Identification, and future offerings.
1.12 "Collocation" means an arrangement whereby one Party's (the
"Collocating Party") facilities are terminated in equipment necessary for
Interconnection or for access to Network Elements offered by the second Party on
an unbundled basis that has been installed and maintained at the premises of a
second Party (the "Housing Party"). For purposes of Collocation, the "premises"
of a Housing Party is limited to a Housing Party Wire Center, other mutually
agreed-upon locations of the Housing Party, or any other location for which
Collocation has been agreed to by the parties or ordered by the FCC or
Commission. Collocation may be "physical" or "virtual". In "Physical
Collocation," the Collocating Party installs and maintains its own equipment in
the Housing Party's premises. In "Virtual Collocation," the Housing Party owns,
installs, and maintains equipment dedicated to use by the Collocating Party in
the Housing Party's premises. BA currently provides Collocation under terms,
rates, and conditions as described in tariffs on file or soon to be filed with
the FCC and the Commission. Upon request by either Party, BA and ACI will
address the provision of additional types of Collocation arrangements, including
additional physical locations and alternative utilizations of space and
facilities.
1.13 "Commission" means the Pennsylvania Public Utility Commission.
1.14 "Common Channel Signaling" or "CCS" means a method of transmitting
call set-up and network control data over a digital signaling network separate
from the public switched
3
<PAGE>
telephone network facilities that carry the actual voice or data traffic of the
call. "SS7" means the common channel out of band signaling protocol developed
by the Consultative Committee for International Telephone and Telegraph
("CCITT") and the American National Standards Institute ("ANSI"). BA and ACI
currently utilize this out-of-band signaling protocol. "CCSAC" or "CCSAS" means
the common channel signaling access connection or service, respectively, which
connects one Party's signaling point of interconnection ("SPOI") to the other
Party's STP for the exchange of SS7 messages.
1.15 "Competitive Local Exchange Carrier" or "CLEC" means any Local
Exchange Carrier other than BA, operating as such in BA's certificated territory
in Pennsylvania. ACI is a CLEC.
1.16 "Cross Connection" means a jumper cable or similar connection
provided pursuant to Collocation at the digital signal cross connect, Main
Distribution Frame or other suitable frame or panel between (i) the Collocating
Party's equipment and (ii) the equipment or facilities of the Housing Party.
1.17 "Customer" means a third-party residence or business end-user
subscriber to Telecommunications Services provided by either of the Parties.
Where appropriate in the context of a particular provision, a "subscriber" shall
include end users at remote subscriber locations whose telephone service is
billed to the subscriber, including but not limited to homes of the subscriber's
employees; provided, however, that in no event shall any interpretation of this
term change the classification of any traffic, whether from toll to local or
from intraLATA toll to interLATA toll, or otherwise.
1.17.A "Customer Proprietary Network Information" or "CPNI" is As Defined
in the Act.
1.18 "Dialing Parity" is As Defined in the Act.
1.19 "Digital Signal Level" means one of several transmission rates in
the time-division multiplex hierarchy.
1.20 "Digital Signal Level 0" or "DS0" means the 64 Kbps zero-level
signal in the time-division multiplex hierarchy.
1.21 "Digital Signal Level 1" or "DS1" means the 1.544 Mbps first-level
signal in the time-division multiplex hierarchy. In the time-division
multiplexing hierarchy of the telephone network, DS1 is the initial level of
multiplexing.
1.22 "Digital Signal Level 3" or "DS3" means the 44.736 Mbps
third-level in the time-division multiplex hierarchy. In the time-division
multiplexing hierarchy of the telephone network, DS3 is defined as the third
level of multiplexing.
4
<PAGE>
1.22A "Digital Subscriber Line", "DSL", and "xDSL" mean a family of
transmission technologies that transmit digital signal to and from the Customer
at varying speeds, both symmetrical and asymmetrical.
1.23 "Exchange Access" is As Defined in the Act.
1.24 "Exchange Message Record" or "EMR" means the standard used for
exchange of telecommunications message information among Local Exchange Carriers
for billable, non-billable, sample, settlement, and study data. EMR format is
contained in BR-010-200-010 CRIS Exchange Message Record, a Bell Communications
Research, Inc. ("Bellcore") document that defines industry standards for
Exchange Message Records.
1.25 "FCC" means the Federal Communications Commission.
1.26 "FCC Regulations" means Title 47 of the Code of Federal
Regulations, including but not limited to the amendments adopted in, and the
additional requirements of, the First Report and Order In the Matter of
Implementation of the Local Competition Provisions in the Telecommunications Act
of 1996 and Interconnection between Local Exchange and Commercial Mobile Radio
Service Providers, CC Docket Nos. 96-98 and 95-185, adopted on August 1, 1996
and released on August 8, 1996, and the Second Report and Order and Memorandum
Opinion and Order, CC Docket Nos. 96-98, 95-185, and 92-237, adopted and
released on August 8, 1996, as each may be amended, stayed, voided, repealed, or
supplemented from time to time.
1.27 "HDSL" or "High-Bit Rate Digital Subscriber Line" means a
transmission technology which transmits up to 784 kbps simultaneously in both
directions on a two-wire channel using a 2 Binary / 1 Quartenary ("2B1Q") line
code.
1.28 "Incumbent Local Exchange Carrier" or "ILEC" is As Defined in the
Act. For purposes of this Agreement, BA is an Incumbent Local Exchange Carrier.
1.29 "Independent Telephone Company" or "ITC" means any entity other
than BA which, with respect to its operations within the Commonwealth of
Pennsylvania, is an Incumbent Local Exchange Carrier.
1.30 "Information Service Traffic" means Local Traffic or IntraLATA
Toll Traffic which originates on a Telephone Exchange Service line and which is
addressed to an information service provided over a Party's information services
platform (E.G., 540, 550, 556, 846, 936, and 970).
1.30.A "Inside Wire" or "Inside Wiring" means all wire, cable, terminals,
hardware, and other equipment or materials on the Customer's side of the Rate
Demarcation Point.
5
<PAGE>
1.31 "Integrated Digital Loop Carrier" or "IDLC" means a subscriber
loop carrier system which integrates within the switch at a DS1 level that is
twenty-four (24) loop transmission paths combined into a 1.544 Mbps digital
signal.
1.32. "Integrated Services Digital Network" or "ISDN" means a switched
network service providing end-to-end digital connectivity for the simultaneous
transmission of voice and data. Basic Rate Interface-ISDN ("BRI-ISDN") provides
for digital transmission of two 64 kbps bearer channels and one 16 kbps data and
signaling channel (2B+D). Primary Rate Interface-ISDN ("PRI-ISDN") provides for
digital transmission of twenty three (23) 64 kbps bearer channels and one (1) 64
kbps data and signaling channel (23 B+D).
1.33 "Interconnection" is As Described in the Act, and means the
connection of separate pieces of equipment or transmission facilities within,
between, or among networks. The architecture of Interconnection may include,
but is not limited to, Collocation Arrangements, entrance facilities, and
Mid-Span Meet arrangements.
1.34 "Interexchange Carrier" or "IXC" means a carrier that provides,
directly or indirectly, interLATA or intraLATA Telephone Toll Services.
1.35 "Interim Number Portability" or "INP" means the use of existing
and available call routing, forwarding, and addressing capabilities (E.G. remote
call forwarding) to enable a Customer to receive Telephone Exchange Service
provided by any Local Exchange Carrier operating within the exchange area with
which the Customer's telephone number(s) is associated, without having to change
the telephone number presently assigned to the Customer and regardless of
whether the Customer's chosen Local Exchange Carrier is the carrier that
originally assigned the number to the Customer.
1.36 "InterLATA" is As Defined in the Act.
1.37 "IntraLATA Toll Traffic" means those intraLATA calls that are not
defined as Local Traffic in this Agreement.
1.38 "Line Side" means an End Office Switch connection that provides
transmission, switching and optional features suitable for Customer connection
to the public switched network, including loop start supervision, ground start
supervision, and signaling for basic rate ISDN service.
1.39 "Line Status Verification" or "LSV" means an operator request for
a status check on the line of a called party. The request is made by one
Party's operator to an operator of the other Party. The verification of the
status check is provided to the requesting operator.
1.40 "Local Access and Transport Area" or "LATA" is As Defined in the
Act.
1.41 "Local Exchange Carrier" or "LEC" is As Defined in the Act. The
Parties to this Agreement are or will shortly become Local Exchange Carriers.
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1.42 "Local Serving Wire Center" means a Wire Center that (i) serves
the area in which the other Party's or a third party's Wire Center, aggregation
point, point of termination, or point of presence is located, or any Wire Center
in the LATA in which the other Party's Wire Center, aggregation point, point of
termination or point of presence is located in which the other Party has
established a Collocation Arrangement or is purchasing an entrance facility, and
(ii) has the necessary multiplexing capabilities for providing transport
services.
1.43 "Local Telephone Number Portability" or "LTNP" means "number
portability" As Defined in the Act.
1.44 "Local Traffic," means traffic that is originated by a Customer of
one Party on that Party's network and terminates to a Customer of the other
Party on that other Party's network, within a given local calling area, or
expanded area service ("EAS") area, as defined in BA's effective Customer
tariffs, or, if the Commission has defined local calling areas applicable to all
LECs, then as so defined by the Commission.
1.45 "Main Distribution Frame" or "MDF" means the primary point at
which outside plant facilities terminate within a Wire Center, for
interconnection to other telecommunications facilities within the Wire Center.
1.46 "MECAB" means the Multiple Exchange Carrier Access Billing (MECAB)
document prepared by the Billing Committee of the Ordering and Billing Forum
("OBF"), which functions under the auspices of the Carrier Liaison Committee
("CLC") of the Alliance for Telecommunications Industry Solutions ("ATIS"). The
MECAB document, published by Bellcore as Special Report SR-BDS-000983, contains
the recommended guidelines for the billing of an Exchange Access service
provided by two or more LECs, or by one LEC in two or more states, within a
single LATA.
1.47 "MECOD" means the Multiple Exchange Carriers Ordering and Design
(MECOD) Guidelines for Access Services - Industry Support Interface, a document
developed by the Ordering/Provisioning Committee under the auspices of OBF. The
MECOD document, published by Bellcore as Special Report SR-STS-002643,
establishes methods for processing orders for Exchange Access service which is
to be provided by two or more LECs.
1.48 "Meet-Point Billing" or "MPB" means an arrangement whereby two or
more LECs jointly provide to a third party the transport element of a Switched
Exchange Access Service to one of the LECs' End Office Switches, with each LEC
receiving an appropriate share of the transport element revenues as defined by
their effective Exchange Access tariffs. "Meet-Point Billing Traffic" means
traffic that is subject to an effective Meet-Point Billing arrangement.
1.49 "Mid-Span Meet" means an Interconnection architecture whereby two
carriers' transmission facilities meet at a mutually agreed-upon point of
Interconnection utilizing a fiber
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hand-off and, at the delivering carrier's option, may interface with such
carrier's collocated equipment to gain access to unbundled elements.
1.50 "Multiple Bill/Single Tariff" or "Multiple Bill/Multiple Tariff"
means the MPB method whereby each LEC prepares and renders its own meet point
bill in accordance with its own Tariff(s) for the portion of the
jointly-provided Switched Exchange Access Service which the LEC provides.
1.51 "Network Element" is As Defined in the Act.
1.52 "Network Interface Device" or "NID" means the BA-provided
interface terminating BA's telecommunications network on the property where the
Customer's service is located at a point determined by BA. The NID contains a
FCC Part 68 registered jack from which Inside Wire may be connected to BA's
network.
1.53 "North American Numbering Plan" or "NANP" means the numbering plan
used in the United States that also serves Canada, Bermuda, Puerto Rico and
certain Caribbean Islands. The NANP format is a 10-digit number that consists
of a 3-digit NPA code (commonly referred to as the area code), followed by a
3-digit NXX code and 4-digit line number.
1.54. "Numbering Plan Area" or "NPA" is also sometimes referred to as an
area code. There are two general categories of NPAs, "Geographic NPAs" and
"Non-Geographic NPAs." A Geographic NPA is associated with a defined geographic
area, and all telephone numbers bearing such NPA are associated with services
provided within that geographic area. A Non-Geographic NPA, also known as a
"Service Access Code" or "SAC Code," is typically associated with a specialized
telecommunications service which may be provided across multiple geographic NPA
areas; 800, 900, 700, 500 and 888 are examples of Non-Geographic NPAs.
1.55 "NXX," "NXX Code," or "End Office Code" means the three digit
switch entity indicator (I.E. the first three digits of a seven digit telephone
number).
1.56 "Permanent Number Portability" or "PNP" means the use of a
database or other technical solution that comports with regulations issued by
the FCC to provide LTNP for all customers and service providers.
1.57 "Port Element" or "Port" means a line card (or equivalent) and
associated peripheral equipment on an End Office Switch which serves as the
Interconnection between individual loops or individual Customer trunks and the
switching components of an End Office Switch and the associated switching
functionality in that End Office Switch. Each Port is typically associated with
one (or more) telephone number(s) which serves as the Customer's network
address. The Port Element is part of the provision of unbundled local Switching
Element.
1.58 "Rate Center Area" or "Exchange Area" means the geographic area
that has been identified by a given LEC as being associated with a particular
NPA-NXX code assigned to the
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LEC for its provision of Telephone Exchange Services. The Rate Center Area is
the exclusive geographic area which the LEC has identified as the area within
which it will provide Telephone Exchange Services bearing the particular NPA-NXX
designation associated with the specific Rate Center Area. A "Rate Center
Point" is a specific geographic point, defined by a V&H coordinate, located
within the Rate Center Area and used to measure distance for the purpose of
billing Customers for distance-sensitive Telephone Exchange Services and Toll
Traffic.
1.59 "Rate Demarcation Point" means the Minimum Point of Entry ("MPOE")
of the property or premises where the Customer's service is located as
determined by BA. This point is where network access recurring charges and BA
responsibility stop and beyond which Customer responsibility begins.
1.60 "Rating Point" or "Routing Point" means a specific geographic
point identified by a specific V&H coordinate. The Rating Point is used to
route inbound traffic to specified NPA-NXXs and to calculate mileage
measurements for distance-sensitive transport charges of switched access
services. Pursuant to Bellcore Practice BR-795-100-100, the Rating Point may be
an End Office location, or a "LEC Consortium Point of Interconnection."
Pursuant to that same Bellcore Practice, examples of the latter shall be
designated by a common language location identifier (CLLI) code with (x)KD in
positions 9, 10, 11, where (x) may be any alphanumeric A-Z or 0-9. The Rating
Point/Routing Point must be located within the LATA in which the corresponding
NPA-NXX is located. However, the Rating Point/Routing Point associated with
each NPA-NXX need not be the same as the corresponding Rate Center Point, nor
must it be located within the corresponding Rate Center Area, nor must there be
a unique and separate Rating Point corresponding to each unique and separate
Rate Center.
1.61 "Reciprocal Compensation" is As Described in the Act, and refers
to the payment arrangement set forth in subsection 5.7 below.
1.62 "Service Control Point" or "SCP" means the node in the common
channel signaling network to which informational requests for service handling,
such as routing, are directed and processed. The SCP is a real time database
system that, based on a query from a service switching point and via a Signaling
Transfer Point, performs subscriber or application-specific service logic, and
then sends instructions back to the SSP on how to continue call processing.
1.63 "Signaling Transfer Point" or "STP" means a specialized switch
that provides SS7 network access and performs SS7 message routing and screening.
1.64 "Switched Access Detail Usage Data" means a category 1101XX record
as defined in the EMR Bellcore Practice BR-010-200-010.
1.65 "Switched Access Summary Usage Data" means a category 1150XX
record as defined in the EMR Bellcore Practice BR-010-200-010.
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1.66 "Switched Exchange Access Service" means the offering of
transmission and switching services for the purpose of the origination or
termination of Toll Traffic. Switched Exchange Access Services include but may
not be limited to: Feature Group A, Feature Group B, Feature Group D, 700
access, 800 access, 888 access, and 900 access.
1.67 "Switching Element" is the unbundled Network Element that provides
a CLEC the ability to use switching functionality in a BA End Office switch,
including all vertical services that are available on that switch, to provide
Telephone Exchange Service to its end user customer(s). The Switching Element
will be provisioned with a Port Element, which provides line side access to the
Switching Element.
1.68 "Tariff" means any applicable federal or state tariff of a Party,
or standard agreement or other document that sets forth the generally available
terms and conditions, each as may be amended by the Party from time to time,
under which a Party offers a particular service, facility, or arrangement. A
Tariff shall not include BA's "Statement of Generally Available Terms and
Conditions for Interconnection, Unbundled Network Elements, Ancillary Services
and Resale of Telecommunications Services" which has been approved or is pending
approval by the Commission pursuant to Section 252(f) of the Communications Act
of 1934, 47 U.S.C. Section 252(f).
1.69 "Technically Feasible Point" is As Described in the Act.
1.70 "Telecommunications" is As Defined in the Act.
1.71 "Telecommunications Act" means the Telecommunications Act of 1996
and any rules and regulations promulgated thereunder.
1.72 "Telecommunications Carrier" is As Defined in the Act.
1.73 "Telecommunications Service" is As Defined in the Act.
1.74 "Telephone Exchange Service," sometimes also referred to as
"Exchange Service," is As Defined in the Act. Telephone Exchange Service
generally provides the Customer with a telephonic connection to, and a unique
telephone number address on, the public switched telecommunications network, and
enables such Customer to place or receive calls to all other stations on the
public switched telecommunications network.
1.75 [Reserved]
1.76 "Toll Traffic" means traffic that is originated by a Customer of
one Party on that Party's network and terminates to a Customer of the other
Party on that Party's network and is not Local Traffic or Ancillary Traffic.
Toll Traffic may be either "IntraLATA Toll Traffic" or "InterLATA Toll Traffic,"
depending on whether the originating and terminating points are within the same
LATA.
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1.77 "Transit Traffic" means any traffic that originates from or
terminates at ACI's network, "transits" BA's network substantially unchanged,
and terminates to or originates from a third carrier's network, as the case may
be. "Transit Traffic Service" provides ACI with the ability to use its
connection to a BA Tandem for the delivery of calls which originate or terminate
with ACI and terminate to or originate from a carrier other than BA, such as
another CLEC, a LEC other than BA, or a wireless carrier. In these cases,
neither the originating nor terminating Customer is a Customer of BA. This
service is provided through BA's Tandems and applies only where the terminating
End Office of the third carrier subtends the BA Tandem. "Transit Traffic" and
"Transit Traffic Service" do not include or apply to traffic that is subject to
an effective Meet-Point Billing arrangement.
1.78 "Trunk Side" means a Central Office Switch connection that is
capable of, and has been programmed to treat the circuit as, connecting to
another switching entity (E.G. another carrier's network). Trunk Side
connections offer those transmission and signaling features appropriate for the
connection of switching entities.
1.79 "Unbundled Local Loop Element" or "ULL" means a transmission path
that extends from a Main Distribution Frame, DSX-panel, or functionally
comparable piece of equipment in the Customer's serving End Office to the Rate
Demarcation Point (or network interface device (NID) if installed) in or at a
Customer's premises. The actual loop transmission facilities used to provide an
ULL may utilize any of several technologies.
1.80 "Verification with Call Interruption" or "VCI" means a service
that may be requested and provided when Line Status Verification has determined
that a line is busy due to an ongoing call. VCI is an operator interruption of
that ongoing call to inform the called party that a calling party is seeking to
complete his or her call to the called party.
1.81 "Voice Grade" means either an analog signal of 300 to 3000 Hz or a
digital signal of 56/64 kilobits per second. When referring to digital voice
grade service (a 56/64 kbps channel), the terms "DS-0" or "sub-DS-1" may also be
used.
1.82 "Wire Center" means a building or portion thereof in which a Party
has the exclusive right of occupancy and which serves as a Routing Point for
Switched Exchange Access Service.
2.0 INTERPRETATION AND CONSTRUCTION.
2.1 All references to Sections, Exhibits and Schedules shall be deemed
to be references to Sections of, and Exhibits and Schedules to, this Agreement
unless the context shall otherwise require. The headings used in this Agreement
are inserted for convenience of reference only and are not intended to be a part
of or to affect the meaning of this Agreement. Unless the context shall
otherwise require, any reference to any agreement, other instrument (including
BA or other third party offerings, guides or practices), statute, regulation,
rule or tariff is to such
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agreement, instrument, statute, regulation, or rule or tariff as amended and
supplemented from time to time (and, in the case of a statute, regulation, rule
or tariff, to any successor provision).
2.2 Subject to the terms set forth in Section 20 regarding rates and
charges, each Party hereby incorporates by reference those provisions of its
tariffs that govern the provision of any of the services or facilities provided
hereunder. If any provision of this Agreement and an applicable tariff cannot
be reasonably construed or interpreted to avoid conflict, the provision
contained in this Agreement shall prevail, provided that in all cases the more
specific shall prevail over the more general. If any provision contained in
this main body of the Agreement and any Schedule or Exhibit hereto cannot be
reasonably construed or interpreted to avoid conflict, the provision contained
in this main body of the Agreement shall prevail. The fact that a condition,
right, obligation, or other term appears in this Agreement but not in any such
tariff shall not be interpreted as, or be deemed grounds for finding, a conflict
for purposes of this Section 2.
3.0 INTERCONNECTION ACTIVATION DATES AND IMPLEMENTATION SCHEDULE.
Subject to the terms and conditions of this Agreement, each Party
shall exercise its best efforts to adhere to the Interconnection Activation
Dates and Network Implementation Schedule set forth in Schedule 3.0, and to
provide fully operational service predominantly over its own Telephone
Exchange Service facilities to business and residential Customers as soon as
reasonably practicable following the achievement of the milestones in said
Schedule for each listed LATA in Pennsylvania. Schedule 3.0 may be revised
and supplemented from time to time upon the mutual agreement of the Parties
to reflect the intention of the Parties to interconnect in additional LATAs
pursuant to subsection 4.4 by attaching one or more supplementary schedules
to Schedule 3.0. The Parties agree that the performance of this Agreement
is in satisfaction of BA's obligation to provide Interconnection under
Section 251 of the Act. ACI represents that it is, or intends to become, a
provider of Telephone Exchange Service to residential and business
subscribers offered exclusively over its own Telephone Exchange Service
facilities or predominantly over its own Telephone Exchange Service
facilities in combination with the use of unbundled Network Elements
purchased from another entity and the resale of the Telecommunications
Services of other carriers.
4.0 INTERCONNECTION PURSUANT TO SECTION 251(c)(2)
The types of Traffic to be exchanged under this Agreement shall be Local
Traffic, IntraLATA Toll (and InterLATA Toll, as applicable) Traffic, Transit
Traffic, Meet Point Billing Traffic, and Ancillary Traffic. Subject to the
terms and conditions of this Agreement, Interconnection of the Parties
facilities and equipment for the transmission and routing of Local Traffic and
Toll Traffic pursuant to this Section 4 shall be established on or before the
corresponding "Interconnection Activation Date" shown for each such LATA within
Pennsylvania on Schedule 3.0 and in accordance with the standards set forth in
subsection 10.2.
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Both Schedule 3.0 and Schedule 4.0 may be revised and supplemented from time to
time upon the mutual agreement of the Parties to reflect additional or changed
Interconnection Points in Pennsylvania by attaching one or more supplementary
addenda to such Schedule.
4.1 SCOPE
4.1.1 Section 4 describes the architecture for Interconnection of
the Parties' facilities and equipment over which the Parties shall configure the
following separate and distinct trunk groups, provided however, that this
provision does not require physically separate trunk groups:
TRAFFIC EXCHANGE TRUNKS for the transmission and routing of
terminating Local Traffic, Transit Traffic, translated LEC
IntraLATA 800/888 traffic, IntraLATA Toll Traffic, and, where
agreed to between the Parties and as set forth in subsection 4.2.8
below, InterLATA Toll Traffic between their respective Telephone
Exchange Service customers pursuant to Section 251 (c)(2) of the
Act, in accordance with Section 5 below;
ACCESS TOLL CONNECTING TRUNKS for the transmission and routing of
Exchange Access traffic, including translated InterLATA 800/888
traffic, between ACI Telephone Exchange Service customers and
purchasers of Switched Exchange Access Service via a BA Tandem,
pursuant to Section 251(c)(2) of the Act, in accordance with
Section 6 below;
INFORMATION SERVICES TRUNKS for the transmission and routing of
terminating Information Services Traffic in accordance with
Section 7 below;
LSV/VCI TRUNKS for the transmission and routing of terminating
LSV/VCI traffic, in accordance with Section 7 below;
911/E911 TRUNKS for the transmission and routing of terminating
E911/911 traffic, in accordance with Section 7 below;
DIRECTORY ASSISTANCE TRUNKS for the transmission and routing of
terminating directory assistance traffic, in accordance with
subsection 19.4 below; and
OPERATOR SERVICES (INTRALATA CALL COMPLETION) TRUNKS for the
transmission and routing of terminating IntraLATA call completion
traffic, in accordance with subsection 19.4 below.
CHOKE TRUNKS for traffic congestion and testing.
4.1.2 Consistent with Section 251 of the Act, this Agreement
provides for Interconnection to each other's networks at technically feasible
points. For the purposes of this
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Agreement, the Parties agree that Interconnection for the transport and
termination of traffic may take place, in the case of BA, at a terminating End
Office, a Tandem, a Local Serving Wire Center and/or other points as specified
herein, and, in the case of ACI, at a Central Office and/or other points as
specified herein, and, in the case of both Parties, any mutually agreed-upon
Mid-Span Meet arrangement as provided in Section 4.3 below. For purposes of
Interconnection, if ACI delivers traffic to BA at a BA End Office or Tandem
point of Interconnection other than the terminating End Office or Tandem
subtended by the terminating End Office, then such point of Interconnection
shall be deemed to be a Local Serving Wire Center. In such instances and
whenever ACI utilizes a Local Serving Wire Center as point of Interconnection,
ACI shall designate that such traffic be transported via a separate trunk group
to the BA Tandem that is subtended by the applicable terminating End Office. In
such cases, the BA Tandem subtended by the terminating End Office will serve as
the BA-IP (as defined below). The Parties further agree that they will work
together in good faith to establish, via the Bona Fide request process, or such
other process as the Parties agree on, additional technically feasible points of
interconnection other than those specifically set forth in this Agreement, to
exchange traffic pursuant to this Section 4.0.
4.1.3 The Parties shall establish interconnection points
(collectively, the "Interconnection Points" or "IPs") at the available locations
designated in Schedule 4.0. The mutually agreed-upon IPs on the ACI network at
which ACI will provide transport and termination of traffic shall be designated
as the ACI Interconnection Points ("ACI-IPs"); the mutually agreed-upon IPs on
the BA network shall be designated as the BA Interconnection Points ("BA-IPs")
and shall be either a BA terminating End Office or Tandem.
4.1.4 In the event either Party fails to make available a
geographically relevant End Office or functional equivalent as an IP on its
network to the other Party, the other Party may, at any time, request that the
first Party establish such additional technically feasible IP(s). Such requests
shall be made as a part of the Joint Process established pursuant to subsection
10.1; provided, however, that the Parties shall commence negotiations to
determine the technically feasible and geographically relevant location(s) of
the additional IP(s) as soon as reasonably practicable following a Party's
request therefor. If, after sixty (60) days following said request, the Parties
have been unable to reach agreement on the additional Interconnection Points,
then either Party may file a complaint with the Commission to resolve such
impasse or pursue with any other remedy available under law or equity. For
purposes of this subsection 4.1.4, a "geographically relevant" IP shall mean an
IP that is located within the BA local calling area of equivalent BA end user
customers, but no greater than twenty five (25) miles from the BA Rate Center
Point of the BA NXX serving the equivalent relevant end user customers, or, with
the mutual agreement of the Parties, an existing and currently utilized IP
within the LATA but outside the foregoing BA local calling area and/or twenty
five (25) mile radius. "Equivalent" customers shall mean customers served by
either Party at the same physical location.
4.1.5 In recognition of the large number and variety of BA-IPs
available for use by ACI, ACI's ability to select from among those points to
minimize the amount of transport it needs to provide or purchase, and the fewer
number of ACI-IPs available to BA to select from
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for similar purposes, and as an express condition of BA's making its LSWCs
available to ACI as points of Interconnection pursuant to subsection 4.1.2
above, ACI shall charge BA no more than ACI's Tariffed non-distance sensitive
entrance facility charge for the transport of traffic from a BA-IP to a ACI-IP
in any given LATA. The Parties may by mutual agreement establish additional
Interconnection Points at any technically feasible points consistent with the
Act.
4.1.6 The Parties shall configure separate trunk groups (as
described in subsection 4.1.1 above) for traffic from ACI to BA, and for traffic
from BA to ACI, respectively; however, the trunk groups shall be equipped as
two-way trunks for testing purposes. As provided in Section 10 below, the
Parties agree to consider as part of the Joint Process the feasibility of
combining any of the separate trunk groups into a single two-way trunk group.
4.2 PHYSICAL ARCHITECTURES
4.2.1 In each LATA identified in Schedule 4.0, the Parties shall
utilize the ACI-IP(s) and BA-IP(s) designated in such Schedule as the points
from which each Party will provide the transport and termination of traffic.
4.2.2 ACI shall have the sole right and discretion to specify any
of the following methods for interconnection at any of the BA-IPs:
(a) a Physical or Virtual Collocation facility ACI establishes
at the BA-IP;
(b) a Physical or Virtual Collocation facility established
separately at the BA-IP by a third party with whom ACI has
contracted for such purposes; and/or
(c) an entrance facility, either copper or fiber, or fiber, at
ACI's request and as mutually agreed, and transport (where
applicable) leased from BA (and any necessary multiplexing), where
such facility extends to the BA-IP from a mutually agreed to point
on ACI's network.
4.2.3 ACI shall provide its own facilities or purchase necessary
transport for the delivery of traffic to any Collocation arrangement it
establishes at a BA-IP pursuant to Section 13. BA shall provide the transport
and termination of the traffic beyond the BA-IP.
4.2.4 ACI may order from BA any of the Interconnection methods
specified above in accordance with the order intervals and other terms and
conditions, including, without limitation, rates and charges, set forth in this
Agreement, in any applicable Tariff(s), or as may be subsequently agreed to
between the Parties.
4.2.5 BA shall have the sole right and discretion to specify any
one of the following methods for Interconnection at any of the ACI-IPs:
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(a) upon reasonable notice to ACI, a Physical Collocation
facility BA establishes at the ACI-IP;
(b) a Physical or Virtual Collocation facility established
separately at the ACI-IP by a third party with whom BA has
contracted for such purposes; and/or
(c) an entrance facility leased from ACI (and any necessary
multiplexing), where such facility extends to the ACI-IP from a
mutually agreed upon point on BA's network.
4.2.6 BA shall provide its own facilities or purchase necessary
transport for the delivery of traffic to any Collocation arrangement it
establishes at an ACI-IP pursuant to Section 13. ACI shall provide the
transport and termination of the traffic beyond the ACI-IP.
4.2.7 BA may order from ACI any of the Interconnection methods
specified above in accordance with the order intervals and other terms and
conditions, including, without limitation, rates and charges, set forth in this
Agreement, in any applicable Tariff(s), or as may be subsequently agreed to
between the Parties.
4.2.8 Under any of the architectures described in this subsection
4.2, either Party may utilize the Traffic Exchange Trunks for the termination of
InterLATA Toll Traffic in accordance with the terms contained in Section 5 below
and pursuant to the other Party's Switched Exchange Access Service tariffs. The
other Party's Switched Exchange Access Service rates shall apply to such
Traffic.
4.3 MID-SPAN MEETS
4.3.1 In addition to the foregoing methods of Interconnection,
the Parties may agree, at either Party's request at any time, to establish (i) a
Mid-Span Meet arrangement in accordance with the terms of this subsection 4.3
that utilizes either wireless or wireline transmission facilities, or a
combination of both, or (ii) a SONET backbone with an electrical interface at
the DS-3 level where and on the same terms BA offers such SONET services to
other carriers. In the event the Parties agree to adopt a Mid-Span Meet
arrangement that utilizes both wireless and wireline facilities, ACI agrees to
bear all expenses associated with the purchase of equipment, materials, or
services necessary to facilitate a wireless to wireline meet up to and including
the optical to electrical multiplexer necessary to effect a fiber hand-off to
BA.
4.3.2 The establishment of any Mid-Span Meet arrangement is
expressly conditioned upon the Parties' reaching prior agreement on appropriate
sizing and forecasting, equipment, ordering, provisioning, maintenance, repair,
testing, augment, and compensation procedures and arrangements, reasonable
distance limitations, and on any other arrangements necessary to implement the
Mid-Span Meet arrangement. Any Mid-Span Meet arrangement requested at a
third-party premises is expressly conditioned on the Parties' having sufficient
capacity at the requested location to meet such request, on unrestricted 24-hour
access for both
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Parties to the requested location, on other appropriate protections as deemed
necessary by either Party, and on an appropriate commitment that such access and
other arrangements may not be restricted for a reasonable period.
4.3.3 Mid-Span Meet arrangements shall be used only for the termination
of Local Traffic and IntraLATA Toll Traffic unless and until such time as the
Parties have agreed to appropriate compensation arrangements relating to the
exchange of other types of traffic over such Mid-Span Meet, and only where
facilities are available. Any agreement to access unbundled Network Elements
via a Mid-Span Meet arrangement shall be conditioned on the resolution of the
technical and other issues described in this subsection 4.3, resolution by the
joint operations team of additional issues (such as inventory and testing
procedures unique to the provision of unbundled Network Elements via a Mid-Span
Meet), and, as necessary, completion of a joint operational and technical test.
In addition, access to unbundled Network Elements via a Mid-Span Meet
arrangement for access to such Elements, shall be limited to that which is
required by Applicable Laws, and shall be subject to full compensation of all
relevant costs (as defined in the FCC Regulations) by the requesting Party to
the other Party.
4.4 INTERCONNECTION IN ADDITIONAL LATAS
4.4.1 If ACI determines to offer Telephone Exchange Services in
any LATA not listed in Schedule 3.0 in which BA also offers Telephone Exchange
Services, ACI shall provide written notice to BA of the need to establish
Interconnection in such LATA pursuant to this Agreement.
4.4.2 The notice provided in subsection 4.4.1 shall include (i)
the initial Routing Point ACI has designated in the new LATA; (ii) ACI's
requested Interconnection Activation Date (and related milestone dates in
accordance with the format in Schedule 3.0); and (iii) a non-binding forecast of
ACI's trunking requirements.
4.4.3 Unless otherwise agreed to by the Parties, the Parties
shall designate the Wire Center(s) ACI has identified as its initial Routing
Point(s) in the LATA as the ACI-IP(s) in that LATA and shall designate mutually
agreed upon BA Local Serving Wire Center(s) that houses a Tandem Office within
the LATA nearest to the ACI-IP (as measured in airline miles utilizing the V&H
coordinates method) as the BA-IP(s) in that LATA, provided that, for the purpose
of charging for the transport of traffic from the BA-IP to the ACI-IP, the
ACI-IP shall be no further than an entrance facility away from the BA-IP.
4.4.4 The Parties shall agree upon an addendum to Schedule 3.0 to
reflect the schedule applicable to each new LATA requested by ACI; provided,
however, that unless agreed by the Parties, the Interconnection Activation Date
in a new LATA shall not be earlier than forty-five (45) days after receipt by BA
of all complete and accurate trunk orders and routing information. Within ten
(10) business days of BA's receipt of ACI's notice, BA and ACI shall confirm the
BA-IP, the ACI-IP and the Interconnection Activation Date for the new LATA by
attaching an addendum to Schedule 3.0.
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4.5 INTERCONNECTION POINTS FOR DIFFERENT TYPES OF TRAFFIC
Each Party shall make available Interconnection Points and facilities for
routing of traffic from those Interconnection Points as designated in Schedule
4.5. Any additional traffic that is not covered in Schedule 4.5 shall be
subject to separate negotiations between the Parties, except that (i) either
Party may deliver traffic of any type or character to the other Party for
termination as long as the delivering Party pays the receiving Party's then
current Switched Exchange Access rates for such traffic, and (ii) upon a BONA
FIDE request from either Party, the Parties will exercise all reasonable efforts
to conclude an agreement covering the exchange of such traffic.
5.0 TRANSMISSION AND ROUTING OF TELEPHONE EXCHANGE SERVICE TRAFFIC PURSUANT
TO SECTION 251(c)(2)
5.1 SCOPE OF TRAFFIC
Section 5 prescribes parameters for trunk groups (the "Traffic Exchange
Trunks") to be effected over the Interconnections specified in Section 4 for the
transmission and routing of Local Traffic, Transit Traffic, translated LEC
IntraLATA 800/888 traffic, InterLATA Toll Traffic (to the extent applicable),
and IntraLATA Toll Traffic between the Parties' respective Telephone Exchange
Service Customers.
5.2 TRUNK GROUP CONNECTIONS AND ORDERING
5.2.1 Traffic Exchange Trunk group connections will be made at a
DS-1 level or higher. Higher speed connections shall be made, when and where
available, in accordance with the Joint Implementation and Grooming Process
prescribed in Section 10. Ancillary Traffic trunk groups may be made below a
DS-1 level, as may be agreed to by the Parties.
5.2.2 Each Party will identify its Carrier Identification Code, a
three or four digit numeric obtained from Bellcore, to the other Party when
ordering a trunk group.
5.3 ADDITIONAL SWITCHING SYSTEM HIERARCHY AND TRUNKING REQUIREMENTS
For purposes of routing ACI traffic to BA, the subtending arrangements
between BA Tandem Switches and BA End Office Switches shall be the same as the
Tandem/End Office subtending arrangements BA maintains for the routing of its
own or other carriers' traffic. For purposes of routing BA traffic to ACI, the
subtending arrangements between ACI Tandem Switches (or functional equivalent)
and ACI End Office Switches (or functional equivalent) shall be the same as the
Tandem/End Office subtending arrangements (or functional equivalent) which ACI
maintains for the routing of its own or other carriers' traffic.
5.4 SIGNALING
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Each Party will provide the other Party with access to its databases and
associated signaling necessary for the routing and completion of the other
Party's traffic in accordance with the provisions contained in Section 17 below.
5.5 GRADES OF SERVICE
The Parties shall initially engineer and shall jointly monitor and
enhance all trunk groups consistent with the Joint Implementation and Grooming
Process as set forth in Section 10.
5.6 MEASUREMENT AND BILLING
5.6.1 For billing purposes, each Party shall pass Calling Party
Number ("CPN") information on each call carried over the Traffic Exchange Trunks
at such time as the originating switch is equipped for SS7 and from all switches
no later than December 31, 1998. At such time as either Party has the ability,
as the Party receiving the traffic, to use such CPN information to classify on
an automated basis traffic delivered by the other Party as either Local Traffic
or Toll Traffic, such receiving Party shall bill the originating Party the Local
Traffic termination rates, Intrastate Exchange Access rates, or Interstate
Exchange Access rates applicable to each minute of Traffic for which CPN is
passed, as provided in Exhibit A and applicable Tariffs.
5.6.2 If, under the circumstances set forth in subsection 5.6.1,
the originating Party does not pass CPN on up to ten percent (10%) of calls, the
receiving Party shall bill the originating Party the Local Traffic termination
rates, Intrastate Exchange Access rates, Intrastate/Interstate Transit Traffic
rates, or Interstate Exchange Access rates applicable to each minute of traffic,
as provided in Exhibit A and applicable Tariffs, for which CPN is passed. For
the remaining up to ten percent (10%) of calls without CPN information, the
receiving Party shall bill the originating Party for such traffic as Local
Traffic termination rates, Intrastate Exchange Access rates,
Intrastate/Interstate Transit Traffic rates, or Interstate Exchange Access rates
applicable to each minute of traffic, as provided in Exhibit A and applicable
Tariffs, in direct proportion to the minutes of use of calls passed with CPN
information.
5.6.3 If the originating Party does not pass CPN on more than ten
percent (10%) of calls, or if the receiving Party lacks the ability to use CPN
information to classify on an automated basis traffic delivered by the other
Party as either Local Traffic or Toll Traffic, and the originating Party chooses
to combine Local and Toll Traffic on the same trunk group, it will supply an
auditable Percent Local Use ("PLU") report quarterly, based on the previous
three months' traffic, and applicable to the following three months. If the
originating Party also chooses to combine Interstate and Intrastate Toll Traffic
on the same trunk group, it will supply an auditable Percent Interstate Use
("PIU") report quarterly, based on the previous three months' terminating
traffic, and applicable to the following three months. In lieu of the foregoing
PLU and/or PIU reports, the Parties may agree to provide and accept reasonable
surrogate measures for an agreed-upon interim period.
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5.6.4 Measurement of billing minutes for purposes of determining
terminating compensation shall be in conversation seconds.
5.7 RECIPROCAL COMPENSATION ARRANGEMENTS -- SECTION 251(b)(5)
Reciprocal Compensation arrangements address the transport and
termination of Local Traffic. BA's delivery of Traffic to ACI that originated
with a third carrier is addressed in subsection 7.3. Where ACI delivers Traffic
(other than Local Traffic) to BA, except as may be set forth herein or
subsequently agreed to by the Parties, ACI shall pay BA the same amount that
such carrier would have paid BA for termination of that Traffic at the location
the Traffic is delivered to BA by ACI. Compensation for the transport and
termination of traffic not specifically addressed in this subsection 5.7 shall
be as provided elsewhere in this Agreement, or if not so provided, as required
by the Tariffs of the Party transporting and/or terminating the traffic. BA
shall provide notice to ACI of any BA filing to the Commission that would alter
the classification of particular traffic as Local or IntraLATA Toll Traffic.
5.7.1 Nothing in this Agreement shall be construed to limit
either Party's ability to designate the areas within which that Party's
Customers may make calls which that Party rates as "local" in its Customer
Tariffs.
5.7.2 The Parties shall compensate each other for the transport
and termination of Local Traffic in an equal and symmetrical manner at the rates
provided in the Detailed Schedule of Itemized Charges (Exhibit A hereto), as may
be amended from time to time in accordance with Exhibit A and subsection 20.1.2
below or, if not set forth therein, in the applicable Tariff(s) of the
terminating Party, as the case may be. These rates are to be applied at the
ACI-IP for traffic delivered by BA, and at the BA-IP for traffic delivered by
ACI. No additional charges, including port or transport charges, shall apply
for the termination of Local Traffic delivered to the BA-IP or the ACI-IP,
except as set forth in Exhibit A. When Local Traffic is terminated over the
same trunks as Toll Traffic, any port or transport or other applicable access
charges related to the Toll Traffic shall be prorated to be applied only to the
Toll Traffic.
5.7.3 The Parties disagree as to whether traffic that originates
on one Party's network and is transmitted to an Internet Service Provider
("ISP") constitutes Local Traffic as defined herein. The issue of whether such
traffic constitutes Local on which reciprocal compensation must be paid pursuant
to the Act may be considered by the Commission and is presently before the FCC
in CCB/CPD 97-30. The Parties agree that the decision of the FCC in that
proceeding shall determine whether such traffic is Local Traffic (as defined
herein). Absent an FCC determination, any Commission ruling on this issue shall
be controlling. If the FCC determines that ISP Traffic is Local Traffic, as
defined herein, it shall be compensated as Local Traffic under this Agreement.
If the FCC or court of competent jurisdiction determines that ISP Traffic is not
Local Traffic, as defined herein, and such decision preempts inconsistent state
rulings, the Parties will agree upon appropriate treatment of said traffic for
compensation purposes; if the Parties are unable to agree upon an appropriate
treatment, either Party may apply to the Commission for a decision on such
issue.
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5.7.4 Compensation for transport and termination of all Traffic
which has been subject to performance of INP by one Party for the other Party
pursuant to Section 14 shall be as specified in subsection 14.5.
5.7.5 The designation of Traffic as Local or non-Local for
purposes of compensation shall be based on the actual originating and
terminating points of the complete end-to-end call, regardless of the entities
involved in carrying any segment of the call.
5.7.6 Each Party reserves the right to measure and audit all
Traffic, up to a maximum of two audits per calendar year, to ensure that proper
rates are being applied appropriately, provided, however, that either Party
shall have the right to conduct additional audit(s) if the preceding audit
disclosed material errors or discrepancies. Each Party agrees to provide the
necessary Traffic data or permit the other Party's recording equipment to be
installed for sampling purposes in conjunction with any such audit.
5.7.7 The Parties will engage in settlements of intraLATA
intrastate alternate-billed calls (E.G. collect, calling card, and third-party
billed calls) originated or authorized by their respective Customers in
Pennsylvania in accordance with the terms of an appropriate IntraLATA
Telecommunications Services Settlement Agreement between the Parties
substantially in the form appended hereto as Exhibit D.
6.0 TRANSMISSION AND ROUTING OF EXCHANGE ACCESS TRAFFIC PURSUANT TO 251(c)(2)
6.1 SCOPE OF TRAFFIC
Section 6 prescribes parameters for certain trunks to be established over
the Interconnections specified in Section 4 for the transmission and routing of
traffic between ACI Telephone Exchange Service Customers and Interexchange
Carriers ("Access Toll Connecting Trunks"), in any case where ACI elects to have
its End Office Switch subtend a BA Tandem. This includes casually-dialed (10XXX
and 101XXXX) traffic.
6.2 TRUNK GROUP ARCHITECTURE AND TRAFFIC ROUTING
6.2.1 ACI shall establish Access Toll Connecting Trunks by which
it will provide tandem-transported Switched Exchange Access Services to
Interexchange Carriers to enable such Interexchange Carriers to originate and
terminate traffic to and from ACI's Customers.
6.2.2 Access Toll Connecting Trunks shall be used solely for the
transmission and routing of Exchange Access to allow ACI's Customers to connect
to or be connected to the interexchange trunks of any Interexchange Carrier
which is connected to a BA Tandem.
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6.2.3 The Access Toll Connecting Trunks shall be two-way trunks
connecting an End Office Switch ACI utilizes to provide Telephone Exchange
Service and Switched Exchange Access in a given LATA to a Tandem BA utilizes to
provide Exchange Access in such LATA.
6.2.4 The Parties shall jointly determine which BA Tandem(s) will
be subtended by each ACI End Office Switch. ACI's End Office switch shall
subtend the BA Tandem that would have served the same rate center on BA's
network. Alternative configurations will be discussed as part of the Joint
Implementation and Grooming Process.
6.3 MEET-POINT BILLING ARRANGEMENTS
6.3.1 ACI and BA will establish Meet-Point Billing arrangements
in order to provide a common transport option to Switched Access Services
Customers via a Tandem Switch in accordance with the Meet-Point Billing
guidelines contained in the OBF's MECAB and MECOD documents, except as modified
herein, and BA's Pennsylvania Tariff Number 302, Section 2.4.7. The
arrangements described in this Section 6 are intended to be used to provide
Switched Exchange Access Service that originates and/or terminates on a
Telephone Exchange Service that is provided by either Party, where the transport
component of the Switched Exchange Access Service is routed through a Tandem
Switch that is provided by BA.
6.3.2 In each LATA, the Parties shall establish MPB arrangements
between the applicable Rating Point/BA Local Serving Wire Center combinations.
6.3.3 Interconnection for the MPB arrangement shall occur at the
BA-IP in the LATA, unless otherwise agreed to by the Parties.
6.3.4 ACI and BA will use reasonable efforts, individually and
collectively, to maintain provisions in their respective state access tariffs,
and/or provisions within the National Exchange Carrier Association ("NECA")
tariff No. 4, or any successor Tariff sufficient to reflect the MPB arrangements
established pursuant to this Agreement.
6.3.5 Each Party shall implement the "Multiple Bill/Single
Tariff" or "Multiple Bill/Multiple Tariff" option, as appropriate, in order to
bill an IXC for the portion of the jointly provided telecommunications service
provided by that Party.
6.3.6 The rate elements to be billed by each Party are as set
forth in Schedule 6.3. The actual rate values for each Party's affected access
service rate element shall be the rates contained in that Party's own effective
federal and state access tariffs, or other document that contains the terms
under which that Party's access services are offered. The MPB billing
percentages for each Rating Point/BA Local Serving Wire Center combination shall
be calculated in accordance with the formula set forth in subsection 6.3.17
below.
6.3.7 Each Party shall provide the other Party with the billing
name, billing address, and Carrier Identification Code ("CIC") of the IXC, and
identification of the IXC's Local Serving
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Wire Center in order to comply with the MPB notification process as outlined in
the MECAB document via facsimile or such other media as the Parties may agree
to.
6.3.8 BA shall provide ACI with the Switched Access Detail Usage
Data (category 1101XX records) on magnetic tape or via such other media as the
Parties may agree to, no later than ten (10) business days after the date the
usage occurred.
6.3.9 ACI shall provide BA with the Switched Access Summary Usage
Data (category 1150XX records) on magnetic tape or via such other media as the
Parties may agree, no later than ten (10) business days after the date of its
rendering of the bill to the relevant IXC, which bill shall be rendered no less
frequently than monthly.
6.3.10 All usage data to be provided pursuant to subsections
6.3.8 and 6.3.9 above shall be sent to the following addresses:
To ACI: ACI Corp.
c/o Joe D'Angelo
7337 South Revere Parkway
Englewood, CO 80112
To BA: Bell Atlantic
Tape Library
1500 Tech Center Drive
Monroeville, PA 15146
Either Party may change its address for receiving usage data by notifying the
other Party in writing.
6.3.11 Each Party shall coordinate and exchange the billing
account reference ("BAR") and billing account cross reference ("BACR") numbers
or Operating Company Number ("OCN"), as appropriate, for the MPB Service. Each
Party shall notify the other if the level of billing or other BAR/BACR elements
change, resulting in a new BAR/BACR number, or if the OCN changes.
6.3.12 Errors may be discovered by ACI, the IXC or BA. Each
Party agrees to provide the other Party with notification of any errors it
discovers within two (2) business days of the date of such discovery. In the
event of a loss of data, both Parties shall cooperate to reconstruct the lost
data and, if such reconstruction is not possible, shall accept a reasonable
estimate of the lost data based upon prior usage data.
6.3.13 Either Party may request a review or audit of the various
components of access recording up to a maximum of two (2) audits per calendar
year. All costs associated with each review and audit shall be borne by the
requesting Party. Such review or audit shall be conducted subject to
confidentiality protection and during regular business hours. A Party may
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conduct additional audits, at its expense, upon the other Party's consent, which
consent shall not be unreasonably withheld.
6.3.14 Nothing contained in this subsection 6.3 shall create any
liability for damages, losses, claims, costs, injuries, expenses or other
liabilities whatsoever on the part of either Party (other than as may be set
forth in MECAB or in any applicable Tariff).
6.3.15 The Parties shall not charge one another for the services
rendered or information provided pursuant to this subsection 6.3.
6.3.16 MPB will apply for all traffic bearing the 500, 900,
800/888 (to the extent provided by an IXC) or any other non-geographic NPA which
may be likewise designated for such traffic in the future.
6.3.17 In the event ACI determines to offer Telephone Exchange
Services in another LATA in which BA operates a Tandem Switch, BA shall permit
and enable ACI to subtend the BA Tandem Switch(es) designated for the BA End
Offices in the area where the ACI Rating Point(s) associated with the NPA-NXX(s)
to/from which the Switched Exchange Access Services are homed. The MPB billing
percentages for each new Rating Point/BA Local Serving Wire Center combination
shall be calculated according to the following formula:
a / (a + b) = ACI Billing Percentage
and
b / (a + b) = BA Billing Percentage
WHERE:
a = the airline mileage between the Rating Point and the
actual point of interconnection for the MPB arrangement; and
b = the airline mileage between the BA Local Serving Wire
Center and the actual point of interconnection for the MPB
arrangement.
ACI shall inform BA of the LATA in which it intends to offer Telephone Exchange
Services and its calculation of the billing percentages which should apply for
such arrangement, as part of the notice required by subsection 4.4.1 above.
Within ten (10) business days of ACI's delivery of notice to BA, BA and ACI
shall confirm the new Rating Point/BA Local Serving Wire Center combination and
billing percentages. Nothing in this subsection 6.3.17 shall be construed to
limit ACI's ability to select to interconnect with BA in additional LATAs by
means of Interconnection at a Local Serving Wire Center, to the extent that such
Interconnection is permitted under this Agreement.
6.3.18 Within thirty (30) days of a request by ACI, BA agrees to
notify all switched access users with a Carrier Identification Code in a LATA in
which the Parties have newly
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established Interconnection arrangements pursuant to this Agreement that BA and
ACI have entered in a Meet Point Billing arrangement.
6.4 800/888 TRAFFIC
The following terms shall apply when either Party delivers 800/888 calls
to the other Party for completion.
6.4.1 When ACI delivers translated 800/888 calls to BA for
completion
(a) to an IXC, ACI shall:
(i) Provide a MPB record in an industry standard format
to BA; and
(ii) Bill the IXC the appropriate ACI query charge
associated with the call.
(b) as an IntraLATA call to BA or another LEC in the LATA, ACI
shall:
(i) Provide a copy record in an industry standard format
to BA or the terminating LEC;
(ii) Submit the call records to ITORP for payment by BA
or the LEC that is the 800/888 service provider of ACI's and any
intermediate LEC's Tariffed Exchange Access charges and query
charges.
6.4.2 When BA delivers translated 800/888 calls originated by
BA's or another LEC's Customers to ACI for completion
(a) to ACI in its capacity as an IXC, BA shall:
(i) Bill ACI the appropriate BA query charge associated
with the call; and
(ii) Bill ACI the appropriate FGD Exchange Access charges
associated with the call.
(b) as an IntraLATA call to ACI in its capacity as a LEC,
(i) the originating LEC shall submit the appropriate
call records to BA for processing under the IntraLATA Toll
Originating Responsibility Plan ("ITORP") for payment by ACI of
BA's (and another LEC's, if appropriate) tariffed Exchange Access
charges; and
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(ii) ACI shall pay the originating LEC's appropriate
query charge associated with the call.
6.4.3 The settlement of all IntraLATA 800/888 calls exchanged
pursuant to this subsection 6.4 shall be in accordance with the terms of an
appropriate IntraLATA Telecommunications Services Settlement Agreement between
the Parties substantially in the form appended hereto as Exhibit D.
7.0 TRANSPORT AND TERMINATION OF OTHER TYPES OF TRAFFIC
7.1 INFORMATION SERVICES TRAFFIC
The following provisions shall apply only to ACI-originated Information
Services Traffic directed to an information services platform connected to BA's
network. At such time as ACI connects Information Services platforms to its
network, the Parties shall agree upon a comparable arrangement for BA-originated
Information Services Traffic.
7.1.1 ACI shall have the option to route Information Services
Traffic that originates on its own network to the appropriate information
services platform(s) connected to BA's network. In the event ACI exercises such
option, ACI will establish a dedicated trunk group to the BA information
services serving switch. This trunk group will be utilized to allow ACI to
route information service traffic originated on its network to BA.
7.1.2 ACI shall provide an electronic file transfer or monthly
magnetic tape containing recorded call detail information to BA.
7.1.3 BA shall provide to ACI via electronic file transfer or
magnetic tape or other means as available all necessary information to rate the
Information Services Traffic to ACI's Customers pursuant to the BA's agreements
with each information services provider. Information shall be provided in as
timely a fashion as practical in order to facilitate record review and reflect
actual prices set by the individual information services providers.
7.1.4 ACI shall bill and collect such information services
provider charges and remit the amounts collected to BA less:
(a) The Information Services Billing and Collection fee set
forth in Exhibit A; and
(b) An uncollectibles reserve calculated based on the
uncollectibles reserve in BA's billing and collection agreement with the
applicable information services provider; and
(c) Customer adjustments provided by ACI.
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ACI shall provide to BA sufficient information regarding uncollectibles
and Customer adjustments to allow BA to pass through the adjustments to the
information services provider, and BA shall pass through such adjustments.
However, if the information services provider disputes such adjustments and
refuses to accept such adjustments, ACI shall reimburse BA for all such disputed
adjustments. Final resolution regarding all disputed adjustments shall be
solely between ACI and the information services provider.
7.1.5 Nothing in this Agreement shall restrict either Party from
offering, or obviate either Party's obligations, if any, under Applicable Laws
to offer, to its Telephone Exchange Service Customers the ability to block the
completion of Information Service Traffic or from establishing such blocking as
the default and requiring that such Customers make an affirmative request to
remove the blocking.
7.1.6 To the extent either Party offers variable rated (E.G. 976,
554, and/or 915, as applicable) information services, the Parties may agree to
separate arrangements for the billing and compensation of such services.
7.1.7 The Information Services Traffic addressed herein does not
include 555 traffic or similar traffic with AIN service interfaces, which
traffic shall be subject to separate arrangements between the Parties.
7.2 LSV/VCI TRAFFIC
7.2.1 If Party A decides or is required by a regulatory body of
competent jurisdiction to offer LSV and VCI services to enable its Customers to
verify and/or interrupt calls of Party B's Customers, Party B shall accept and
respond to LSV and VCI requests from the operator bureau of the Party A. Each
Party shall compensate the other Party for LSV and VCI inquiries in accordance
with the other Party's Tariffed rates, the terms of the Directory Assistance and
Call Completion Agreement appended hereto as Exhibit C, or as may be agreed to
by the Parties.
7.2.2 The Party B operator shall only verify the status of the
line (LSV) or interrupt the line to inform the called party that there is a call
waiting. The Party B operator will not complete the telephone call of the
Customer initiating the LSV/VCI request. The Party B operator will only make
one LSV/VCI attempt per Customer operator bureau telephone call, and the
applicable charges apply whether or not the called party releases the line.
7.2.3 Each Party's operator bureau shall accept LSV and VCI
inquiries from the operator bureau of the other Party in order to allow
transparent provision of LSV/VCI Traffic between the Parties' networks.
7.2.4 Each Party shall route LSV/VCI Traffic inquiries over
separate direct trunks (and not the Local/IntraLATA/InterLATA Trunks)
established between the Parties'
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respective operator bureaus. Each Party shall offer interconnection for LSV/VCI
traffic at its Local Serving Wire Center, operator services Tandem Office
subtended by such Local Serving Wire Center, or other mutually agreed point in
the LATA. Separate LSV/VCI trunks delivered at the Local Serving Wire Center
will be directed to the operator services Tandem Office designated by Party B.
Unless otherwise mutually agreed, the Parties shall configure LSV/VCI trunks
over the Interconnection architectures in accordance with the terms of Section
4, consistent with the Joint Implementation and Grooming Process. Party A shall
outpulse the appropriate NPA, ATC Code, and Routing Code (operator code) to
Party B.
7.3 TRANSIT SERVICE
7.3.1 Each Party shall exercise all reasonable efforts to enter
into a reciprocal local traffic exchange arrangement (either via written
agreement or mutual tariffs) with any wireless carrier, ITC, CLEC, or other LEC
to which it sends, or from which it receives, local traffic that transits the
other Party's facilities over Traffic Exchange Trunks. If either Party fails to
enter into such an arrangement as quickly as commercially reasonable following
the Effective Date and to provide written notification of such Agreement,
including the relevant rates therein, to the other Party, but continues to
utilize the other Party's Transit Service for the exchange of local traffic with
such wireless carrier, ITC, CLEC, or other LEC, then the Party utilizing the
Transit Service shall, in addition to paying the rate set forth in Exhibit A for
said Transit Service, pay the other Party any charges or costs such terminating
third party carrier imposes or levies on the other Party for the delivery or
termination of such Traffic, including any switched access charges, PLUS all
reasonable expenses incurred by the other Party in delivering or terminating
such Traffic and/or resulting from the utilizing Party's failure to secure said
reciprocal local traffic exchange arrangement. Each Party will, upon request,
provide the other Party with all reasonable cooperation and assistance in
obtaining such arrangements. In addition, neither Party shall take any actions
to prevent the other Party from entering into a direct and reciprocal local
traffic exchange arrangement (either via written agreement or mutual tariffs)
with any wireless carrier, ITC, CLEC, or other LEC to which it sends, or from
which it receives, local traffic that does not utilize the Transit Service of
the first Party. The Parties agree to work cooperatively in appropriate
industry fora to promote the adoption of reasonable industry guidelines relating
to Transit Traffic.
7.3.2 Transit Traffic that is originated by an ITC or wireless
carrier shall be settled in accordance with the terms of an appropriate
IntraLATA Telecommunications Services Settlement Agreement between the Parties
substantially in the form appended hereto as Exhibit D. Meet-Point Billing
compensation arrangements as described in subsection 6.3 shall be utilized for
compensation for the joint handling of Toll Traffic.
7.3.3 BA expects that most networks involved in Transit Traffic
will deliver each call to each involved network with CCS and the appropriate
Transactional Capabilities Application Part ("TCAP") message to facilitate full
interoperability of those services supported by BA and billing functions. In
all cases, each Party shall follow the Exchange Message Record ("EMR") standard
and exchange records between the Parties and with the terminating carrier to
facilitate the billing process to the originating network.
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7.3.4 Transit Traffic shall be routed over the Traffic Exchange
Trunks described in Section 5 above.
7.4 911/E911 ARRANGEMENTS
7.4.1 ACI may, at its option, interconnect to the BA 911/E911
selective routers or 911 Tandem Offices, as appropriate, that serve the areas in
which ACI provides Telephone Exchange Services, for the provision of 911/E911
services and for access to all subtending Public Safety Answering Points
("PSAP"). In such situations, BA will provide ACI with the appropriate CLLI
codes and specifications of the Tandem Office serving area. In areas where E911
is not available, ACI and BA will negotiate arrangements to connect ACI to the
911 service.
7.4.2 Path and route diverse interconnections for 911/E911 shall
be made at the ACI-IP, the BA-IP, or other points as necessary and mutually
agreed, and as required by law or regulation.
7.4.3 Within thirty (30) days of its receipt of a request from
ACI and to the extent authorized by the relevant federal, state, and local
authorities, BA will provide ACI with the following at no charge:
(a) a file on diskette or other mutually agreed upon medium
containing the Master Street Address Guide ("MSAG") for each county within the
LATA(s) specified in this Agreement, which MSAG shall be updated no more
frequently than monthly and a complete copy of which shall be made available on
an annual basis;
(b) a list of the address, CLLI code, and an associated NXX of
each 911/E911 selective router or 911 Tandem office(s) in the area in which ACI
plans to offer Telephone Exchange Service;
(c) a list of the address, CLLI code, associated NXX, contact
name and phone number of each PSAP in each county in the area in which ACI plans
to offer Telephone Exchange Service;
(d) a list of BA personnel who currently have responsibility
for each county's 911 requirements;
(e) the ten-digit subscriber number for each PSAP or the "main"
PSAP that subtends each BA 911/E911 selective router or 911 Tandem to which ACI
is interconnected for the transfer of "0-" calls to the PSAP;
(f) any special 911 trunking requirements for each 911/E911
selective router or 911 Tandem;
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(g) an electronic interface, when available, through which ACI
shall input and provide a daily update of 911/E911 database information related
to appropriate ACI Customers. Until such time as an electronic interface is
available, ACI shall provide BA with all appropriate 911 information such as
name, address, and telephone number in writing for BA's entry into the 911
database system. Any 911-related data exchanged between the Parties prior to
the availability of an electronic interface shall conform to BA standards,
whereas 911-related data exchanged electronically shall conform to the National
Emergency Number Association standards;
(h) return of any ACI E911 data entry files containing errors,
so that ACI may ensure the accuracy of the Customer records; and
(i) a Design Layout Record ("DLR") of a 911 (CAMA) trunk, if
applicable.
7.4.4 In cases where a Customer of one Party elects to
discontinue its service and become the Customer of the other Party ("Party B")
but desires to retain its original telephone number pursuant to an INP
arrangement, Party B will outpulse the telephone number to which the call has
been forwarded (I.E. the Customer's ANI) to the 911 Tandem Office. Party B will
also provide the 911 database with both the forwarded number and the directory
number, as well as the appropriate address information of the Customer.
7.4.5 BA and ACI will use their best efforts to facilitate the
prompt, robust, reliable and efficient interconnection of ACI systems to the
911/E911 platforms.
7.4.6 BA and ACI will work cooperatively to arrange meetings with
PSAPs to answer any technical questions the PSAPs, or county or municipal
coordinators may have regarding the 911/E911 arrangements.
7.4.7 The Parties acknowledge that the provision of INP, until
PNP with full 911 compatibility is available, creates a special need to have the
Automatic Location Identification ("ALI") screen reflect two number: the "old"
number and the "new" number assigned by ACI. The Parties acknowledge further
the objective of including the five character Telephone Company Identification
("TCI") of the company that provides service to the calling line as part of the
ALI display. Until such time as TCI is operational, however, BA and ACI agree
to supply and use the three-letter Access Carrier Name Abbreviation ("ACNA") as
the carrier identifier.
7.4.8 ACI will compensate BA for connections to its 911/E911
pursuant to Exhibit A.
7.4.9 ACI will comply with all applicable rules and regulations
pertaining to the provision of 911/E911 services in Pennsylvania.
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7.5 ANCILLARY TRAFFIC GENERALLY
Ancillary Traffic that may be terminated at a BA Local Serving Wire
Center pursuant to subsection 4.5 above shall be subject to a separate transport
charge for transport from the Local Serving Wire Center to the appropriate
Tandem Office, as set forth in Exhibit A.
8.0 NUMBER RESOURCES, RATE CENTERS AND RATING POINTS
8.1 Nothing in this Agreement shall be construed to limit or otherwise
adversely affect in any manner either Party's right to employ or to request and
be assigned any Central Office (NXX) Codes pursuant to the Central Office Code
Assignment Guidelines, as may be amended from time to time, or to establish, by
Tariff or otherwise, Rate Centers and Rating Points corresponding to such NXX
codes. Until such time as number administration is provided by a third party, BA
shall provide ACI access to telephone numbers by assigning NXX codes to ACI in
accordance with such Assignment Guidelines.
8.2 It shall be the responsibility of each Party to program and update
its own switches and network systems in accordance with the Local Exchange
Routing Guide ("LERG") in order to recognize and route traffic to the other
Party's assigned NXX codes at all times. Neither Party shall impose any fees or
charges whatsoever on the other Party for such activities, except as expressly
set forth in this Agreement.
8.3 Unless mandated otherwise by a Commission order, the Rate Center
Areas will be the same for each Party. During the term of this Agreement, ACI
shall adopt the Rate Center Areas and Rate Center Points that the Commission has
approved for BA, in all areas where BA and ACI service areas overlap, and ACI
shall assign whole NPA-NXX codes to each Rate Center unless the LEC industry
adopts alternative methods of utilizing NXXs in the manner adopted by the NANP.
8.4 ACI will also designate a Routing Point for each assigned NXX
code. ACI shall designate one location for each Rate Center Area as the Routing
Point for the NPA-NXXs associated with that Area, and such Routing Point shall
be within the same LATA as the Rate Center Area but not necessarily within the
Rate Center Area itself.
8.5 Notwithstanding anything to the contrary contained herein, nothing
in this Agreement is intended to, and nothing in this Agreement shall be
construed to, in any way constrain ACI's choices regarding the size of the local
calling area(s) that ACI may establish for its Customers, which local calling
areas may be larger than, smaller than, or identical to, BA's local calling
areas.
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9.0 NETWORK MAINTENANCE AND MANAGEMENT; OUTAGES
9.1 The Parties will work cooperatively to install and maintain a
reliable network. ACI and BA will exchange appropriate information (E.G.,
maintenance contact numbers, escalation procedures, network information,
information required to comply with law enforcement and other security agencies
of the Government) to achieve this desired reliability. In addition, the
Parties will work cooperatively to apply sound network management principles to
alleviate or to prevent congestion.
9.2 Each Party recognizes a responsibility to follow the standards
that may be agreed to between the Parties and to employ characteristics and
methods of operation that will not interfere with or impair the service or any
facilities of the other or any third parties connected with or involved directly
in the network of the other. Each Party also recognizes the need for the other
Party to follow spectrum management guidelines or practices in order to maintain
or prevent degradation or impairment of the quality of its network. The Parties
will keep each other informed of such guidelines or practices and will attempt
to co-ordinate their development and use of such guidelines or practices.
9.3 INTERFERENCE OR IMPAIRMENT
If BA reasonably determines that the use of an unbundled Network
Element or network service by ACI is interfereing with or impairing BA's
provision of services, BA shall have the right to discontinue service to the
degree reasonably necessary to resolve the interference or impairment,
subject, however, to the following:
9.3.1 BA shall have given ACI at least ten (10) days' prior
written notice of the interference or impairment or potential interference or
impairment and the need to correct the condition within said time period.
9.3.2 BA shall have concurrently provided a copy of the notice
provided to ACI under subsection 9.3.1 above to the appropriate federal and/or
state regulatory bodies.
9.3.3 Notice in accord with subsections 9.3.1 and 9.3.2 above
shall not be required in emergencies and BA may immediately discontinue service
if reasonably necessary to avoid interference with or impairment of BA's
network or services. In such case, however, BA shall use all reasonable means
to notify ACI and the appropriate federal and/or state regulatory bodies.
9.3.4 Upon correction of the interference or impairment, which
may include relocation at appropriate rates and charges, BA will promptly
renew service to ACI. During such period of discontinuance, there will be no
compensation or credit allowance by BA to ACI for interruptions.
9.3.5 If Party A reasonably determines that (i) the Party B's use
of an Unbundled Network Element or a service or (ii) the characteristics and
methods of operation used by Party B
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would or could interfere with or impair Party A's provision of services, Party A
shall give Party B at least twenty (20) days' prior written notice of the
potential interference or impairment and the need to correct the condition
within said time period, Party A may take any action permitted by Applicable
Law, including, but not limited to, filing a complaint with or seeking other
relief from the FCC or the Commission.
9.3.6 The provisions of the Section 9.3 shall not apply to ADSL
2W, HDSL 2W, and HDSL 4W ULLs provided by BA to ACI pursuant to Section 11.2 of
this Agreement, so long as ACI conforms to the applicable technical references
in its use of such loops.
9.4 Interference and Impairment for ADSL 2W, HDSL 2W and HDSL 4W ULLs
Subject to Section 11.2.4:
9.4.1 ACI shall be able to order and BA shall provision ADSL 2W, HDSL 2W
and HDSL 4W ULL(s).
9.4.2 In its use of ADSL 2W, HDSL 2W and HDSL 4W ULLs, ACI shall conform
to the BA references in order to ensure that its provision of services to its
customers does not degrade or otherwise adversely affect the quality or
reliability of service to BA's customers, provided that BA is in compliance with
the provisions of this Section.
9.4.3 BA shall conform to its references and shall not introduce
services on its network that would degrade or otherwise adversely affect the
quality or reliability of service to ACI's customers, provided that ACI is in
compliance with the provisions of this Section.
9.4.4 If ACI determines that BA is deploying xDSL technology on an ADSL
or HDSL Compatible ULL in a manner that will or may interfere with ACI's
provision of its services, ACI shall notify BA in a reasonable manner and time
frame. If BA determines that ACI is using an ADSL or HDSL Compatible ULL in a
manner that will interfere with or impair BA's provision of its services, BA
shall notify ACI in a reasonable manner and time frame.
9.4.5 The Parties agree to work cooperatively to resolve interference or
other impairment issues. In the event a cooperative resolution cannot be
reached, the Dispute Resolution procedures for this Agreement shall apply.
9.5 REPEATED OR WILLFUL NONCOMPLIANCE
The Interconnection provided hereunder may be discontinued by either
Party upon thirty (30) days written notice to the other for repeated or willful
violation of and/or a refusal to comply with this Agreement in any material
respect. The Party discontinuing will notify the appropriate federal and/or
state regulatory bodies concurrently with the notice to the other Party of the
prospective discontinuance.
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9.6 OUTAGE REPAIR STANDARD
In the event of an outage or trouble in any arrangement, facility, or
service being provided by a Party hereunder, the providing Party will follow
procedures for isolating and clearing the outage or trouble that are no less
favorable than those that apply to comparable arrangements, facilities, or
services being provided by the providing Party to any other carrier whose
network is connected to that of the providing Party. ACI and BA may agree to
modify those procedures from time to time based on their experience with
comparable Interconnection arrangements with other carriers.
9.7 NOTICE OF CHANGES -- SECTION 251(c)(5)
If a Party makes a change in the information necessary for the
transmission and routing of services using that Party's network, or any other
change in its network which it believes will materially affect the
interoperability of its network with the other Party's network, the Party making
the change shall provide at least ninety (90) days advance written notice of
such change to the other Party, and shall use all reasonable efforts to provide
at least one hundred eighty (180) days notice where practicable; provided,
however, that if a longer period of notice is required by the FCC's or
Commission's rules, including, E.G., the Network Disclosure rules set forth in
the FCC Regulations, the Party will comply with such rules.
9.8 FRAUD
The Parties shall work cooperatively to minimize fraud associated with
third number billed calls, calling card calls, and any other services related to
this Agreement.
10. JOINT NETWORK IMPLEMENTATION AND GROOMING PROCESS; INSTALLATION,
MAINTENANCE, TESTING AND REPAIR
10.1 JOINT NETWORK IMPLEMENTATION AND GROOMING PROCESS
On or before November 1, 1998, unless the Parties agree to a different
date, ACI and BA shall jointly develop an implementation and grooming process
(the "Joint Process") which shall define and detail, INTER ALIA,
(a) standards to ensure that Interconnection trunk groups
experience a grade of service, availability and quality which is
comparable to that achieved on interoffice trunks within BA's network and
in accord with all appropriate relevant industry-accepted quality,
reliability and availability standards. Trunks provided by either Party
for Interconnection services will be engineered using a design blocking
objective of B.01;
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(b) the respective duties and responsibilities of the Parties
with respect to the administration and maintenance of the trunk groups,
including, but not limited to, standards and procedures for notification
and discoveries of trunk disconnects;
(c) disaster recovery provision escalations;
(d) migration from one-way to two-way Interconnection Trunks
upon mutual agreement of the Parties;
(e) the procedures to govern any ACI request for information
concerning available BA network facilities that ACI may purchase as
unbundled Network Elements to connect the beginning and end points within
given exchanges specified by ACI in its request;
(f) additional technically feasible and geographically relevant
IP(s) in a LATA as provided in subsection 4.1.4 above; and
(g) such other matters as the Parties may agree, including,
E.G., End Office to End Office high usage trunks as good engineering
practices may dictate.
Nothing in this subsection 10.1 shall affect either Party's obligations
to meet the milestone dates set forth in Schedule 3.0 hereof.
10.2 INSTALLATION, MAINTENANCE, TESTING AND REPAIR
Unless otherwise agreed to by the Parties, Interconnection shall be equal
in quality to that provided by each of the Parties to itself or any subsidiary,
affiliate, or third party. For purposes of this Agreement, "equal in quality"
means the same or equivalent interface specifications, provisioning,
installation, maintenance, testing and repair intervals for the same or
equivalent services under like Interconnection circumstances. If either Party
is unable to fulfill its obligations under this subsection 10.2, it shall notify
the other Party of its inability to do so and will negotiate alternative
intervals in good faith. The Parties agree that the standards to be used by
each Party for isolating and clearing any disconnections and/or other outages or
troubles shall be no less favorable than those applicable to comparable
arrangements, facilities, or services being provided by such Party to any other
carrier whose network is connected to that of the providing Party, including
itself or any subsidiary or affiliate.
10.3 FORECASTING REQUIREMENTS FOR TRUNK PROVISIONING
Within ninety (90) days of executing this Agreement, ACI shall provide BA
a one (1) year traffic forecast. This initial forecast will provide the amount
of traffic to be delivered to BA over each of the Traffic Exchange Trunk groups
over the next four (4) quarters. The forecast shall be updated and provided to
BA on an as-needed but no less frequently than quarterly basis. All forecasts
shall include Access Carrier Terminal Location (ACTL), traffic type (local/toll,
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operator services, 911, etc.), code (identifies trunk group), A location/Z
location (CLLI codes for ACI-IPs and BA-IPs), interface type (e.g., DS1), and
trunks in service each year (cumulative).
10.3.1 INITIAL FORECASTS/TRUNKING REQUIREMENTS Because BA's
trunking requirements will, at least during an initial period, be dependent on
the customer segments and service segments within customer segments to whom ACI
decides to market its services, BA will be largely dependent on ACI to provide
accurate trunk forecasts for both inbound (from BA) and outbound (from ACI)
traffic. BA will, as an initial matter and upon request, provide the same
number of trunks to terminate local traffic to ACI as ACI provides to terminate
local traffic to BA, unless ACI expressly identifies particular situations that
are expected to produce traffic that is substantially skewed in either the
inbound or outbound direction, in which case BA will provide the number of
trunks ACI suggests; provided, however, that in all cases BA's provision of the
forecasted number of trunks to ACI is conditioned on the following: that such
forecast is based on reasonable engineering criteria, there are no capacity
constraints, and ACI's previous forecasts have proven to be reliable and
accurate.
10.3.2 MONITORING AND ADJUSTING FORECASTS BA will, for ninety
(90) days, monitor traffic on each trunk group that it establishes at ACI's
suggestion or request pursuant to the procedures identified in subsection 10.3.1
above. At the end of such ninety (90) day period, BA may disconnect such trunks
that, based on reasonable engineering criteria and capacity constraints, are not
warranted by the actual traffic volume experienced. If, after such initial
ninety (90) day period for a trunk group, BA determines that any trunks in the
trunk group in excess of four (4) DS-1s are not warranted by actual traffic
volumes (considering engineering criteria for busy hour CCS and blocking
percentages), then BA may hold ACI financially responsible for the excess
facilities. In subsequent periods, BA may also monitor traffic for ninety (90)
days on additional trunk groups that ACI suggests or requests BA to establish.
If, after any such (90) day period, BA determines that any trunks in the trunk
group are not warranted by actual traffic volumes (considering engineering
criteria for busy hour CCS and blocking percentages), then BA may hold ACI
financially responsible for the excess facilities. At any time during the
relevant ninety (90) day period, ACI may request that BA disconnect trunks to
meet a revised forecast. In such instances, BA may hold ACI financially
responsible for the disconnected trunks retroactive to the start of the ninety
(90) day period through the date such trunks are disconnected.
10.3.3 RECIPROCAL RESPONSIBILITY To the extent that BA requires
ACI to install trunks for delivery of traffic to BA, ACI may apply the same
procedures with respect to BA's trunking requirements.
10.3.4 FUTURE FORECASTS/TRUNKING REQUIREMENT The Parties agree
to determine and develop reciprocal forecast requirements at the end of two (2)
years following the Service Activation Date (as set forth in Schedule 3.0).
11.0 UNBUNDLED ACCESS -- SECTION 251(c)(3)
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As required by Section 251 of the Act, BA shall offer ACI
nondiscriminatory access to Network Elements on an unbundled basis at any
technically feasible point. BA shall unbundle and separately price and offer
Network Elements such that ACI will be able to lease and interconnect to
whichever of the Network Elements ACI requires, and to allow ACI to combine the
BA provided elements with any facilities and services that ACI may itself
provide, subject to Applicable Law.
To the extent permitted by Applicable Law, ACI may use one or more
unbundled Network Elements to provide to itself, its affiliates or its customers
any feature, function or service option that (1) such unbundled Network Element
is presently capable or becomes capable of providing in the BA network, (2) is
described in the applicable Bellcore and other industry standard technical
references identified herein and which the BA network has the capability of
providing on the Effective Date of this Agreement or becomes capable of
providing during the Term of this Agreement, or (3) may otherwise be agreed to
by the Parties. To the extent required by Applicable Law, BA may require that
any combination by ACI of unbundled Network Elements purchased from BA shall be
through a Collocation arrangement pursuant to Section 13.0 or applicable Tariff.
Unless otherwise provided in this Agreement, the unbundled Network
Elements specified in this Agreement shall be made available by BA to ACI for
ordering and provisioning on the Effective Date. The unbundled Network Elements
and rates specified in this Agreement shall be made available by BA to ACI
pursuant to and to the extent required by Applicable Law.
ACI and BA agree that the unbundled Network Elements identified in this
Section 11 are not exclusive and that pursuant to the BFR Process ACI may
identify and request that BA furnish additional or revised unbundled Network
Elements to the extent required under the Act. Additionally, if BA provides any
unbundled Network Element that is not identified in this Agreement to a
requesting Telecommunications Carrier, including a BA affiliate, without
requiring such carrier to utilize the BFR process, then BA will make available
the same unbundled Network Element to ACI without ACI being required to use the
BFR process.
At the time ACI provides BA with an order for a particular unbundled
Network Element other than the standard interfaces provided under this
Agreement, ACI may request any technically feasible network interface. Where
appropriate, such request shall be made pursuant to the BFR process. Any such
requested network interface shall be subject to the approval of BA, which
approval shall not be unreasonably withheld or delayed. If ACI's request is
denied, BA shall provide ACI with written notice of the reasons for said denial,
including, if applicable, a specific description of why it is technically
infeasible for BA to comply with ACI's request.
For each appropriate unbundled Network Element, BA shall identify a
demarcation point and, if necessary and appropriate, provide access to such
demarcation point.
11.1 AVAILABLE NETWORK ELEMENTS
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At the request of ACI, BA shall, at a minimum, provide ACI access to the
following unbundled Network Elements in accordance with the requirements of the
FCC Regulations:
11.1.1 Local Loops, as set forth in subsection 11.2;
11.1.2 The Network Interface Device, as set forth in subsection
11.3;
11.1.3 Switching Capability, as set forth in subsection 11.4;
11.1.4 Interoffice Transmission Facilities, as set forth in
subsection 11.5;
11.1.5 Signaling Links and Call-Related Databases, as set forth in
Section 17 and Section 5.4;
11.1.6 Operations Support Systems, as set forth in subsection
11.6;
11.1.7 Operator Services and Directory Assistance, as set forth in
subsection 19.4; and
11.1.8 such other Network Elements in accordance with subsection
11.8 below.
11.2 UNBUNDLED LOCAL LOOP ("ULL") TRANSMISSION TYPES
Subject to subsection 11.7, BA shall allow ACI to access the following
ULL types (in addition to those ULLs available under applicable tariffs)
unbundled from local switching and local transport in accordance with the terms
and conditions set forth in this subsection 11.2.
11.2.1 "2-Wire Analog Voice Grade ULL" or "Analog 2W" which
supports analog transmission of 300-3000 Hz, repeat link start, link reverse
battery, or ground start seizure and disconnect in one direction (toward the End
Office Switch), and repeat ringing in the other direction (toward the Customer)
and terminates at both the central office MDF (or equivalent) and the Customer
premises, in accordance with BA TR72565 and TR 72570. At the request of ACI, BA
agrees to make every commercially reasonable effort to provide such ULLs over
copper facilities.
11.2.2 "4-Wire Analog Voice Grade ULL" or "Analog 4W" which
supports transmission of voice grade signals using separate transmit and receive
paths and terminate in a 4-wire electrical interface at both ends, in accordance
with BA TR72570.
11.2.3 "2-Wire ISDN Digital Grade ULL" or "BRI ISDN" provides a
channel with 2-wire interfaces at each end that is suitable for the transport of
160 kbps digital services using the ISDN 2B1Q line code.
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11.2.4 "2 Wire ADSL-Compatible ULL" or "ADSL 2W" is a 2-wire,
non-loaded, twisted copper pair that meets revised resistance design or carrier
serving area design guidelines. An ADSL-2W is a transmission path that is
suitable for the transmission of up to a 6Mpbs digital signal downstream (toward
the Customer) and up to a 640 Kbps digital signal upstream (away from the
Customer) while simultaneously carrying an analog voice signal, although ACI is
not restricted to those bandwidth specifications in providing its services,
provided that ACI complies with appropriate industry ADSL standards and BA
technical reference TR72575. An ADSL 2W terminates in a 2-wire electrical
interface at the Customer premises and at the Bell Atlantic Central Office
frame. ADSL 2W loops are only available where existing facilities can meet the
non-loaded revised resistance design or carrier serving area design guidelines.
The upstream and downstream ADSL power spectral density masks and dc line power
limits referenced in BA TR 72575 must be met. 2-Wire ADSL compatible local
loops are offered under this Agreement subject to availability.
11.2.4.1 In addition to the options provided under Section
11.7.2, once it becomes technically feasible for BA to provide an ADSL 2W loop
that is partly copper and partly fiber with ADSL electronics, BA will provide
ACI with non-discriminatory access to the ASDL 2W ULL.
11.2.5 "2-Wire HDSL-Compatible ULL" or "HDSL 2W" consists of
a single 2-wire, non-loaded, twisted copper pair that meets the carrier serving
area design criteria. The HDSL power spectral density mask and dc line power
limits referenced in BA TR 72575 must be met. 2-Wire HDSL loops are subject to
availability.
11.2.6 "4-Wire HDSL-Compatible ULL" or "HDSL 4W" consists of two
2-wire, non-loaded, twisted copper pairs that meet the carrier serving area
design criteria. The HDSL power spectral density mask and dc line power limits
referenced in BA TR 72575 must be met. 4-wire HDSL loops are subject to
availability.
11.2.7 "4-Wire DS1-compatible ULL" (Digital Grade Loop) is a
transmission path that supports the transmission of digital signals of up to a
maximum binary information rate of 1.544 Mbps and terminates in a 4-Wire
electrical interface at the Customer premises and a ACI Collocation node at a
BA central office. A DS-1 Digital Grade Loop is capable of operating in a full
duplex, time division (digital) multiplexing mode and provides transmission
capacity equivalent to 24 voice grade channels with associated signaling,
twenty-four 56 Kbps digital channels when in band signaling is provided or
twenty-four 64 Kbps channels with the selection of the Clear Channel signaling
option, as described in BA TR72575.
11.2.8 ULLs will be offered on the terms and conditions specified
herein and on such other terms in applicable Tariffs that are not inconsistent
with the terms and conditions set forth herein or in the Act or FCC and
Commission orders interpreting the Act. BA shall make ULLs available to ACI at
the rates specified by the Commission, as amended from time to time, subject to
the provisions of subsection 11.2.9 below.
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11.2.9 BA will make Analog 2-Wire ULLs, BRI ISDN ULLs, Analog 4W
ULLs, and 4-Wire DS-1-compatible ULLs available for purchase by ACI at any time
after the Effective Date. BA will make available ADSL 2-Wire ULLs to ACI at
Central Offices in the Philadelphia and Pittsburgh metropolitan areas by July 1,
1998, and BA will make ADSL 2-Wire ULLs at other Central Offices, HDSL 4-Wire
ULLs and HDSL 4-Wire, HDSL 2-Wire, and ADSL 2-Wire ULLs available to ACI no
later than the date on which it makes such ULLs commercially available to any
other Telecommunications Carrier in Pennsylvania.
11.2.10 BA is presently undertaking mechanized testing of loops
on a Central Office-by-Central Office basis and it intends to incorporate
information developed as a result of this testing, including the loop type and
associated loop length information, in a database or databases (collectively,
the "Loop Database"). BA will provide ACI with non-discriminatory access to the
information contained in the Loop Database no later than the time that BA begins
using the information included in the Loop Database on a commercial bases in its
own retail operations. If at the time that ACI requests a loop to provide ADSL
service to a specific customer there are no loops in the Loop Database that meet
the requirements of 11.2.4, then ACI may request BA to undertake a mechanized
testing of the of the relevant Central Office (if such testing has not yet been
done) or the manual qualification of a loop (if mechanized testing has already
been performed at that Central Office). ACI shall pay BA's normal charge for
any such mechanized testing or manual loop qualification. BA shall provide ACI
with information developed pursuant to such mechanized testing or manual loop
qualification.
11.2.11 ACI may choose to accept as an ADSL 2W one or more
available copper ULLs that fail (for reasons of length or otherwise) to meet the
performance characteristics in appropriate industry ADSL standards (including BA
technical reference TR72575) and therefore would not normally qualify as an ADSL
2W. Alternatively, ACI may obtain such a ULL for testing. Except as provided
in 11.2.12 below, ACI shall pay the regular recurring and non-recurring charges
for connecting and disconnecting such ULL for testing.
11.2.12 BA and ACI will continue to negotiate after the signing
of this Agreement in order to determine the feasibility of developing a simpler,
alternative procedure by which BA would, at the request and expense of ACI, make
available to ACI for acceptability testing any ULL identified pursuant to
11.2.11 above.
11.3 NETWORK INTERFACE DEVICE
At the request of ACI, BA shall permit ACI to connect a carrier's loop to
the Inside Wiring of a Customer's premises through BA's NID in the manner set
forth in Schedule 11.3. ACI must establish the connection to BA's NID through
an adjoining NID deployed by ACI. The Customer shall be responsible for
resolving any conflicts between service providers for access to Customer's
premises and Inside Wire.
11.4 UNBUNDLED SWITCHING ELEMENTS
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BA shall make available to ACI the local Switching Element and tandem
Switching Element unbundled from transport, local loop transmission, or other
services in accordance with all Applicable Laws and as more fully described in
Schedule 11.4. In the event there is no applicable Tariff, the parties agree to
negotiate the terms, conditions and rates for the provision of unbundled
switching elements upon ACI's request.
11.5 INTEROFFICE TRANSMISSION FACILITIES
BA shall provide ACI local transport from the trunk side of BA's Central
Office Switches unbundled from switching, unbundled interoffice transmission
facilities, and other services in accordance with Exhibit A.
11.6 OPERATIONS SUPPORT SYSTEMS
BA shall provide ACI with access via electronic interfaces or electronic
bonding to databases required for pre-ordering, ordering, provisioning,
maintenance and repair, and billing as soon as required by Applicable Law.
Until such electronic access is established, and for an interim period
thereafter, BA shall provide ACI with comparable information via facsimile or
other mutually agreed upon medium. ACI shall have access to Operations Support
Systems that shall be non-discriminatory and equal in quality to the access
available to or utilized by the retail BA entities for functions specifically
held by the FCC or the Commission to be comparable to the functions provided to
ACI. Nothing in this subsection shall restrict ACI's ability to obtain access
to any operational support systems ("OSS") that BA makes generally available to
any other Telecommunications Carrier in the state.
11.7 LIMITATIONS ON UNBUNDLED ACCESS
11.7.1 ACI shall access BA's unbundled Network Elements
specifically identified in this Agreement via Collocation in accordance with
Section 13 at the BA Wire Center where those elements exist or other mutually
agreed upon means of Interconnection, and each ULL or Port shall, in the case of
Collocation, be delivered to ACI's Collocation by means of a Cross Connection.
11.7.2 BA shall provide ACI access to its Unbundled Local Loops
at each of BA's Wire Centers for loops terminating in that Wire Center. In
addition, if ACI requests one or more ULLs provisioned via Integrated Digital
Loop Carrier or Remote Switching technology deployed as a ULL concentrator, BA
shall, where available, move the requested ULL(s) to an available , existing
physical ULL at no additional charge to ACI. If, however, no physical ULL is
available, BA shall within three (3) business days of ACI's request notify ACI
of the lack of available facilities. ACI may then at its discretion make a
Network Element Bona Fide Request to BA to provide the Unbundled Local Loop
through the demultiplexing of the integrated digitized ULL(s). ACI may also
make a Network Element Bona Fide Request for access to Unbundled Local Loops at
the ULL concentration site point. Alternatively, ACI may choose to avail itself
of BA's Special Construction services, as set forth in Exhibit A, for the
provisioning
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of such ULL(s). Notwithstanding anything to the contrary in this Agreement, the
provisioning intervals set forth in subsection 11.9 and the Performance Criteria
and Performance Interval Dates set forth in subsection 27.1 and Schedule 27,
respectively, shall not apply to ULLs provided under this subsection 11.7.2. BA
shall provide ULL(s) to ACI via the BFR process in intervals no longer than the
intervals in which BA provides to any entity related to BA, whether through the
BFR process or otherwise, any functionality specifically held by the FCC or the
Commission as being equivalent to that provided under this subsection. If BA
provides any unbundled Network Element that is not identified in the Agreement
to a requesting Telecommunications Carrier, including a BA affiliate, without
requiring such carrier to utilize the BFR process, then BA will make available
the same unbundled Network Element to ACI without ACI being required to use the
BFR process.
11.7.3 If ACI orders a ULL type and the distance requested on
such ULL exceeds the transmission characteristics in applicable technical
references, including those specified below, distance extensions may be required
and additional rates and charges shall apply as set forth in Exhibit A or
applicable Tariffs.
Loop Type Technical Reference/Limitation
ISDN Bellcore TA-NWT-000393
HDSL 2W T1E1 Technical Report Number 28
HDSL 4W T1E1 Technical Report Number 28
ADSL 2W ANSI T1.413 1995 Specification
11.7.4 BA will exercise all reasonable efforts to ensure that the
service intervals that apply to ULLs and unbundled Ports are comparable to the
(i) repair intervals that apply to the bundled dial tone line service, and (ii)
installation intervals that apply to other BA-coordinated services, except as
provided in Section 27. Although BA will make commercially reasonable efforts
to ensure that ULLs and unbundled ports meet specified or agreed-upon technical
standards, BA makes no warranty that the ULLs or unbundled Ports supplied by BA
hereunder will be compatible with the services ACI may offer to its Customers if
they are used in a manner not contemplated by the Parties.
11.8 AVAILABILITY OF OTHER NETWORK ELEMENTS ON AN UNBUNDLED BASIS
11.8.1 BA shall, upon request of ACI and to the extent required
by Applicable Law, provide to ACI access to its Network Elements on an unbundled
basis for the provision of ACI's Telecommunications Service. Any request by ACI
for access to an BA Network Element that is not already available and is not
specifically required to be offered under regulations or orders of the FCC or
the Commission shall be treated as a Network Element Bona Fide Request.
11.8.2 A Network Element obtained by ACI from BA under this
subsection 11.8 may be used in combination with the facilities of ACI only to
provide a Telecommunications
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Service, including obtaining billing and collection, transmission, and routing
of the Telecommunications Service.
11.8.3 Notwithstanding anything to the contrary in this
subsection 11.8, a Party shall not be required to provide a proprietary Network
Element to the other Party under this subsection 11.8 except as required by the
Commission or FCC.
11.8.4 BA will notify ACI of the availability of any new
unbundled Network Element as soon as such Network Element is made available to
any entity, including without limitation any BA retail customer or any entity
that is related to BA in any way and that offers on a retail basis a service
using such Network Element. The notice to be provided under this Section 11.8.4
may be provided in writing or electronically, including, but not limited to, by
allowing ACI to access a data base or Internet site containing the applicable
information.
11.9 PROVISIONING OF UNBUNDLED LOCAL LOOPS
The following coordination procedures shall apply for conversions of
"live" Telephone Exchange Services to ULLs. These and other mutually
agreed-upon procedures shall apply reciprocally for the "live" cutover of
Customers from BA to ACI and from ACI to BA.
11.9.1 Upon request by ACI, and to ensure compliance with the
nondiscrimination requirements of the Act, BA will apply the following
coordination procedures to conversions of live Telephone Exchange Services to
ULLs. Coordinated cutover charges will apply to any such arrangement, unless
Commission approval of such charges is required by Applicable Law and has not
been granted. If ACI elects not to request coordinated cutover, BA will
process ACI's request in the normal course and subject to the normal
installation intervals.
11.9.2 ACI shall request ULLs from BA by delivering to BA a valid
electronic transmittal service order (when available) or another mutually
agreed-upon type of service order such as a Loop/NID Time and Material form.
Such service order shall be provided in accordance with industry format and
specifications or such format and specifications as may be agreed to by the
Parties. At the earliest possible time, but no more than forty-eight (48)
hours of BA's receipt of such valid service order, BA shall provide ACI the firm
order commitment date according to the Performance Interval Dates set forth in
Schedule 27 by which the ULLs covered by such service order will be installed.
11.9.3 On each ULL order in a Wire Center, ACI and BA will agree
on a cutover time at least forty eight (48) hours before that cutover time. The
cutover time will be defined as a 15-30 minute window within which both the ACI
and BA personnel will make telephone contact to complete the cutover.
11.9.4 Within the appointed 15-30 minute cutover time, the BA
person will call the ACI person designated to coordinate cutover work.
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11.9.5 If ACI requires a change in scheduling, it must contact BA
to issue a supplement to the original order. The negotiations process to
determine the date and time of cutover will then be reinitiated as usual.
11.9.6 If the ACI person is not ready within the appointed
interval and if ACI had not called to reschedule the work at least two (2) hours
prior to the start of the interval, ACI shall be liable for the non-recurring
charge for the unbundled elements scheduled for the missed appointment. In
addition, non-recurring charges for the rescheduled appointment will apply.
11.9.7 If BA is not available or not ready at any time during the
appointed 15-30 minute interval, ACI and BA will reschedule and BA will waive
the non-recurring charge for the unbundled elements originally scheduled for
that interval, whenever those unbundled elements are actually cut over pursuant
to an agreed-upon rescheduling, with the result that ACI will pay no
non-recurring charge for the unbundled elements.
11.9.8 The standard time expected from disconnection of a live
Telephone Exchange Service to the connection of the unbundled element to the ACI
Collocation Arrangement is fifteen (15) minutes per voice grade circuit for all
orders consisting of twenty (20) ULLs or less at any single customer premise.
Orders involving more than twenty (20) ULLs at any single customer premise will
require a negotiated interval.
11.9.9 If unusual or unexpected circumstances prolong or extend
the time required to accomplish the coordinated cutover, the Party responsible
for such circumstances is responsible for the reasonable labor charges of the
other Party. Delays caused by the Customer are the responsibility of ACI.
11.9.10 If ACI has ordered INP as part of an ULL installation, BA
will coordinate implementation of INP with the ULL installation.
11.9.11 If ACI requests or approves a BA technician to perform
services on the network side of the Rate Demarcation Point beyond normal
installation of the ULLs covered by the service order, BA may charge ACI for any
additional and reasonable labor charges to perform such services. BA may also
charge ACI its normal overtime rates for services ACI requests to be performed
outside of BA's normal business hours (M-F, 9 am to 5 pm, E.S.T.).
11.9.12 BA's provision of facilities for unbundled elements shall
in all cases be subject to the availability of such facilities, to the extent
permitted by Section 251 of the Act, unless and until there is a relevant change
in the law as set forth in Iowa Utilities Board v. FCC 120 F.3D 753 (8th Cir.,
1997).
11.10 MAINTENANCE OF UNBUNDLED LOCAL LOOPS
If (i) ACI reports to BA a Customer trouble, (ii) ACI requests a
dispatch, (iii) BA dispatches a technician, and (iv) such trouble was not caused
by BA's facilities or equipment,
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then ACI shall pay BA the applicable tariff rate for said dispatch. In
addition, this charge also applies in situations when the Customer contact as
designated by ACI is not available at the appointed time. ACI accepts
responsibility for initial trouble isolation and providing BA with appropriate
dispatch information based on their test results. If, as the result of ACI
instructions, BA is erroneously requested to dispatch within the Central Office,
BA may levy on ACI an appropriate charge. However, if BA imposes any charge on
ACI under this subsection 11.8 and the same trouble recurs and the cause in both
instances is determined to be in BA's facilities, then BA shall refund to ACI
all charges applicable to that trouble that were erroneously levied on and paid
by ACI to BA plus interest at the rate applicable to refunds of overpayments
pursuant to BA's Tariffs. BA agrees to respond to ACI trouble reports on a
nondiscriminatory basis consistent with the manner in which it provides service
to its own retail customers or to any other similarly situated
Telecommunications Carrier.
11.11 RATES AND CHARGES
BA shall charge the non-recurring and monthly recurring rates for ULLs
and other Network Elements set forth in Exhibit A as interim rates until such
time as the Commission adopts permanent rates consistent with the requirements
of the FCC Regulations. Such permanent rates shall be applied in the manner
described in Exhibit A and subsection 20.1.2 below.
12.0 RESALE -- SECTIONS 251(c)(4) AND 251(b)(1)
12.1 AVAILABILITY OF RETAIL RATES FOR RESALE
Each Party shall make available its Telecommunications Services for
resale at the retail rates set forth in its Tariffs to the other Party in
accordance with Section 251(b)(1) of the Act and the Commission's rulings. In
addition, BA shall allow ACI the resale of all Telecommunications Services
that are offered primarily or entirely to other Telecommunications Carriers
(E.G., Switched and special Exchange Access Services) at the rates applicable
to such services. BA shall also allow the resale by ACI of such other
non-Telecommunications Services as BA, in its sole discretion, determines to
provide for resale under terms and conditions to be agreed to by the Parties.
12.2 AVAILABILITY OF WHOLESALE RATES FOR RESALE
BA shall make available to ACI for resale all Telecommunications Services
that BA provides at retail to Customers that are not Telecommunications Carriers
at the retail prices set forth in BA's Tariffs less the wholesale discount set
forth in Exhibit A in accordance with Section 251(c)(4) of the Act. Such
services shall be provided in accordance with the terms of the applicable retail
services Tariff(s), including, without limitation, user or user group
restrictions, as the case may be, subject to the requirement that such
restrictions shall in all cases comply with the requirements of Section 251 of
the Act and the FCC Regulations regarding restrictions on resale. The Parties
may also agree to negotiate term and/or volume discounts for resold services.
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12.3 AVAILABILITY OF SUPPORT SERVICES AND BRANDING FOR RESALE
BA shall make available to ACI the various support services for resale
described in Schedule 12.3 hereto in accordance with the terms set forth
therein. In addition, to the extent required by Applicable Law, upon request by
ACI and at prices, terms and conditions to be negotiated by ACI and BA, BA shall
provide BA Retail Telecommunications Services (as defined in Schedule 12.3) that
are identified by ACI's trade name, or that are not identified by trade name,
trademark or service mark.
12.4 ADDITIONAL TERMS GOVERNING RESALE AND USE OF BA SERVICES
12.4.1 ACI shall comply with the provisions of this Agreement
(including, but not limited to, all applicable BA Tariffs) regarding resale or
use of BA services. In addition, ACI shall undertake in good faith to ensure
that its Customers comply with the provisions of BA's Tariffs applicable to
their use of BA's Telecommunications Services.
12.4.2 Without in any way limiting subsection 12.4.1, ACI shall
not resell (a) residential service to business or other nonresidential Customers
of ACI, or (b) Lifeline or other means-tested service offerings, or
grandfathered service offerings, to persons not eligible to subscribe to such
service offerings from BA, In addition, ACI shall be subject to the same
limitations that BA's own retail Customers may be subject to with respect to any
Telecommunications Service that BA may, in its discretion and to the extent not
prohibited by Applicable Law, discontinue offering.
12.4.3 BA shall not be obligated to offer to ACI at a wholesale
discount Telecommunications Services that BA offers at a special promotional
rate if such promotions are for a limited duration of ninety (90) days or less.
12.4.4 Upon request by BA, ACI shall provide to BA adequate
assurance of payment of charges due to BA in connection with ACI's purchase of
BA services for resale. Assurance of payment of charges may be requested by BA:
if ACI (a) in BA's reasonable judgment, at the Effective Date or at any time
thereafter, is unable to show itself to be creditworthy; (b) in BA's reasonable
judgment, at the Effective Date or at any time thereafter, is not creditworthy;
or, (c) fails to timely pay a bill rendered to ACI by BA. Unless otherwise
agreed by the Parties, the assurance of payment shall be in the form of a cash
deposit and shall be in an amount equal to the charges for BA services that ACI
may reasonably be expected to incur during a period of two (2) months. BA may
at any time use the deposit or other assurance of payment to pay amounts due
from ACI.
12.4.5 ACI shall not be eligible to participate in any BA plan or
program under which BA end user retail Customers may obtain products or
merchandise, or services which are not Bell Atlantic Retail Telecommunications
Services, in return for trying, agreeing to purchase, purchasing, or using Bell
Atlantic Retail Telecommunications Services.
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12.4.6 BA may impose additional restrictions on ACI's resale of
BA's retail Telecommunications Services to the extent permitted by Applicable
Laws.
13.0 COLLOCATION -- SECTION 251(c)(6)
13.1 BA shall offer to ACI Physical Collocation of equipment necessary
for Interconnection (pursuant to Section 4) or for access to unbundled Network
Elements (pursuant to Section 11.0), except that BA may offer only Virtual
Collocation if BA demonstrates to the Commission that Physical Collocation is
not practical for technical reasons or because of space limitations, as provided
in Section 251(c)(6) of the Act. In the event that Physical Collocation is not
available, BA will work with ACI to explore other collocation alternatives. BA
shall provide such Collocation solely for the purpose of Interconnection with
facilities or services of BA or access to unbundled Network Elements of BA,
except as otherwise mutually agreed to in writing by the Parties or as required
by the FCC or the Commission, subject to applicable federal and state Tariffs.
13.2 In the event BA desires to terminate any Virtual Collocation
established by ACI at a BA premise, BA shall allow ACI a reasonable period of
time to migrate to a Physical Collocation arrangement (or another Virtual
Collocation arrangement at a different BA premise) before terminating the
existing Virtual Collocation arrangement. For purposes of the preceding
sentence, a "reasonable period of time" shall mean up to sixty (60) days
following the date of Collocation termination notice to ACI for ACI to submit a
new Collocation application to BA PLUS the amount of time needed for BA to
prepare the BA premise(s) specified by ACI in its application or as may be
agreed to by the Parties for Collocation by ACI. If Physical Collocation
becomes available in a Central Office in which ACI has virtual collocation, then
ACI may, at its option, migrate to Physical Collocation.
13.3
13.3 Prior to the initiation of a Collocation project, BA shall:
(a) identify the Collocation project manager assigned to the project;
(b) develop a written comprehensive "critical tasks" timeline
detailing the work (and relative sequence thereof) that is to be performed by
each Party or jointly by both Parties; and
(c) provide ACI with the following engineering requirements, if
applicable:
- Fiber Optic Terminal/Integrated Digital Loop Carrier bay
locations;
- Digital Cross-Connect panel location and jack assignments (in
the case of Physical Collocation only);
- fiber panel location and fiber port assignments;
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- single point of contact for each BA office where
Collocation activities will
be performed; and
- MDF assignments for the installation of ULLs.
13.4 For both Physical Collocation and Virtual Collocation, ACI shall
provide its own or third-party leased transport facilities and terminate those
transport facilities in equipment located in its Physical Collocation space, or
in its virtually collocated equipment, at BA's premises as described in
applicable Tariffs, and purchase Cross Connection to services or facilities as
described in applicable Tariffs.
13.5 Collocation shall occur under the terms of BA's applicable and
available Tariffs.
13.6 Non-recurring charges for collocation and central office switch
dialing plans may be paid in installments in accordance with Schedule 13.6.
SECTION 251(b) PROVISIONS
14.0 NUMBER PORTABILITY -- SECTION 251(b)(2)
14.1 SCOPE
14.1.1 The Parties shall provide Local Telephone Number
Portability ("LTNP") on a reciprocal basis to each other to the extent
technically feasible, and in accordance with rules and regulations as from time
to time prescribed by the FCC and/or the Commission.
14.1.2 Until Permanent Number Portability is implemented by the
industry pursuant to regulations issued by the FCC and/or the Commission, the
Parties agree to reciprocally provide Interim Number Portability to each other
at the prices listed in Exhibit A. Such agreed-upon prices for INP are not
intended to reflect either Party's views on the cost recovery mechanisms being
considered by the FCC in its current proceeding on number portability issues.
14.1.3 Upon the agreement of the Parties or issuance of
applicable FCC and/or Commission order(s) or regulations mandating the adoption
of a Permanent Number Portability ("PNP") arrangement, BA and ACI will commence
migration from INP to the agreed-upon or mandated PNP arrangement as quickly as
practically possible while minimizing interruption or degradation of service to
their respective Customers. Once PNP is implemented, either Party may withdraw,
at any time and at its sole discretion, its INP offerings, subject to advance
notice to the other Party and coordination to allow the seamless and transparent
conversion of INP Customer numbers to PNP. Upon implementation of PNP pursuant
to FCC or Commission regulation, both Parties agree to conform and provide such
PNP. To the extent PNP rates or cost recovery mechanisms are not established by
the applicable FCC or Commission order or regulation mandating the adoption of
PNP, the Parties will negotiate in good faith the charges or
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cost recovery mechanism for PNP service at such time as a PNP arrangement is
adopted by the Parties.
14.1.4 Under either an INP or PNP arrangement, ACI and BA will
implement a process to coordinate LTNP cutovers with ULL conversions (as
described in Section 11 of this Agreement).
14.2 PROCEDURES FOR PROVIDING INP THROUGH REMOTE CALL FORWARDING
ACI and BA will provide INP through Remote Call Forwarding as follows:
14.2.1 A Customer of one Party ("Party A") elects to become a
Customer of the other Party ("Party B"). The Customer elects to utilize the
original telephone number(s) corresponding to the Telephone Exchange Service(s)
it previously received from Party A, in conjunction with the Telephone Exchange
Service(s) it will now receive from Party B. Upon receipt of a service order
from Party B requesting assignment of the number(s) to Party B, Party A will
implement an arrangement whereby all calls to the original telephone number(s)
will be forwarded to a new telephone number(s) designated by Party B, only
within the same Exchange Area as the original telephone number(s). Party A will
route the forwarded traffic to Party B over the appropriate traffic exchange
trunk groups.
14.2.2 Party B will become the customer of record for the
original Party A telephone number(s) subject to the INP arrangements. Upon the
execution of an appropriate billing services agreement or such other mutually
agreed-upon arrangement between the Parties, Party A shall use its reasonable
efforts to consolidate into as few billing statements as possible collect,
calling card, and third-number billed calls associated with the number(s), with
sub-account detail by retained number.
14.2.3 Party A will update its Line Information Database ("LIDB")
listings for retained numbers, and load calling card information associated with
those forwarded numbers as directed by Party B. In addition, Party A will
update the retained numbers in the LIDB with the screening options provided by
Party B on a per order basis. Party B shall determine which of the screening
options offered by Party A should apply to the Party B Customer account.
14.2.4 Party B will outpulse the telephone number to which the
call has been forwarded to the 911 Tandem Office. Party B will also provide the
911 database with both the forwarded number and the directory number, as well as
the appropriate address information of the Customer.
14.2.5 Party A shall be permitted to cancel INP arrangements and
reassign the telephone number(s) upon (i) receipt of notification from Party B
or a third party that is authorized to act on behalf of the Customer or (ii)
authorization from the Customer itself. The Parties agree to work cooperatively
to develop procedures or adopt industry standards or practices concerning the
initiation and termination of INP service in a multi-carrier environment.
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14.2.6 The INP service offered herein shall not initially apply
to NXX Codes 555, 915, 950 (as applicable), or 976, or for Feature Group A or
coin telephone service. Upon request of either Party, provision of INP to these
services will be mutually negotiated between the parties and provided to the
extent feasible under negotiated rates, terms and conditions. INP shall not
apply for any arrangement that would render the forwarded call Toll Traffic.
14.2.7 The ordering of INP arrangements and the exchange of
screening information shall be made in accordance with industry-accepted (E.G.
OBF developed) format and specifications to the extent they have been
implemented by the Parties.
14.3 PROCEDURES FOR PROVIDING INP THROUGH DIRECT INWARD DIAL TRUNKS
(FLEX-DID)
Either Party may also request INP through Direct Inward Dial Trunks
pursuant to any applicable Tariffs.
14.4 PROCEDURES FOR PROVIDING LTNP THROUGH FULL NXX CODE MIGRATION
Where either Party has activated an entire NXX for a single Customer, or
activated at least eighty percent (80%) of an NXX for a single Customer, with
the remaining numbers in that NXX either reserved for future use by that
Customer or otherwise unused, if such Customer chooses to receive Telephone
Exchange Service from the other Party, the first Party shall cooperate with the
second Party to have the entire NXX reassigned in the LERG (and associated
industry databases, routing tables, etc.) to an End Office operated by the
second Party. Such transfer will be accomplished with appropriate coordination
between the Parties and subject to appropriate industry lead-times for movements
of NXXs from one switch to another. Neither Party shall charge the other in
connection with this coordinated transfer.
14.5 RECEIPT OF TERMINATING COMPENSATION ON TRAFFIC TO INP'ED NUMBERS
The Parties agree in principle that, under the INP arrangements described
in subsections 14.2 and 14.3 above, terminating compensation on calls to INP'ed
numbers should be received by each Customer's chosen LEC as if each call to the
Customer had been originally addressed by the caller to a telephone number
bearing an NPA-NXX directly assigned to the Customer's chosen LEC. In order to
accomplish this objective where INP is employed, the Parties shall utilize the
process set forth in this subsection 14.5 whereby terminating compensation on
calls subject to INP will be passed from the Party (the "Performing Party")
which performs the INP to the other Party (the "Receiving Party") for whose
Customer the INP is provided.
14.5.1 The Parties shall individually and collectively make best
efforts to track and quantify INP traffic between their networks based on the
CPN of each call by identifying CPNs which are INP'ed numbers. The Receiving
Party shall charge the Performing Party for
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each minute of INP traffic at the INP Traffic Rate specified in subsection
14.5.3 in lieu of any other compensation charges for terminating such traffic,
except as provided in subsection 14.5.2.
14.5.2 By the Interconnection Activation Date in each LATA, the
Parties shall jointly estimate for the prospective six months, based on historic
data of all traffic in the LATA, the percentages of such traffic that, if dialed
to telephone numbers bearing NPA-NXXs directly assigned to a Receiving Party (as
opposed to the INP'ed number), would have been subject to (i) Reciprocal
Compensation ("Recip Traffic"), (ii) appropriate intrastate FGD charges ("Intra
Traffic"), (iii) interstate FGD charges ("Inter Traffic"), or (iv) handling as
Transit Traffic. On the date which is six (6) months after the Interconnection
Activation Date, and thereafter on each succeeding six month anniversary of such
Interconnection Activation Date, the Parties shall establish new INP traffic
percentages to be applied in the prospective six (6) month period, based on the
Performing Party's choice of actual INP traffic percentages from the preceding
six (6) month period or historic data of all traffic in the LATA.
14.5.3 The INP Traffic Rate shall be equal to the sum of:
(Recip Traffic percentage TIMES the Reciprocal Compensation Rate set forth
in Exhibit A)
PLUS
(Intra Traffic percentage TIMES Receiving Party's effective intrastate
FGD rates)
PLUS
(Inter Traffic percentage TIMES Receiving Party's effective interstate
FGD rates).
The Receiving Party shall compensate the Performing Party for its billing
and collection of charges for the intrastate and interstate FGD access services
provided by the Receiving Party to a third party through the greater of (i) the
difference between the intrastate and interstate FGD rates of the Receiving
Party and the Performing Party, or (ii) three percent (3%) of the Performing
Party's intrastate and interstate FGD revenues for INP'ed numbers. Under no
circumstances shall the Performing Party, in performing the billing and
collections service on behalf of the Receiving Party, be obligated to pass
through more than ninety seven percent (97%) of its FGD access charge to the
Receiving Party in connection with any given INP'ed call.
14.6 RECOVERY OF INP COSTS PURSUANT TO FCC ORDER AND RULEMAKING
Notwithstanding anything to the contrary contained in this Section 14, in
light of the FCC's First Report and Order and Further Notice of Proposed
Rulemaking, adopted June 27, 1996, in CC Docket 95-116 (the "Order"), the
Parties stipulate and agree as follows:
14.6.1 The rates listed in Exhibit A for the provision of INP are
appropriate amounts that each Party providing INP service should recover for the
provision of those INP functionalities in BA's operating territory on an interim
basis until the Commission mandates an alternative cost recovery mechanism for
the provision of INP. For the INP functions it provides, each Party should be
allowed to recover these amounts in a manner consistent with any final
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FCC and/or Commission order on INP cost recovery (such as a state-wide fund
contributed to by all telecommunications carriers).
14.6.2 The Parties agree that neither Party waives its rights to
advocate its views that are consistent with this subsection 14.6 on the
appropriate INP cost recovery mechanism, or to present such views before any
relevant regulatory body or other agency as they relate to FCC or Commission
actions on INP cost recovery.
15.0 DIALING PARITY -- SECTION 251(b)(3)
BA and ACI shall each provide the other with nondiscriminatory access to
such services and information as are necessary to allow the other Party to
implement dialing parity for Telephone Exchange Service, operator services,
directory assistance, and directory listing information with no unreasonable
dialing delays, as required under Section 251(b)(3) of the Act.
16.0 ACCESS TO RIGHTS-OF-WAY -- SECTION 251(b)(4)
16.1 BA ("Licensor") shall provide ACI ("Licensee") access for
purposes of making attachments to the poles, ducts, rights-of-way and conduits
it owns or controls pursuant to any existing or future license agreement between
the Parties, and in conformance with 47 U.S.C. Section 224, where facilities are
available, on terms, conditions and prices comparable to those offered to any
other entity pursuant to BA's applicable Tariffs (including generally-available
license agreements). Where no such Tariffs exist, such access shall be provided
in accordance with the requirements of 47 U.S.C. Section 224, including any
applicable FCC regulations that may be issued.
16.2 Licensor shall process all completed license applications for new
or additional attachments, including the performance of a pre-license survey, on
a first-come, first-serve basis as set forth in its applicable Tariff. Licensor
shall make all access determinations in accordance with the requirements of
Applicable Law (including any applicable FCC regulations), considering such
factors as capacity, safety, reliability and general engineering considerations.
Licensor shall inform Licensee in writing as to whether an application has been
granted (subject to Licensee's payment for any "make-ready" work that may be
required) or denied within forty-five (45) days of receipt of such application.
Where an application involves an increase in capacity by Licensor, Licensor
shall take reasonable steps to accommodate requests for access in accordance
with Applicable Law. Before denying Licensee access based on lack of capacity,
Licensor shall explore potential accommodations in good faith with Licensee. In
order to facilitate Licensee's completion of an application, Licensor shall make
commercially reasonable efforts to, within fifteen (15) business days of a
legitimate request identifying the specific geographic area and types and
quantities of required structures, provide Licensee such maps, plats or other
relevant data reasonably necessary to complete the applications described above,
subject to a non-disclosure agreement in form reasonably agreeable to Licensor.
Such requests shall be processed by Licensor on a first-come, first-serve basis.
This exchange of information and records does not preclude the need for a field
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survey to verify the location and availability of structures and rights of way
to be used. Licensor shall make commercially reasonable efforts to meet with or
respond to Licensee's inquiries regarding the information supplied to it as soon
as practicable following receipt of such request for meeting or inquiry from
Licensee. Completion of make-ready work and attachments shall be in accordance
with any existing or future license agreement between the Parties.
17.0 DATABASES AND SIGNALING
17.1 Each Party shall provide the other Party with access to databases
and associated signaling necessary for call routing and completion by providing
SS7 Common Channel Signaling (CCS) Interconnection in accordance with existing
Tariffs, and Interconnection and access to 800/888 databases, LIDB, and any
other necessary databases in accordance with existing Tariffs and/or agreements
with other unaffiliated carriers, at the rates set forth in Exhibit A.
Alternatively, either Party may secure CCS Interconnection from a commercial SS7
hub provider, and in that case the other Party will permit the purchasing Party
to access the same databases as would have been accessible if the purchasing
party had connected directly to the other Party's CCS network.
17.2 The Parties will provide CCS Signaling to each other, where and as
available, in conjunction with all Local Traffic, Toll Traffic, Meet Point
Billing Traffic, and Transit Traffic. The Parties will cooperate on the
exchange of TCAP messages to facilitate interoperability of CCS-based features
between their respective networks, including all CLASS features and functions,
to the extent each Party offers such features and functions to its Customers.
All CCS Signaling parameters will be provided upon request (where available),
including called party number, calling party number, originating line
information, calling party category, and charge number. All privacy indicators
will be honored. The Parties will follow all Ordering and Billing Forum-adopted
standards pertaining to CIC/OZZ codes. Where CCS Signaling is not available,
in-band multi-frequency (MF) wink start signaling will be provided. Any such MF
arrangement will require a separate local trunk circuit between the Parties'
respective switches in those instances where the Parties have established End
Office to End Office high usage trunk groups. In such an arrangement, each
Party will outpulse the full ten-digit telephone number of the called party to
the other Party.
17.3 Each Party shall provide trunk groups, where available and upon
reasonable request, that are configured utilizing the B8ZS ESF protocol for 64
kbps clear channel transmission to allow for ISDN interoperability between the
Parties' respective networks.
17.4 The following publications describe the practices, procedures and
specifications generally utilized by BA for signaling purposes and is listed
herein to assist the Parties in meeting their respective Interconnection
responsibilities related to Signaling:
(a) Bellcore Generic Requirements, GR-905-CORE, Issue 1, March,
1995, and subsequent issues and amendments; and
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(b) Bell Atlantic Supplement Common Channel Signaling Network
Interface Specification (BA-905).
17.5 Each Party shall charge the other Party mutual and reciprocal
rates for any usage-based charges for CCS Signaling, 800/888 database access,
LIDB access, and access to other necessary databases, as follows: BA shall
charge ACI in accordance with Exhibit A hereto and applicable Tariffs; ACI shall
charge BA rates equal to the rates BA charges ACI, unless ACI's Tariffs for CCS
signaling provide for lower generally available rates, in which case ACI shall
charge BA such lower rates; except to the extent a Party uses a third party
vendor for the provision of CCS Signaling, in which case such charges shall
apply only to the third party vendor.
18.0 COORDINATED SERVICE ARRANGEMENTS
18.1 INTERCEPT AND REFERRAL ANNOUNCEMENTS
When a Customer changes its service provider from BA to ACI, or from ACI
to BA, and does not retain its original telephone number, the Party formerly
providing service to such Customer shall provide a referral announcement
("Referral Announcement") on the abandoned telephone number which provides
details on the Customer's new number or provide other appropriate information to
the extent known. Referral Announcements shall be provided reciprocally, free
of charge to either the other Party or the Customer to the extent the providing
Party does not charge its own customers for such service, for a period of not
less than four (4) months after the date the Customer changes its telephone
number in the case of business Customers and not less than sixty (60) days after
the date the Customer changes its telephone number in the case of residential
Customers. However, if either Party provides Referral Announcements for
different periods than the above respective periods when its Customers change
their telephone numbers, such Party shall provide the same level of service to
Customers of the other Party.
18.2 COORDINATED REPAIR CALLS
ACI and BA will employ the following procedures for handling misdirected
repair calls:
18.2.1 ACI and BA will educate their respective Customers as to
the correct telephone numbers to call in order to access their respective repair
bureaus.
18.2.2 To the extent Party A is identifiable as the correct
provider of service to Customers that make misdirected repair calls to Party B,
Party B will immediately refer the Customers to the telephone number provided by
Party A, or to an information source that can provide the telephone number of
Party A, in a courteous manner and at no charge. In responding to
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misdirected repair calls, neither Party shall make disparaging remarks about the
other Party, its services, rates, or service quality.
18.2.3 ACI and BA will provide their respective repair contact
numbers to one another on a reciprocal basis.
18.3 CUSTOMER AUTHORIZATION
18.3.1 Without in any way limiting either Party's obligations
under subsection 28.1, each Party shall comply with Applicable Laws with regard
to Customer selection of a primary Telephone Exchange Service provider. Until
the Commission and/or FCC adopts regulations and/or orders applicable to
Customer selection of a primary Telephone Exchange Service provider, each Party
shall adhere to the rules and procedures set forth in Section 64.1100 of the FCC
Rules, 47 CFR Section 64.1100, in effect on the Effective Date hereof when
ordering, terminating, or otherwise changing Telephone Exchange Service on
behalf of the other Party's or another carrier's Customers.
18.3.2 In the event either Party requests that the other Party
install, provide, change, or terminate a Customer's Telecommunications Service
(including, but not limited to, a Customer's selection of a primary Telephone
Exchange Service Provider) and (a) fails to provide documentary evidence of the
Customer's primary Telephone Exchange Service Provider selection upon request,
or (b) without having obtained authorization from the Customer for such
installation, provision, selection, change or termination in accordance with
Applicable Laws (or as provided in subsection 18.3.1 above), the requesting
Party shall be liable to the other Party for all charges that would be
applicable to the Customer for the initial change in the Customer's
Telecommunications Service and any charges for restoring the Customer's
Telecommunications Service to its Customer-authorized condition, including to
the appropriate primary Telephone Exchange Service provider.
18.3.3 Without in any way limiting ACI's obligations under
subsection 28.1, the Parties shall comply with Applicable Laws with regard to
Customer Proprietary Network Information, including, but not limited to, 47
U.S.C. Section 222. Neither Party shall access (including, but not limited to,
through OSS Services (as defined in Schedule 12.3) and Pre-OSS Services), use,
or disclose Customer Proprietary Network Information made available to it by the
other Party pursuant to this Agreement, expect as permitted by Applicable Law,
as required by a court or agency pursuant to legal process, or where the
accessing Party has obtained any Customer authorization for such access, use
and/or disclosure required by Applicable Laws. By accessing, using or
disclosing Customer Proprietary Network Information, the Parties represent and
warrant that they have obtained authorization for such action from the
applicable Customer in the manner required by Applicable Laws and this
Agreement. Each Party shall, upon request by the other Party, provide proof
of such authorization (including a copy of any written authorization).
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18.3.4 BA shall have the right to monitor and/or audit ACI's
access to and use and/or disclosure of Customer Proprietary Network Information
that is made available by BA to ACI pursuant to this Agreement to ascertain
whether ACI is complying with the requirements of Applicable Laws and this
Agreement with regard to such access, use, and/or disclosure. To the extent
permitted by Applicable Laws, the foregoing right shall include, but not be
limited to, the right to electronically monitor ACI's access to and use of
Customer Proprietary Network Information that is made available by BA to ACI
pursuant to this Agreement.
19.0 DIRECTORY SERVICES ARRANGEMENTS
19.1 DIRECTORY LISTINGS AND DIRECTORY DISTRIBUTIONS
In this subsection 19.1, references to a ACI Customer's "primary listing"
shall mean such Customer's primary name, address, and telephone number, which
number falls within the NXX codes directly assigned to ACI or is retained by ACI
on the Customer's behalf pursuant to LTNP arrangements with BA or any other
carrier within the geographic area covered in the relevant BA directory. BA
will, upon request, provide the following directory services to ACI in
accordance with the terms set forth herein.
19.1.1 BA will include the ACI Customer's primary listing in its
"White Pages" directory (residence and business listings) and "Yellow Pages"
directory (business listings) that cover the address of the Customer. Listings
of ACI's Customers will be interfiled with listings of BA's Customers and the
Customers of other LECs included in the BA directories. ACI will pay BA a
non-recurring charge as set forth in Exhibit A for providing such service for
each ACI Customer's primary listing. ACI will also pay BA's Tariffed charges,
as the case may be, for additional and foreign white page listings and other
white pages services for ACI's Customers. BA will not require a minimum number
of listings per order.
19.1.2 BA will also include the ACI Customer's primary listing in
BA's directory assistance database on the same basis that BA's own Customers are
included, as well as in any electronic directories in which BA's Customers are
ordinarily included, for no charge other than the charges identified in
subsection 19.1.1.
19.1.3 BA will distribute to ACI Customers copies of their
primary white pages and yellow pages directories at the same time and on the
same basis that BA distributes primary directories to its own Customers. BA
will also deliver a reasonable number of such directories to ACI. These
distributions will be made for no additional charge. ACI and its Customers may
request additional directories from BA's Directory Fulfillment Centers, which
Centers will provide such additional directories for the same charges applicable
to comparable requests by BA Customers.
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19.1.4 Upon request by ACI, BA will provide ACI with a directory
list of relevant NXX codes, the close dates, publishing data, and call guide
close dates on the same basis as such information is provided to BA's own
business offices.
19.1.5 ACI shall provide BA with daily listing information on all
new ACI Customers in the format required by BA or a mutually-agreed upon
industry standard format. The information shall include the Customer's name,
address, telephone number, the delivery address and number of directories to be
delivered, and, in the case of a business listing, the primary business heading
under which the business Customer desires to be placed, and any other
information necessary for the publication and delivery of directories. ACI will
also provide BA with daily listing information showing Customers that have
disconnected or terminated their service with ACI. BA will provide ACI with
confirmation of listing order activity within forty eight (48) hours.
19.1.6 BA will accord ACI's directory listing information the
same level of confidentiality which BA accords its own directory listing
information, and BA shall ensure that access to ACI's directory listing
information will be used solely for the purpose of providing directory services;
provided, however, that BA may use or license information contained in its
directory listings for direct marketing purposes so long as the ACI Customers
are not separately identified as such; and provided further that ACI may
identify those of its Customers that request that their names not be sold for
direct marketing purposes, and BA will honor such requests to the same extent as
it does for its own Customers.
19.1.7 Both Parties shall use their best efforts to ensure the
accurate listing of ACI Customer listings. BA will also provide ACI, upon
request, a copy of the BA listings standards and specifications manual. In
addition, BA will provide ACI with a listing of Yellow Pages headings and
directory close schedules on an ongoing basis.
19.1.8 ACI will adhere to all practices, standards, and ethical
requirements of BA with regard to listings, and, by providing BA with listing
information, warrants to BA that ACI has the right to place such listings on
behalf of its Customers. ACI agrees that it will undertake commercially
practicable and reasonable steps to attempt to ensure that any business or
person to be listed is authorized and has the right (i) to provide the product
or service offered, and (ii) to use any personal or corporate name, trade name
or language used in the listing. In addition, ACI agrees to release, defend,
hold harmless and indemnify BA from and against any and all claims, losses,
damages, suits, or other actions, or any liability whatsoever, suffered, made,
instituted, or asserted by any person arising out of BA's listing of the listing
information provided by ACI hereunder.
19.1.9 BA's liability to ACI in the event of a BA error in or
omission of a listing shall not exceed the amount of charges actually paid by
ACI for such listing. In addition, ACI agrees to take, with respect to its own
Customers, all reasonable steps to ensure that its and BA's liability to ACI's
Customers in the event of a BA error in or omission of a listing shall be
subject to the same limitations that BA's liability to its own Customers are
subject to.
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19.1.10 Within thirty (30) business days of the Effective Date,
BA agrees to meet with ACI and, if appropriate, arrange a meeting with a BA
authorized Yellow Pages agent, to address issues regarding ACI customer
referrals or questions pertaining to Yellow Pages listings.
19.2 YELLOW PAGES MAINTENANCE
The Parties agree to work cooperatively to ensure that Yellow Page
advertisements purchased by Customers that switch their service to ACI
(including Customers utilizing ACI-assigned telephone numbers and ACI Customers
utilizing LTNP) are maintained without interruption. BA will offer Yellow Pages
services to ACI Customers on the same basis as they are offered to BA Customers.
19.3 SERVICE INFORMATION PAGES
BA will include all ACI NXX codes associated with the areas to which each
directory pertains, along with BA's own NXX codes, in any lists of such codes
which are contained in the general reference portions of the directories. ACI's
NXX codes shall appear in such lists in the same manner as BA's NXX information.
In addition, BA will include in the "Customer Guide" or comparable section of
the applicable white pages directories listings provided by ACI for ACI's
installation, repair and customer service and other essential service oriented
information, as agreed by the Parties, including appropriate identifying logo.
Such listings shall appear in the manner agreed to by the Parties. BA shall not
charge ACI for inclusion of this essential service-oriented information, but
reserves the right to impose charges on other information ACI may elect to
submit and BA may elect to accept for inclusion in BA's white pages directories.
BA will provide ACI with the annual directory close dates and reasonable notice
of any changes in said dates.
19.4 DIRECTORY ASSISTANCE (DA); CALL COMPLETION
19.4.1 Upon request, BA will provide ACI with directory
assistance, connect request, and/or IntraLATA call completion services in
accordance with the terms set forth in the Directory Assistance and Call
Completion Services Agreement appended hereto as Exhibit C.
19.4.2 Also upon request, BA will provide to ACI operator
services trunk groups, utilizing Feature Group D type signaling, with ANI, minus
OZZ, when interconnecting to the BA operator services network.
19.4.3 BA agrees to utilize existing trunking arrangements, at no
facility charge to ACI, to transfer ACI's operator calls handled by a BA
operator to the appropriate 911/E911 PSAP. The ALI information passed to the
PSAP shall be consistent with the information that BA passes on its own
operator-handled calls.
19.4.4 At the request of ACI, BA will provide ACI with "Direct
Access" service to the same directory assistance ("DA") database that is used by
BA to provide directory assistance to BA Customers. Direct Access will enable
ACI's operator bureau, if ACI elects to
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provide its own DA services, to obtain direct electronic access to the DA
database for the purpose of providing intraLATA directory assistance to ACI
Customers. ACI may search and read DA database information at the per query
rates specified in Exhibit A. BA will furnish ports for connection and
termination of ACI facilities to the DA database system. The type of ports and
associated charges will be based on the type of access configuration required by
ACI for termination of its facilities. The number of ports provided at the
database will be based on ACI's annual forecast of "Busy Hour" queries. At the
request of ACI, BA will also accept electronic transmission of ACI Customer DA
information for inclusion in the DA database.
20.0 COORDINATION WITH TARIFF TERMS
20.1 The Parties acknowledge that some of the services, facilities, and
arrangements described herein are or will be available under and subject to the
terms of the federal or state tariffs of the other Party applicable to such
services, facilities, and arrangements. To the extent a Tariff of the providing
Party applies to any service, facility, and arrangement described herein, the
Parties agree as follows:
20.1.1 Those rates and charges set forth in Exhibit A for the
services, facilities, and arrangements described herein that reference or are
identical to a rate contained in an existing Tariff of the providing Party,
shall conform with those contained in the then-prevailing Tariff and vary in
accordance with any changes that may be made to the Tariff rates and charges
subsequent to the Effective Date.
20.1.2 As applied to wholesale discount rates, unbundled Network
Elements or call transport and/or termination of Local Traffic purchased for the
provision of Telephone Exchange Service or Exchange Access, the rates and
charges set forth in Exhibit A shall apply until such time as they are replaced
by new rates as may be approved by the Commission from time to time pursuant to
the FCC Regulations, subject to a stay or other order issued by any court of
competent jurisdiction. At such time(s) as such new rates have been approved by
the Commission, the Parties shall amend Exhibit A to reflect the new approved
rates.
20.2 Except with respect to the rates and charges described in
subsection 20.1 above, all other terms contained in an applicable Tariff of the
providing Party shall apply in connection with its provision of the particular
service, facility, and arrangement hereunder, except where such terms conflict
with the provisions of this Agreement, in which case the Agreement shall
control.
21.0 INSURANCE
21.1 ACI shall maintain, during the term of this Agreement, all
insurance and/or bonds required by law and necessary to satisfy its obligations
under this Agreement, including, without limitation, its obligations set forth
in Section 25 hereof. At a minimum and without limiting the foregoing covenant,
ACI shall maintain the following insurance:
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(a) Commercial General Liability Insurance, on an occurrence
basis, including but not limited to, premises-operations, broad form
property damage, products/completed operations, contractual liability,
independent contractors, and personal injury, with limits of at least
$2,000,000 combined single limit for each occurrence.
(b) Automobile Liability, Comprehensive Form, with limits of at
least $500,000 combined single limit for each occurrence.
(c) Excess Liability, in the umbrella form, with limits of at
least $10,000,000 combined single limit for each occurrence.
(d) Worker's Compensation Insurance as required by law and
Employer's Liability Insurance with limits of not less than $1,000,000
per occurrence.
21.2 ACI shall name BA as an additional insured on the foregoing
insurance.
21.3 ACI shall, within two (2) weeks of the date hereof and on a
semi-annual basis thereafter, furnish certificates or other adequate proof of
the foregoing insurance. The certificates or other proof of the foregoing
insurance shall be sent to: Bell Atlantic, Insurance Administration Group, 1320
N. Court House Road, 4th Floor, Arlington, Virginia, 22201. In addition, ACI
shall require its agents, representatives, or contractors, if any, that may
enter upon the premises of BA or BA's affiliated companies to maintain similar
and appropriate insurance and, if requested, to furnish BA certificates or other
adequate proof of such insurance. Certificates furnished by ACI or ACI's
agents, representatives, or contractors shall contain a clause stating: "Bell
Atlantic - Pennsylvania, Inc. shall be notified in writing at least thirty (30)
days prior to cancellation of, or any material change in, the insurance."
22.0 TERM AND TERMINATION.
22.1 This Agreement shall be effective as of the date first above
written and continue in effect until December 31, 1999, and
thereafter the Agreement shall continue in force and effect unless
and until terminated as provided herein. Upon the expiration of
the initial term, either Party may terminate this Agreement by
providing written notice of termination to the other Party, such
written notice to be provided at least ninety (90) days in advance
of the date of termination. In the event of such termination,
those service arrangements made available under this Agreement and
existing at the time of termination shall continue without
interruption under (a) a new agreement executed by the Parties,
(b) standard Interconnection terms and conditions approved and
made generally effective by the Commission, (c) Tariff terms and
conditions generally available to CLECs, or (d) if none of the
above is available, under the terms of this Agreement on a
month-to-month basis until such time as (a), (b), or (c) becomes
available.
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22.1.1 This Agreement shall be effective between the Parties as of the
Effective Date, notwithstanding the pendency of Commission approval of
this Agreement.
22.2 For service arrangements made available under this Agreement
and existing at the time of termination, if the standard Interconnection
terms and conditions or Tariff terms and conditions result in the
non-terminating Party physically rearranging facilities or incurring
programming expense, the non-terminating Party shall be entitled to recover
such rearrangement or programming costs from the terminating Party. By
mutual agreement, the Parties may jointly petition the appropriate regulatory
bodies for permission to have this Agreement supersede any rules as such
regulators might adopt or approve.
22.3 If either Party defaults in the payment of any amount due
hereunder, or if either Party violates any other provision of this Agreement,
and such default or violation shall continue for sixty (60) days after
written notice thereof, the other Party may terminate this Agreement and
services hereunder by written notice; provided the other Party has provided
the defaulting Party and the appropriate federal and/or state regulatory
bodies with written notice at least twenty five (25) days' prior to
terminating service. Notice shall be posted by overnight mail, return receipt
requested. If the defaulting Party cures the default or violation within the
twenty five (25) day period, the other Party will not terminate service or
this Agreement but shall be entitled to recover all costs, if any, incurred
by it in connection with the default or violation, including, without
limitation, costs incurred to prepare for the termination of service.
23.0 DISCLAIMER OF REPRESENTATIONS AND WARRANTIES
EXCEPT AS EXPRESSLY PROVIDED UNDER THIS AGREEMENT, NEITHER PARTY MAKES
ANY WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE SERVICES, FUNCTIONS AND
PRODUCTS IT PROVIDES UNDER OR CONTEMPLATED BY THIS AGREEMENT AND THE PARTIES
DISCLAIM THE IMPLIED WARRANTIES OF MERCHANTABILITY OR OF FITNESS FOR A
PARTICULAR PURPOSE.
24.0 CANCELLATION CHARGES
Except as provided in this Agreement or as otherwise provided in any
applicable Tariff, no cancellation charges shall apply.
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25.0 INDEMNIFICATION
25.1 Each Party agrees to release, indemnify, defend and hold harmless
the other Party from and against all losses, claims, demands, damages, expenses,
suits or other actions, or any liability whatsoever, including, but not limited
to, costs and attorneys' fees (collectively, a "Loss"), (a) whether suffered,
made, instituted, or asserted by any other party or person, relating to personal
injury to or death of any person, or for loss, damage to, or destruction of real
and/or personal property, whether or not owned by others, arising from
transactions or activities relating to this Agreement and to the extent
proximately caused by the negligent or willful acts or omissions of the
indemnifying Party, regardless of the form of action, or (b) suffered, made,
instituted, or asserted by its own customer(s) against the other Party arising
out of the other Party's provision of services to the indemnifying Party under
this Agreement. Notwithstanding the foregoing indemnification, nothing in this
Section 25.0 shall affect or limit any claims, remedies, or other actions the
indemnifying Party may have against the indemnified Party under this Agreement,
any other contract, or any applicable Tariff(s), regulations or laws for the
indemnified Party's provision of said services.
25.2 The indemnification provided herein shall be conditioned upon:
(a) The indemnified Party shall promptly notify the
indemnifying Party of any action taken against the indemnified Party
relating to the indemnification.
(b) The indemnifying Party shall have sole authority to defend
any such action, including the selection of legal counsel, and the
indemnified Party may engage separate legal counsel only at its sole cost
and expense.
(c) In no event shall the indemnifying Party settle or consent
to any judgment pertaining to any such action without the prior written
consent of the indemnified Party, which consent shall not be unreasonably
withheld. However, in the event the settlement or judgment requires a
contribution from or affects the rights of the Indemnified Party, the
Indemnified Party shall have the right to refuse such settlement or
judgment and, at its own cost and expense, take over the defense against
such Loss, provided that in such event the indemnifying Party shall not
be responsible for, nor shall it be obligated to indemnify the
indemnified Party against, the Loss for any amount in excess of such
refused settlement or judgment.
(d) The indemnified Party shall, in all cases, assert any and
all provisions in its Tariffs that limit liability to third parties as a
bar to any recovery by the third party claimant in excess of such
limitation of liability.
(e) The indemnified Party shall offer the indemnifying Party
all reasonable cooperation and assistance in the defense of any such
action.
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26.0 LIMITATION OF LIABILITY
26.1 The liability of either Party to the other Party for damages
arising out of failure to comply with a direction to install, restore or
terminate facilities; or out of failures, mistakes, omissions, interruptions,
delays, errors, or defects (collectively, "Errors") occurring in the course of
furnishing any services, arrangements, or facilities hereunder shall be
determined in accordance with the terms of the applicable tariff(s) of the
providing Party. In the event no tariff(s) apply, the providing Party's
liability for such Errors shall not exceed an amount equal to the pro rata
monthly charge for the period in which such failures, mistakes, omissions,
interruptions, delays, errors or defects occur. Absent willful misconduct,
recovery of said amount shall be the injured Party's sole and exclusive remedy
against the providing Party for such failures, mistakes, omissions,
interruptions, delays, errors or defects.
26.2 Neither Party shall be liable to the other in connection with the
provision or use of services offered under this Agreement for indirect,
incidental, consequential, reliance or special damages, including (without
limitation) damages for lost profits (collectively, "Consequential Damages"),
regardless of the form of action, whether in contract, warranty, strict
liability, or tort, including, without limitation, negligence of any kind, even
if the other Party has been advised of the possibility of such damages;
provided, that neither Party's liability shall be limited for willful
misconduct; and, provided further that the foregoing shall not limit a Party's
obligation under Section 25.
26.3 The Parties agree that neither Party shall be liable to the
customers of the other Party in connection with its provision of services to the
other Party under this Agreement. Nothing in this Agreement shall be deemed to
create a third party beneficiary relationship between the Party providing the
service and the customers of the Party purchasing the service. In the event of
a dispute involving both Parties with a customer of one Party, both Parties
shall assert the applicability of any limitations on liability to customers that
may be contained in either Party's applicable Tariff(s).
27.0 PERFORMANCE STANDARDS FOR SPECIFIED ACTIVITIES
27.1 PERFORMANCE STANDARDS
BA shall provide the Interconnection and unbundled Network Elements
contemplated hereunder in accordance with the performance standards set forth in
Section 251(c) of the Act and the FCC Regulations, including without limitation
the rules set forth in 47 Code of Federal Regulations Sections 51.305(a)(3),
51.305(a)(5), 51.311(a), 51.311(b), and 51.313(b).
27.2 PERFORMANCE MONITORING REPORTS, STANDARDS AND REMEDIES
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27.2.1 Schedule 27.0, Performance Monitoring Reports, Standards
and Remedies, is made a part of this Agreement and incorporated herein in its
entirety. The Parties acknowledge that Schedule 27.0 does not provide for
intervals, reports or standards including xDSL loops and intend that such
intervals, reports and standards will be developed in the future.
27.3 PERFORMANCE REMEDIES
The question of what remedies or other action might be appropriate in any
situation where ACI believes, based on a statistically significant number of
reports described above, that Bell Atlantic is not complying with the
performance standards referenced in subsection 27.1 above shall be resolved, in
the first instance, through negotiations between the Parties and, failing prompt
and successful negotiations, through the complaint processes of the Commission,
the FCC, or a court of competent jurisdiction. BA agrees to join ACI in
encouraging the Commission to develop expedited procedures for the resolution of
any performance-related complaints.
28.0 COMPLIANCE WITH LAWS; REGULATORY APPROVAL
28.1 Each Party represents and warrants that it is now and will remain
in compliance with all Applicable Laws. Each Party shall promptly notify the
other Party in writing of any governmental action that suspends, cancels,
withdraws, limits, or otherwise materially affects its ability to perform its
obligations hereunder.
28.2 The Parties understand and agree that this Agreement will be
filed with the Commission and may thereafter be filed with the FCC as an
integral part of BA's application pursuant to Section 271(d) of the Act. The
Parties agree this Agreement was negotiated to satisfy obligations imposed by
Section 251 of the Act. Each Party covenants and agrees to fully support
approval of this Agreement by the Commission or the FCC under Section 252 of
the Act without modification. The Parties, however, reserve the right to
seek regulatory relief and otherwise seek redress from each other regarding
performance and implementation of this Agreement, including, without
limitation, the conformance of this Agreement to the FCC Regulations as
provided in subsection 28.3 below.
28.3 The Parties recognize that the FCC has issued and may continue to
issue the FCC Regulations implementing Sections 251, 252, and 271 of the Act
that affect certain terms contained in this Agreement. In the event that any
one or more of the provisions contained herein is inconsistent with any
applicable rule contained in such FCC Regulations or, in BA's reasonable
determination, affects BA's application pursuant to Section 271(d) of the Act,
the Parties agree to make only the minimum revisions necessary to eliminate the
inconsistency or amend the application-affecting provision(s). Such minimum
revisions shall not be considered material, and
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shall not require further Commission approval (beyond any Commission approval
required under Section 252(e) of the Act).
28.4 In the event any Applicable Law other than the FCC Regulations
requires modification of any material term(s) contained in this Agreement,
either Party may require a renegotiation of the term(s) that require direct
modification as well as of any term(s) that are reasonably affected thereby. If
neither Party requests a renegotiation or if an Applicable Law requires
modification of any non-material term(s), then the Parties agree to make only
the minimum modifications necessary, and the remaining provisions of this
Agreement shall remain in full force and effect. For purposes of this
subsection 28.4 and without limitation of any other modifications required by
Applicable Laws, the Parties agree that any modification required by Applicable
Laws (i) to the two-tier Reciprocal Call Termination compensation structure for
the transport and termination of Local Traffic described in Exhibit A, or (ii)
that affects either Party's receipt of reciprocal compensation for the transport
and termination of Local Traffic, shall be deemed to be a modification of a
material term that requires immediate good faith renegotiation between the
Parties. Until such renegotiation results in a new agreement or an amendment to
this Agreement between the Parties, the Parties agree that (a) in the case of
(i) above, they will pay each other appropriate transport charges in addition to
the usual call termination charge for Local Traffic that it delivers to the
other Party's Local Serving Wire Center, provided each Party continues to offer
the option of delivering Local Traffic to another IP in the LATA at the usual
call termination charge only, and (b) in the case of (ii) above, the Party whose
receipt of reciprocal compensation is affected shall not be obligated to pay the
other Party reciprocal compensation for the other Party's transport and
termination of the same kind of Local Traffic delivered by the affected Party in
excess of what the affected Party is permitted to receive and retain.
29.0 MISCELLANEOUS
29.1 AUTHORIZATION
29.1.1 BA is a corporation duly organized, validly existing and
in good standing under the laws of the Commonwealth of Pennsylvania and has full
power and authority to execute and deliver this Agreement and to perform the
obligations hereunder.
29.1.2 ACI is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, and has full power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder.
29.2 INDEPENDENT CONTRACTOR
Each Party shall perform services hereunder as an independent contractor
and nothing herein shall be construed as creating any other relationship between
the Parties. Each Party and each Party's contractor shall be solely responsible
for the withholding or payment of all applicable federal, state and local income
taxes, social security taxes and other payroll taxes with
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respect to their employees, as well as any taxes, contributions or other
obligations imposed by applicable state unemployment or workers' compensation
acts. Each Party has sole authority and responsibility to hire, fire and
otherwise control its employees.
29.3 FORCE MAJEURE
Neither Party shall be responsible for delays or failures in performance
resulting from acts or occurrences beyond the reasonable control of such Party,
regardless of whether such delays or failures in performance were foreseen or
foreseeable as of the date of this Agreement, including, without limitation:
adverse weather conditions, fire, explosion, power failure, acts of God, war,
revolution, civil commotion, or acts of public enemies; any law, order,
regulation, ordinance or requirement of any government or legal body; or labor
unrest, including, without limitation, strikes, slowdowns, picketing or
boycotts; or delays caused by the other Party or by other service or equipment
vendors; or any other circumstances beyond the Party's reasonable control. In
such event, the affected Party shall, upon giving prompt notice to the other
Party, be excused from such performance on a day-to-day basis to the extent of
such interferences (and the other Party shall likewise be excused from
performance of its obligations on a day-to-day basis to the extent such Party's
obligations relate to the performance so interfered with). The affected Party
shall use its best efforts to avoid or remove the cause(s) of non-performance
and both Parties shall proceed to perform with dispatch once the cause(s) are
removed or cease.
29.4 CONFIDENTIALITY
29.4.1 All information, including but not limited to
specification, microfilm, photocopies, magnetic disks, magnetic tapes, drawings,
sketches, models, samples, tools, technical information, data, employee records,
maps, financial reports, and market data, (i) furnished by one Party to the
other Party dealing with customer specific, facility specific, or usage specific
information, other than customer information communicated for the purpose of
publication or directory database inclusion, or (ii) obtained by one Party about
the other Party's Customers through use of operations support systems, and that
the receiving Party knows or has reason to know is Confidential information, or
(iii) in written, graphic, electromagnetic, or other tangible form and marked at
the time of delivery as "Confidential" or "Proprietary," or (iv) communicated
orally and declared to the receiving Party at the time of delivery to be
"Confidential" or "Proprietary" (collectively referred to as "Proprietary
Information"), shall remain the property of the disclosing Party.
29.4.2 Each Party shall keep all of the other Party's Proprietary
Information confidential in the same manner it holds its own Proprietary
Information confidential (which in all cases shall be no less than reasonable)
and shall use the other Party's Proprietary Information only for performing the
covenants contained in this Agreement. Neither Party shall use the other
Party's Proprietary Information for any other purpose, including access by BA's
retail operations, except as permitted by Applicable Law or upon such terms and
conditions as may be agreed upon between the Parties in writing.
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29.4.3 Unless otherwise agreed, the obligations of
confidentiality and non-use set forth in this Agreement do not apply to such
Proprietary Information that:
(a) was, at the time of receipt, already known to the receiving
Party free of any obligation to keep it confidential as evidenced by
written records prepared prior to delivery by the disclosing Party; or
(b) is or becomes publicly known through no wrongful act of the
receiving Party; or
(c) is rightfully received from a third person having no direct
or indirect secrecy or confidentiality obligation to the disclosing Party
with respect to such information; or
(d) is independently developed by an employee, agent, or
contractor of the receiving Party that is not involved in any manner with
the provision of services pursuant to this Agreement and does not have
any direct or indirect access to the Proprietary Information; or
(e) is approved for release by written authorization of the
disclosing Party; or
(f) is required to be made public by the receiving Party
pursuant to applicable law or regulation, provided that the receiving
Party shall give sufficient notice of the requirement to the disclosing
Party to enable the disclosing Party to seek protective orders.
29.4.4 Upon request by the disclosing Party, the receiving Party
shall return all tangible copies of Proprietary Information, whether written,
graphic, electromagnetic or otherwise, except that the receiving Party may
retain one copy for archival purposes only.
29.4.5 Notwithstanding any other provision of this Agreement, the
provisions of this subsection 29.4 shall apply to all Proprietary Information
furnished by either Party to the other in furtherance of the purpose of this
Agreement, even if furnished before the Effective Date.
29.4.6 Any breach by a Party or its employees, agents or
contractors, of the provisions of this section 29.4 shall be deemed a material
breach of the Agreement. The Parties agree that the Party whose information is
disclosed would be irreparably injured by such a breach of this section 29.4.
In addition, if a Party or its employee, agent or contractor any time breaches
this section 29.4 and such breach continues for more than ten (10) days after
written notice thereof from the other Party, then that other Party shall be
entitled to seek equitable relief, including injunctive relief and specific
performance, in the event of any such breach. Such remedies shall not be deemed
to be the exclusive remedies for any such breach, but shll be in addition to any
other remedies available under this Agreement or at law or in equity.
29.5 CHOICE OF LAW
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The construction, interpretation and performance of this Agreement shall
be governed by and construed in accordance with the laws of the state in which
this Agreement is to be performed, except for its conflicts of laws provisions.
In addition, insofar as and to the extent federal law may apply, federal law
will control.
29.6 TAXES
29.6.1 IN GENERAL. With respect to any purchase hereunder of
services, facilities or arrangements, if any federal, state or local tax, fee,
surcharge or other tax-like charge (a "Tax") is required or permitted by
Applicable Law to be collected from the purchasing Party by the providing Party,
then (i) the providing Party shall properly bill the purchasing Party for such
Tax, (ii) the purchasing Party shall timely remit such Tax to the providing
Party and (iii) the providing Party shall timely remit such collected Tax to the
applicable taxing authority.
29.6.2 TAXES IMPOSED ON THE PROVIDING PARTY With respect to any
purchase hereunder of services, facilities or arrangements, if any federal,
state or local Tax is imposed by Applicable Law on the receipts of the providing
Party, which Law permits the providing Party to exclude certain receipts
received from sales for resale to a public utility, distributor, telephone
company, local exchange carrier, telecommunications company or other
communications company ("Telecommunications Company"), such exclusion being
based solely on the fact that the purchasing Party is also subject to a tax
based upon receipts ("Receipts Tax"), then the purchasing Party (i) shall
provide the providing Party with notice in writing in accordance with subsection
29.6.6 of this Agreement of its intent to pay the Receipts Tax and (ii) shall
timely pay the Receipts Tax to the applicable tax authority.
29.6.3 TAXES IMPOSED ON CUSTOMERS With respect to any purchase
hereunder of services, facilities or arrangements that are resold to a third
party, if any federal, state or local Tax is imposed by Applicable Law on the
subscriber, end-user, Customer or ultimate consumer ("Subscriber") in connection
with any such purchase, which a Telecommunications Company is required to impose
and/or collect from a Subscriber, then the purchasing Party (i) shall be
required to impose and/or collect such Tax from the Subscriber and (ii) shall
timely remit such Tax to the applicable taxing authority.
29.6.4 LIABILITY FOR UNCOLLECTED TAX, INTEREST AND PENALTY If
the providing Party has not received an exemption certificate and fails to
collect any Tax as required by subsection 29.6.1, then, as between the providing
Party and the purchasing Party, (i) the purchasing Party shall remain liable for
such uncollected Tax and (ii) the providing Party shall be liable for any
interest assessed thereon and any penalty assessed with respect to such
uncollected Tax by such authority. If the providing Party properly bills the
purchasing Party for any Tax but the purchasing Party fails to remit such Tax to
the providing Party as required by subsection 29.6.1, then, as between the
providing Party and the purchasing Party, the purchasing Party shall be liable
for such uncollected Tax and any interest assessed thereon, as well as any
penalty assessed with respect to such uncollected Tax by the applicable taxing
authority. If the providing Party does not collect any Tax as required by
subsection 29.6.1 because the purchasing Party has
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provided such providing Party with an exemption certificate that is later found
to be inadequate by a taxing authority, then, as between the providing Party and
the purchasing Party, the purchasing Party shall be liable for such uncollected
Tax and any interest assessed thereon, as well as any penalty assessed with
respect to such uncollected Tax by the applicable taxing authority. If the
purchasing Party fails to pay the Receipts Tax as required by subsection 29.6.2,
then, as between the providing Party and the purchasing Party, (x) the providing
Party shall be liable for any Tax imposed on its receipts and (y) the purchasing
Party shall be liable for any interest assessed thereon and any penalty assessed
upon the providing Party with respect to such Tax by such authority. If the
purchasing Party fails to impose and/or collect any Tax from Subscribers as
required by subsection 29.6.3, then, as between the providing Party and the
purchasing Party, the purchasing Party shall remain liable for such uncollected
Tax and any interest assessed thereon, as well as any penalty assessed with
respect to such uncollected Tax by the applicable taxing authority. With
respect to any Tax that the purchasing Party has agreed to pay, or is required
to impose on and/or collect from Subscribers, the purchasing Party agrees to
indemnify and hold the providing Party harmless on an after-tax basis for any
costs incurred by the providing Party as a result of actions taken by the
applicable taxing authority to recover the Tax from the providing Party due to
the failure of the purchasing Party to timely pay, or collect and timely remit,
such Tax to such authority. In the event either Party is audited by a taxing
authority, the other Party agrees to cooperate fully with the Party being
audited in order to respond to any audit inquiries in a proper and timely manner
so that the audit and/or any resulting controversy may be resolved
expeditiously.
29.6.5 TAX EXEMPTIONS AND EXEMPTION CERTIFICATES If Applicable
Law clearly exempts a purchase hereunder from a Tax, and if such Law also
provides an exemption procedure, such as an exemption-certificate requirement,
then, if the purchasing Party complies with such procedure, the providing Party
shall not collect such Tax during the effective period of such exemption. Such
exemption shall be effective upon receipt of the exemption certificate or
affidavit in accordance with the terms set forth in subsection 29.6.6. If
Applicable Law clearly exempts a purchase hereunder from a Tax, but does not
also provide an exemption procedure, then the providing Party shall not collect
such Tax if the purchasing Party (i) furnishes the providing Party with a letter
signed by an officer requesting such an exemption and citing the provision in
the Law which clearly allows such exemption and (ii) supplies the providing
Party with an indemnification agreement, reasonably acceptable to the providing
Party (E.G., an agreement commonly used in the industry), which holds the
providing Party harmless on an after-tax basis with respect to its forbearing to
collect such Tax.
29.6.6 If any discount or portion of a discount in price provided
to ACI under this Agreement (including, but not limited to, a wholesale discount
provided for in Exhibit A) is based on anticipated Tax savings to BA because it
was anticipated that receipts from sales of BA services that would otherwise be
subject to a Tax on such receipts could be excluded from such Tax under
Applicable Law because the BA services would be sold to ACI for resale, and BA
is, in fact, required by Applicable Law to pay such Tax on receipts from sales
of BA services to ACI, then, as between BA and ACI, ACI shall be liable for, and
shall indemnify and hold harmless BA against (on an after-tax basis), any such
Tax and any interest and/or penalty
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assessed by the applicable taxing authority on either ACI or BA with respect to
the Tax on BA's receipts.
29.6.7 All notices, affidavits, exemption-certificates or other
communications required or permitted to be given by either Party to the other,
for purposes of this subsection 29.6, shall be made in writing and shall be
delivered in person or sent by certified mail, return receipt requested, or
registered mail, or a courier service providing proof of service, and sent to
the addressees set forth in subsection 29.10 as well as to the following:
To Bell Atlantic: Tax Administration
Bell Atlantic Network Services, Inc.
1717 Arch Street
30th Floor
Philadelphia, PA 19103
To ACI:
ACI Corp.
c/o Katrina Thompson
8787 Complex Drive
Suite 200
San Diego, CA 92123
Either Party may from time to time designate another address or other addressees
by giving notice is accordance with the terms of this subsection 29.6. Any
notice or other communication shall be deemed to be given when received.
29.7 ASSIGNMENT
Either Party may assign this Agreement or any of its rights or
obligations hereunder to a third party, including, without limitation, its
parent or other affiliate, with the other Party's prior written consent, which
consent shall not be unreasonably withheld upon the provision of reasonable
evidence by the proposed assignee that it has the resources, ability, and
authority to provide satisfactory performance under this Agreement. Any
assignment or delegation in violation of this subsection 29.7 shall be void and
ineffective and constitute a default of this Agreement.
29.8 BILLING AND PAYMENT; DISPUTED AMOUNTS
29.8.1 Except as may otherwise be provided in this Agreement, or
as otherwise expressly agreed in writing by the Parties, each Party shall submit
on a monthly basis an itemized statement of charges incurred by the other Party
during the preceding month(s) for services rendered hereunder. Payment of
billed amounts under this Agreement, whether billed on a monthly basis or as
otherwise provided herein, shall be due, in immediately available U.S. funds,
within thirty (30) calendar days of the bill date or within twenty (20)
calendar days from the receipt of the bill, whichever is longer.
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29.8.2 Although it is the intent of both Parties to submit timely
and accurate statements of charges, failure by either Party to present
statements to the other Party in a timely manner shall not constitute a breach
or default, or a waiver of the right to payment of the incurred charges, by the
billing Party under this Agreement, and the billed Party shall not be entitled
to dispute the billing Party's statement(s) based on such Party's failure to
submit them in a timely fashion.
29.8.3 If any portion of an amount due to a Party (the "Billing
Party") under this Agreement is subject to a BONA FIDE dispute between the
Parties, the Party billed (the "Non-Paying Party") shall within sixty (60) days
of its receipt of the invoice containing such disputed amount give notice to the
Billing Party of the amounts it disputes ("Disputed Amounts") and include in
such notice the specific details and reasons for disputing each item. The
Non-Paying Party shall pay when due (i) all undisputed amounts to the Billing
Party and (ii) the Disputed Amount up to the higher of $10,000 or 50% of the
Disputed Amount into an interest bearing escrow account with a third party
escrow agent mutually agreed upon by the Parties. The remaining balance of the
Disputed Amount not placed into escrow shall thereafter be paid, if appropriate,
upon final determination of such dispute.
29.8.4 If the Parties are unable to resolve the issues related to
the Disputed Amounts in the normal course of business within ninety (90) days
after delivery to the Billing Party of notice of the Disputed Amounts, each of
the Parties shall appoint a designated representative that has authority to
settle the dispute and that is at a higher level of management than the persons
with direct responsibility for administration of this Agreement. The designated
representatives shall meet as often as they reasonably deem necessary in order
to discuss the dispute and negotiate in good faith in an effort to resolve such
dispute. The specific format for such discussions will be left to the
discretion of the designated representatives, however all reasonable requests
for relevant information made by one Party to the other Party shall be honored.
29.8.5 If the Parties are unable to resolve issues related to the
Disputed Amounts within forty-five (45) days after the Parties' appointment of
designated representatives pursuant to subsection 29.8.4, or if either Party
fails to appoint a designated representative within forty five (45) days, then
either Party may file a complaint with the Commission to resolve such issues or
proceed with any other remedy pursuant to law or equity. The Commission may
direct release of any or all funds (including any accrued interest) in the
escrow account, plus applicable late fees, to be paid to either Party.
29.8.6 The Parties agree that all negotiations pursuant to this
subsection 29.8 shall remain confidential and shall be treated as compromise and
settlement negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
29.8.7 Any undisputed amounts not paid when due shall accrue
interest from the date such amounts were due at the lesser of (i) one and
one-half percent (1-1/2%) per month or (ii) the highest rate of interest that
may be charged under applicable law.
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29.9 DISPUTE RESOLUTION
Any dispute between the Parties regarding the interpretation or
enforcement of this Agreement or any of its terms shall be addressed by good
faith negotiation between the Parties, in the first instance. Should such
negotiations fail to resolve the dispute in a reasonable time, either Party may
initiate an appropriate action in any regulatory or judicial forum of competent
jurisdiction or such other dispute resolution mechanisms as the Parties may
agree. During any such negotiation or action, each Party shall continue to
perform its obligations under this Agreement; provided, however, that neither
Party shall be required to act in an unlawful fashion.
29.10 NOTICES
Except as otherwise provided in this Agreement, notices given by one
Party to the other Party under this Agreement shall be in writing and shall be
(a) delivered personally, (b) delivered by express delivery service, (c) mailed,
certified mail or first class U.S. mail postage prepaid, return receipt
requested, or (d) delivered by telecopy to the following addresses of the
Parties:
To ACI: ACI Corp.
c/o Jeffrey Blumenfeld
Blumenfeld and Cohen
1615 M. Street, N.W.
Suite 700
Washington, DC 20036
Phone: 202-955-6300
Fax: 202-955-6460
To BA: Director - Interconnection Services
Bell Atlantic Network Services, Inc.
1320 N. Courthouse Road
2nd Floor
Arlington, VA 22201
Facsimile: 703/974-2183
with a copy to:
Vice President and General Counsel
Bell Atlantic - Pennsylvania, Inc.
1717 Arch Street
32nd Floor
Philadelphia, PA 19103
Facsimile: 215/563-2658
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or to such other address as either Party shall designate by proper notice.
Notices will be deemed given as of the earlier of (i) the date of actual
receipt, (ii) the next business day when notice is sent via express mail or
personal delivery, (iii) three (3) days after mailing in the case of first class
or certified U.S. mail, or (iv) on the date set forth on the confirmation in the
case of telecopy.
29.11 SECTION 252(i) OBLIGATIONS
29.11.1 To the extent , and only to the extent, required under
Applicable Law, BA shall make available without unreasonable delay to ACI any
individual interconnection, service or network element contained in any
agreement to which BA is a party that is approved by the Commission pursuant to
Section 252 of the Act, upon the same rates, terms and conditions, as those
provided in such agreement. In addition, BA shall make available to ACI without
unreasonable delay to ACI any individual interconnection, services or network
elements not provided for in this Agreement, that is contained in any Agreement
to which BA is a party and that has been approved by the Commission pursuant to
Section 252 of the Act, upon the same rates, terms, and conditions as those
provided in such agreement. BA agrees to notify ACI on a quarterly basis via an
"all users of access" letter or similar written notice or by providing
information on a publicly available BA Internet website of any such agreement
once BA has filed it with the Commission for approval.
29.11.2 To the extent the exercise of the foregoing options
requires a rearrangement of facilities by the providing Party, the opting Party
shall be liable for the non-recurring charges associated therewith.
29.11.3 The Party electing to exercise such option shall do so by
delivering written notice to the first Party. Upon receipt of said notice by
the first Party, the Parties shall amend this Agreement to provide the same
rates, terms and conditions to the notifying Party for the remaining term of
this Agreement; provided, however, that the Party exercising its option under
this subsection 29.11 must continue to provide the same services or arrangements
to the first Party as required by this Agreement, subject either to the rates,
terms, and conditions applicable to the first Party in its agreement with the
third party or to the rates, terms, and conditions of this Agreement, whichever
is more favorable to the first Party in its sole determination.
29.11.4 BA represents and warrants that, as of the date of this
Agreement, it has not entered into any comparable Interconnection agreement with
any other CLEC in BA's service territory that is significantly more favorable
than the terms contained herein. BA makes no warranty or representation with
respect to its Interconnection arrangements with its affiliates or ITCs.
29.12 JOINT WORK PRODUCT
Certain of the provisions in this Agreement are the joint work product of
the parties and have been negotiated by the parties and their respective counsel
and those provisions shall be
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fairly interpreted in accordance with its terms and, in the event of any
ambiguities, no inferences shall be drawn against either Party.
29.13 NO THIRD PARTY BENEFICIARIES; DISCLAIMER OF AGENCY
This Agreement is for the sole benefit of the Parties and their permitted
assigns, and nothing herein express or implied shall create or be construed to
create any third-party beneficiary rights hereunder. Except for provisions
herein expressly authorizing a Party to act for another, nothing in this
Agreement shall constitute a Party as a legal representative or agent of the
other Party, nor shall a Party have the right or authority to assume, create or
incur any liability or any obligation of any kind, express or implied, against
or in the name or on behalf of the other Party unless otherwise expressly
permitted by such other Party. Except as otherwise expressly provided in this
Agreement, no Party undertakes to perform any obligation of the other Party,
whether regulatory or contractual, or to assume any responsibility for the
management of the other Party's business.
29.14 NO LICENSE
29.14.1 Except as may be expressly provided herein, nothing in
this Agreement shall be construed as the grant of a license with respect to any
patent, copyright, trademark, trade name, trade secret or any other proprietary
or intellectual property now or hereafter owned, controlled or licensable by
either Party. Neither Party may use any patent, copyrightable materials,
trademark, trade name, trade secret or other intellectual property right of the
other Party except in accordance with the terms of a separate license agreement
between the Parties granting such rights.
29.14.2 Neither Party shall have any obligation to defend,
indemnify or hold harmless, or acquire any license or right for the benefit of,
or owe any other obligation or have any liability to, the other Party or its
customers based on or arising from any claim, demand, or proceeding by any third
party alleging or asserting that the use of any circuit, apparatus, or system,
or the use of any software, or the performance of any service or method, or the
provision of any facilities by either Party under this Agreement, alone or in
combination with that of the other Party, constitutes direct, vicarious or
contributory infringement or inducement to infringe, misuse or misappropriation
of any patent, copyright, trademark, trade secret, or any other proprietary or
intellectual property right of any Party or third party. Each Party, however,
shall offer to the other reasonable cooperation and assistance in the defense of
any such claim.
29.14.3 NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT,
THE PARTIES AGREE THAT NEITHER PARTY HAS MADE, AND THAT THERE DOES NOT EXIST,
ANY WARRANTY, EXPRESS OR IMPLIED, THAT THE USE BY THE PARTIES OF THE OTHER'S
FACILITIES, ARRANGEMENTS, OR SERVICES PROVIDED UNDER THIS AGREEMENT SHALL NOT
GIVE RISE TO A CLAIM BY ANY THIRD PARTY OF INFRINGEMENT, MISUSE, OR
MISAPPROPRIATION OF ANY INTELLECTUAL PROPERTY RIGHT OF SUCH THIRD PARTY.
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29.15 TECHNOLOGY UPGRADES
Nothing in this Agreement shall limit BA's ability to upgrade its network
through the incorporation of new equipment, new software or otherwise. BA shall
provide ACI written notice at least ninety (90) days prior to the incorporation
of any such upgrades in BA's network that will materially affect ACI's service,
and shall exercise reasonable efforts to provide at least one hundred eighty
(180) days notice where practicable. In addition, BA shall comply with the FCC
Network Disclosure rules set forth in the FCC Regulations to the extent
applicable. ACI shall be solely responsible for the cost and effort of
accommodating such changes in its own network.
29.16 SURVIVAL
The Parties' obligations under this Agreement which by their nature are
intended to continue beyond the termination or expiration of this Agreement
shall survive the termination or expiration of this Agreement.
29.17 ENTIRE AGREEMENT
The terms contained in this Agreement and any Schedules, Exhibits,
tariffs and other documents or instruments referred to herein, which are
incorporated into this Agreement by this reference, constitute the entire
agreement between the Parties with respect to the subject matter hereof,
superseding all prior understandings, proposals and other communications, oral
or written. Neither Party shall be bound by any preprinted terms additional to
or different from those in this Agreement that may appear subsequently in the
other Party's form documents, purchase orders, quotations, acknowledgments,
invoices or other communications.
29.18 COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original and all of which together shall constitute one and
the same instrument.
29.19 MODIFICATION, AMENDMENT, SUPPLEMENT, OR WAIVER
No modification, amendment, supplement to, or waiver of the Agreement or
any of its provisions shall be effective and binding upon the Parties unless it
is made in writing and duly signed by the Parties. A failure or delay of either
Party to enforce any of the provisions hereof, to exercise any option which is
herein provided, or to require performance of any of the provisions hereof shall
in no way be construed to be a waiver of such provisions or options.
29.20 SEVERABILITY
If any term, condition or provision of this Agreement is held to be
invalid or unenforceable for any reason, such invalidity or unenforceability
shall not invalidate the entire Agreement (unless
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such construction would be unreasonable), and the Agreement shall be construed
as if it did not contain the invalid or unenforceable provision or provisions,
and the rights and obligations of each Party construed and enforced accordingly.
29.21 SUCCESSORS AND ASSIGNS
This Agreement shall be binding on and inure to the benefit of the
Parties and their respective legal successors and permitted assigns.
29.22 PUBLICITY
Neither Party shall use the name of the other Party in connection with
this Agreement in a press release or statement without the prior consent of the
other Party, which consent shall not be unreasonably withheld.
29.23 GOOD FAITH PERFORMANCE
In the performance of their obligations under this Agreement, the Parties
shall cooperate fully and act in good faith and consistently with the intent of
the Act. Where notice, approval or similar action by a Party is permitted or
required by any provision of this Agreement (including, without limitation the
obligation of the Parties to further negotiate the resolution of new or open
issues under this Agreement), such action shall not be unreasonably delayed,
withheld or conditioned.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed as of this 5th day of June, 1998.
ACI CORP. BELL ATLANTIC-
PENNSYLVANIA, INC.
By: /s/ Joseph D. D'Angelo By: /s/ J. Goldberg
------------------------- -------------------------
Printed: Joseph D. D'Angelo Printed: J. Goldberg
-------------------- --------------------
Title: VP and GM Title: President -- TLS
---------------------- ----------------------
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SCHEDULE 1.0
[INTENTIONALLY LEFT BLANK BY MUTUAL AGREEMENT OF THE PARTIES]
1
<PAGE>
SCHEDULE 3.0
INITIAL NETWORK IMPLEMENTATION SCHEDULE FOR BA-PA
In accordance with the provisions of Section 3 of the Agreement, the
Parties shall make their best efforts to meet the following initial Milestones
no later than the listed Dates.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
LATA IN BA-PA MILESTONE DATE
- --------------------------------------------------------------------------------
<S> <C> <C>
LATA ___ LATA Start Date TBD
-----------------------------------------------------------
SS7 Certification, Collocation, Operator TBD
Services/DA Facilities, and NXX(s) Applied For
-----------------------------------------------------------
Parties Agree on Trunking Arrangements for Traffic TBD
Exchange
-----------------------------------------------------------
Valid Access Service Request(s) ("ASRs") for TBD
Traffic Exchange Trunk Groups and Routing
Information Received by BA
-----------------------------------------------------------
Valid Orders for 911 Facilities Received by BA TBD
-----------------------------------------------------------
All Trunks (Traffic Exchange, Operator TBD
Services/DA, 911) Tested and Turned Up
-----------------------------------------------------------
SS7 Certification Achieved;(1) Collocation TBD
Arrangements Complete for Trunk Interconnection
and Access to Network Elements(2)
-----------------------------------------------------------
Arrangements for Alternate-Billed Calls Agreed TBD
Upon
-----------------------------------------------------------
Call-through Testing Completed; "Interconnection TBD
Activation Date"
- --------------------------------------------------------------------------------
</TABLE>
Failure of a Party or the Parties to meet an earlier Milestone Date shall
not relieve either Party of the responsibility to make its best efforts to meet
subsequent Milestone Date(s) in the LATA, unless, and only to the extent that,
the subsequent Milestone Date(s) depend on the timely completion of such earlier
Milestone Date.
For purposes of Section 3, (i) business Telephone Exchange Service shall be
considered "fully operational" in a LATA in BA-PA when ACI has an effective
Tariff for business Telephone Exchange Service in BA-PA and a significant number
of Telephone Exchange Service Customer lines in service for business Telephone
Exchange Service Customers in that LATA in BA-PA that are not affiliates or
employees of either BA or
- -----------------------------------
(1) SS7 certification scheduling depends on actual schedule availability at
time of request. Initial implementation will be multi-frequency until SS7
certification is achieved.
(2) Intervals for IDLC collocation arrangements for VG ULL capability are 60
days for Virtual Collocation and 120 days for Physical Collocation from the date
the arrangement is applied for.
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ACI, and (ii) residential Telephone Exchange Service shall be considered "fully
operational" in a LATA in BA-PA when ACI has an effective Tariff for residential
Telephone Exchange Service in BA-PA and has a significant number of Telephone
Exchange Service Customer lines in service for residential Telephone Exchange
Service Customers in that LATA in BA-PA that are not affiliates or employees of
either BA or ACI.
2
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SCHEDULE 4.0
BA - PA
<TABLE>
<CAPTION>
ACI IPs BA IPs
------- ------
<S> <C>
TBD TBD
</TABLE>
<PAGE>
SCHEDULE 4.5
INTERCONNECTION POINTS FOR DIFFERENT TYPES OF TRAFFIC
Each Party shall provide the other Party with Interconnection to its
network at the following points for transmission, routing and termination. Each
Party shall make available at its Interconnection Points facilities to route the
traffic it receives to the appropriate final destination. Interconnection at a
BA-IP that is a Local Serving Wire Center provides access to all of the
Interconnection Points identified below (except for paragraphs 8 through 11),
via facilities appropriate for the traffic types and destinations identified
below. Compensation for such facilities will be as set forth in Exhibit A or as
provided elsewhere herein.
1. For the termination of Local Traffic or Toll Traffic originated by one
Party's Customer and terminated to the other Party's Customer, at the points set
forth in subsections 4.2 and/or 4.3 of the main body of the Agreement.
2. For the termination of Meet Point Billing Traffic from an IXC to:
(a) ACI, at the ACI-IP in LATA in which the Traffic is to terminate.
(b) BA, at the BA-IP in LATA in which the Traffic is to terminate.
3. For the termination of Transit Traffic from an ITC, wireless carrier,
or other CLEC to:
(a) ACI, at the ACI-IP in which the Traffic is to terminate.
(b) BA, at the BA-IP in LATA in which the Traffic is to terminate.
4. For 911/E911 traffic originated on ACI's network, at the PSAP in areas
where only Basic 911 service is available, or at the BA 911 Tandem Office
serving the area in which the ACI Customer is located, in accordance with
applicable state laws and regulations and PSAP requirements.
5. For Directory Assistance (411 or NPA-555-1212) traffic, at the
applicable BA Local Serving Wire Center or the BA operator services Tandem
Office subtended by such Local Serving Wire Center.
6. For Operator Services (call completion) traffic, at the applicable BA
Local Serving Wire Center or the BA operator services Tandem Office subtended by
such Local Serving Wire Center.
7. For LSV/VCI traffic, at the terminating Party's Local Serving Wire
Center or operator services Tandem Office subtended by such Local Serving Wire
Center.
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8. For SS7 signaling originated by:
(a) ACI, at mutually agreed-upon Signaling Point of
Interconnection(s) ("SPOI") in the LATA in which the Local or Toll Traffic
originates, over CCSAC links provisioned in accordance with Bellcore GR-905 and
Bell Atlantic Supplement Common Channel Signaling Network Interface
Specification (BA_905).
(b) BA, at mutually agreed-upon SPOIs in the LATA in which the Local
or Toll Traffic originates, over a CCSAC links provisioned in accordance with
Bellcore GR-905 and BA-905.
Alternatively, either Party may elect to interconnect for SS7 signaling through
a commercial SS7 hub provider.
9. For 800/888 database inquiry traffic, at any BA Signaling Transfer
Point in the LATA in which the originating ACI Wire Center is located, over a
CCSAC link. Alternatively, ACI may elect to interconnect through a commercial
SS7 hub provider.
10. For Line Information Database ("LIDB") inquiry traffic, at any BA
Signaling Transfer Point in the LATA in which the LIDB is located, over a CCSAC
link. Alternatively, ACI may elect to interconnect through a commercial SS7 hub
provider.
11. For any other type of traffic, at reasonable points to be agreed upon
by the Parties, based on the network architecture of the terminating Party's
network.
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SCHEDULE 6.3
RATE ELEMENTS UNDER MEET POINT BILLING
INTERSTATE ACCESS - TERMINATING TO OR ORIGINATING FROM ACI CUSTOMERS
RATE ELEMENT BILLING COMPANY
- ------------ ---------------
Carrier Common Line ACI
Local Switching ACI
Interconnection Charge ACI
Local Transport Facility/
Tandem Switched Transport Per Mile Based on negotiated billing
percentage (BIP)
Tandem Switching BA
Local Transport Termination/
Tandem Switched Transport Fixed BA
Entrance Facility BA
800 Database Query Party that performs query
INTRASTATE ACCESS - TERMINATING TO OR ORIGINATING FROM ACI CUSTOMERS
RATE ELEMENT BILLING COMPANY
- ------------ ---------------
Carrier Common Line ACI
Local Switching ACI
Interconnection Charge ACI
Local Transport Facility/
Tandem Switched Transport Per Mile Based on negotiated billing
percentage (BIP)
Tandem Switching BA
Local Transport Termination/
Tandem Switched Transport Fixed BA
Entrance Facility BA
800 Database Query Party that performs query
<PAGE>
SCHEDULE 11.3
ACCESS TO NETWORK INTERFACE DEVICE
1. Due to the wide variety of NIDs utilized by BA (based on Customer size
and environmental considerations), ACI may access the Customer's Inside Wire by
any of the following means:
(a) Where an adequate length of Inside Wire is present and
environmental conditions permit, Requesting Carrier may remove the Inside Wire
from BA's NID and connect that wire to ACI's NID;
(b) Enter the Customer access chamber or "side" of "dual chamber" NID
enclosures for the purpose of extending a connecterized or spliced jumper wire
from the Inside Wire through a suitable "punch-out" hole of such NID enclosures;
(c) Request BA to make other rearrangements to the Inside Wire
terminations or terminal enclosure on a time and materials cost basis to be
charged to the requesting party (I.E., ACI, its agent, the building owner or the
Customer).
2. If ACI accesses the Customer's Inside Wire as described in Paragraph
1(c) above, the Tariffed time and materials charges will be billed to the
requesting party (I.E., ACI, the building owner or the Customer).
3. In no case shall ACI remove or disconnect BA's loop facilities from
BA's NIDs, enclosures, or protectors.
4. In no case shall ACI remove or disconnect ground wires from BA's NIDs,
enclosures, or protectors.
5. In no case shall ACI remove or disconnect NID modules, protectors, or
terminals from BA's NID enclosures.
6. Maintenance and control of premises wiring (Inside Wire) is the
responsibility of the Customer. Any conflicts between service providers for
access to the Customer's Inside Wire must be resolved by the Customer.
7. Due to the wide variety of NID enclosures and outside plant
environments, BA will work with ACI to develop specific procedures to establish
the most effective means of implementing this Schedule 11.3.
<PAGE>
SCHEDULE 11.4
UNBUNDLED SWITCHING ELEMENTS
LOCAL SWITCHING
The unbundled local Switching Elements include line side and trunk side
facilities (E.G. line and trunk side Ports such as analog and ISDN line side
Ports and DS1 trunk side Ports) plus the features, functions, and capabilities
of the switch. It consists of the line-side Port (including connection between
a loop termination and a switch line card, telephone number assignment, basic
intercept, one primary directory listing, presubscription, and access to 911,
operator services, and directory assistance), line and line group features
(including all vertical features and line blocking options that the switch and
its associated deployed switch software is capable of providing and are
currently offered to BA's local exchange customers), usage (including the
connection of lines to lines, lines to trunks, trunks to lines, and trunks to
trunks), and trunk features (including the connection between the trunk
termination and a trunk card).
BA shall offer, as an optional chargeable feature, daily usage tapes. ACI
may request activation or deactivation of features on a per-port basis at any
time, and shall compensate BA for the non-recurring charges associated with
processing the order. ACI may submit a Bona Fide Request for other switch
features and functions that the switch is capable of providing, but which BA
does not currently provide, or for customized routing of traffic other than
operator services and/or directory assistance traffic. BA shall develop and
provide these requested services where technically feasible with the agreement
of ACI to pay the recurring and non-recurring costs of developing, installing,
updating, providing and maintaining these services.
TANDEM SWITCHING
The unbundled tandem Switching Element includes trunk-connect facilities,
the basic switching function of connecting trunks to trunks, and the functions
that are centralized in Tandem Switches. Unbundled tandem switching creates a
temporary transmission path between interoffice trunks that are interconnected
at a BA Access Tandem for the purpose of routing a call or calls.
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SCHEDULE 12.3
SUPPORT SERVICES FOR RESALE
1. BA OSS SERVICES
1.1 DEFINITIONS
As used in the Schedule 12.3, the following terms shall have the meanings
stated below:
1.1.1 "BA Operations Support Systems" means BA systems for pre-ordering,
ordering, provisioning, maintenance and repair, and billing.
1.1.2 "BA OSS Services" means access to BA Operations Support Systems
functions. The term "BA OSS Services" includes, but is not limited to:
(a) BA's provision of ACI Usage Information to ACI pursuant to Section 1.3
below; and, (b) "BA OSS Information", as defined in Section 1.1.4 below.
1.1.3 "BA OSS Facilities" means any gateways, interfaces, databases,
facilities, equipment, software, or systems, used by BA to provide BA OSS
Services to ACI.
1.1.4 "BA OSS Information" means any information accessed by, or disclosed
or provided to, ACI through or as a part of BA OSS Services. The term "BA
OSS Information" includes, but is not limited to: (a) any Customer
Information related to a BA Customer or a ACI Customer accessed by, or
disclosed or provided to, ACI through or as a part of BA OSS Services; and,
(b) any ACI Usage Information (as defined in Section 1.1.6 below) accessed
by, or disclosed or provided to, ACI.
1.1.5 "BA Retail Telecommunications Service" means any Telecommunications
Service that Bell Atlantic provides at retail to subscribers that are not
Telecommunications Carriers. The term "BA Retail Telecommunications
Service" does not include any exchange access service (as defined in
Section 3(16) of the Act, 47 U.S.C. Section 153(16)) provided by BA.
1.1.6 "ACI Usage Information" means the usage information for a BA Retail
Telecommunications Service purchased by ACI under this Agreement that BA
would record if BA was furnishing such BA Retail Telecommunications Service
to a BA end-user retail Customer.
1.1.7 "Customer Information" means CPNI of a Customer and any other
non-public, individually identifiable information about a Customer or
the purchase by a Customer of the services or products of a Party.
1.2 BA OSS SERVICES
1.2.1 Upon request by ACI, BA shall provide to ACI, pursuant to Section
251(c)(3) of the Act, 47 U.S.C. Section 251(c)(3), BA OSS Services.
1.2.2 Subject to the requirements of Applicable Law, BA Operations Support
Systems, BA Operations Support Systems functions, BA OSS Facilities, BA OSS
Information, and the BA OSS Services that will be offered by BA, shall be
as determined by BA. Subject to the requirements of Applicable Law,
(including, where applicable, the disclosure requirements of Sections
29.15, 11.8.4 as well as any disclosure requirements imposed by the
Commission, FCC or a court of competent jurisdiction). BA shall have the
right to change BA Operations Support Systems, BA Operations Support
Systems functions, BA OSS
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Facilities, BA OSS Information, and the BA OSS Services, from time-to-time,
without the consent of ACI. .
1.3 ACI USAGE INFORMATION
1.3.1 Upon request by ACI, BA shall provide to ACI, pursuant to Section
251(c)(3) of the Act, 47 U.S.C. Section 251(c)(3), ACI Usage Information.
1.3.2 ACI Usage Information will be available to ACI through the
following:
(a) Daily Usage File on Data Tape.
(b) Daily Usage File through Network Data Mover ("NDM").
(c) Daily Usage File through Centralized Message Distribution System
("CMDS").
1.3.3.1 ACI Usage Information will be provided in a Bellcore Exchange
Message Records ("EMR") format.
1.3.3.2 Daily Usage File Data Tapes provided pursuant to Section 1.3.2(a)
above will be issued each day, Monday through Friday, except holidays
observed by BA.
1.3.4 Except as stated in this Section 1.3, subject to the requirements of
Applicable Law, the manner in which, and the frequency with which, ACI
Usage Information will be provided to ACI shall be determined by BA.
1.5 ACCESS TO AND USE OF BA OSS FACILITIES
1.5.1 BA OSS Facilities may be accessed and used by ACI only to the extent
necessary for ACI's access to and use of BA OSS Services pursuant to the
Agreement.
1.5.2 BA OSS Facilities may be accessed and used by ACI only to provide
Telecommunications Services to ACI Customers.
1.5.3 ACI shall restrict access to and use of BA OSS Facilities to ACI.
This Schedule 12.3 does not grant to ACI any right or license to grant
sublicenses to other persons, or permission to other persons (except ACI's
employees, agents and contractors, in accordance with Section 1.5.7 below),
to access or use BA OSS Facilities.
1.5.4 ACI shall not (a) alter, modify or damage the BA OSS Facilities
(including, but not limited to, BA software), (b) copy, remove, derive,
reverse engineer, or decompile, software from the BA OSS Facilities, or (c)
obtain access through BA OSS Facilities to BA databases, facilities,
equipment, software, or systems, which are not offered for ACI's use under
this Schedule 12.3.
1.5.5 ACI shall comply with all practices and procedures established by BA
for access to and use of BA OSS Facilities (including, but not limited to,
BA practices and procedures with regard to security and use of access and
user identification codes).
1.5.6 All practices and procedures for access to and use of BA OSS
Facilities, and all access and user identification codes for BA OSS
Facilities: (a) shall remain the property of BA; (b) shall be used by ACI
only in connection with ACI's use of BA OSS Facilities permitted by this
Schedule 12.3; (c) shall be treated by ACI as Confidential Information of
BA pursuant to subsection 29.4 of the Agreement; and, (d) shall be
destroyed or returned by ACI to BA upon the earlier of request by BA or the
expiration or termination of the Agreement.
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1.5.7 ACI's employees, agents and contractors may access and use BA OSS
Facilities only to the extent necessary for ACI's access to and use of the
BA OSS Facilities permitted by this Agreement. Any access to or use of BA
OSS Facilities by ACI's employees, agents, or contractors, shall be subject
to the provisions of the Agreement, including, but not limited to,
subsection 29.4 thereof and Sections 1.5.6 and 1.6.3.3 of this Schedule
12.3.
1.6 BA OSS INFORMATION
1.6.1 Subject to the provisions of this Schedule 12.3 and Applicable Law,
BA grants to ACI a non-exclusive license to use BA OSS Information.
1.6.2 All BA OSS Information shall at all times remain the property of BA.
Except as expressly stated in this Schedule 12.3, ACI shall acquire no
rights in or to any BA OSS Information.
1.6.3.1 The provisions of this Section 1.6.3 shall apply to all BA OSS
Information, except (a) ACI Usage Information, (b) CPNI of ACI, and (c)
CPNI of a BA Customer or a ACI Customer, to the extent the Customer has
authorized ACI to use the Customer Information.
1.6.3.2 BA OSS Information may be accessed and used by ACI only to provide
Telecommunications Services to ACI Customers.
1.6.3.3 ACI shall treat BA OSS Information that is designated by BA,
through written or electronic notice (including, but not limited to,
through the BA OSS Services), as "Confidential" or "Proprietary" as
Confidential Information of BA pursuant to subsection 29.4 of the
Agreement.
1.6.3.4 Except as expressly stated in this Schedule 12.3, this Agreement
does not grant to ACI any right or license to grant sublicenses to other
persons, or permission to other persons (except ACI's employees, agents or
contractors, in accordance with Section 1.6.3.5 below, to access, use or
disclose BA OSS Information.
1.6.3.5 ACI's employees, agents and contractors may access, use and
disclose BA OSS Information only to the extent necessary for ACI's access
to, and use and disclosure of, BA OSS Information permitted by this
Schedule 12.3. Any access to, or use or disclosure of, BA OSS Information
by ACI's employees, agents or contractors, shall be subject to the
provisions of this Agreement, including, but not limited to, subsection
29.4 of the Agreement and Section 1.6.3.3 above.
1.6.3.6 ACI's license to use BA OSS Information shall expire upon the
earliest of: (a) the time when the BA OSS Information is no longer needed
by ACI to provide Telecommunications Services to ACI Customers; (b)
termination of the license in accordance with this Schedule 12.3; or (c)
expiration or termination of the Agreement.
1.6.3.7 All BA OSS Information received by ACI shall be destroyed or
returned by ACI to BA, upon expiration, suspension or termination of the
license to use such BA OSS Information.
1.6.4 Unless sooner terminated or suspended in accordance with the
Agreement or this Schedule 12.3 (including, but not limited to, subsection
22.3 of the Agreement and Section 1.7.1 above), ACI's access to BA OSS
Information through BA OSS Services shall terminate upon the expiration or
termination of the Agreement.
1.6.5.1 Without in any way limiting subsections 18.3 or 29.4 of the
Agreement, BA shall have the right (but not the obligation) to audit ACI to
ascertain whether ACI is complying with the requirements of Applicable Law
and this Agreement with regard to ACI's access to, and use and disclosure
of, BA OSS Information.
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1.6.5.2 Without in any way limiting any other rights BA or ACI may have
under the Agreement or Applicable Law, BA shall have the right (but not the
obligation) to monitor ACI's access to and use of BA OSS Information which
is made available by BA to ACI pursuant to this Agreement, solely for the
purpose of ascertaining whether ACI is complying with the requirements of
Applicable Law and this Agreement, with regard to ACI's access to, and use
and disclosure of, such BA OSS Information. The foregoing right shall
include, but not be limited to, the right (but not the obligation) to
electronically monitor ACI's access to and use of BA OSS Information which
is made available by BA to ACI through BA OSS Facilities.
1.6.5.3 Information obtained by BA pursuant to this Section 1.6.5 shall be
treated by BA as Confidential Information of ACI pursuant to subsection
29.4 of the Agreement; provided that, BA shall have the right (but not the
obligation) to use and disclose information obtained by BA pursuant to this
Section 1.6.5 to enforce BA's rights under the Agreement or Applicable Law.
1.6.6 ACI acknowledges that the BA OSS Information, by its nature, is
updated and corrected on a continuous basis by BA, and therefore that BA
OSS Information is subject to change from time to time.
1.7 LIABILITIES AND REMEDIES
1.7.1 Any breach by ACI, or ACI's employees, agents or contractors, of the
provisions of Sections 1.5 or 1.6 above shall be deemed a material breach
of the Agreement. In addition, if ACI or an employee, agent or contractor
of ACI at any time breaches a provision of Sections 1.5 or 1.6 above and
such breach continues for more than ten (10) days after written notice
thereof from BA, then, except as otherwise required by Applicable Law, BA
shall have the right, upon notice to ACI, to suspend the license to use BA
OSS Information granted by Section 1.6.1 above and/or the provision of BA
OSS Services, in whole or in part.
1.7.2 ACI agrees that BA would be irreparably injured by a breach of
Sections 1.5 or 1.6 above by ACI or the employees, agents or contractors
of ACI, and that BA shall be entitled to seek equitable relief, including
injunctive relief and specific performance, in the event of any such
breach. Such remedies shall not be deemed to be the exclusive remedies for
any such breach, but shall be in addition to any other remedies available
under this Agreement or at law or in equity.
1.8 RELATION TO APPLICABLE LAW
The provisions of Sections 1.5, 1.6 and 1.7 above shall be in addition to
and not in derogation of any provisions of Applicable Law, including, but
not limited to, 47 U.S.C. Section 222, and are not intended to constitute a
waiver by BA of any right with regard to protection of the confidentiality
of the information of BA or BA Customers provided by Applicable Law.
1.9 COOPERATION
ACI, at ACI's expense, shall reasonably cooperate with BA in using BA OSS
Services. Such cooperation shall include, but not be limited to, the
following:
1.9.1 Upon request by BA, ACI shall by no later than the fifteenth (15th)
day of each calendar month submit to BA reasonable, good faith estimates
(by central office or other BA office or geographic area designated by BA)
of the volume of each BA Retail Telecommunications Service for which ACI
anticipates submitting orders in each week of the next calendar month.
1.9.2 Upon request by BA, ACI shall submit to BA reasonable, good faith
estimates of other types of transactions or use of BA OSS Services that ACI
anticipates.
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1.9.3 ACI shall reasonably cooperate with BA in submitting orders for BA
Retail Telecommunications Services and otherwise using the BA OSS Services,
in order to avoid exceeding the capacity or capabilities of such BA OSS
Services. The Parties shall take such steps as are commercially reasonable
to alleviate any difficulties or delays in order processing that may occur.
1.9.4 ACI shall participate in cooperative testing of BA OSS Services and
shall provide assistance to BA in identifying and correcting mistakes,
omissions, interruptions, delays, errors, defects, faults, failures, or
other deficiencies, in BA OSS Services.
1.10 BA ACCESS TO INFORMATION RELATED TO ACI CUSTOMERS
1.10.1 To the extent necessary to effectuate the transfer of a Customer
from one carrier to another, either Party shall have the right to access,
use and disclose information related to that Customer that is in either
Party's possession (including, but not limited to, in either Party's OSS
Facilities) to the extent such access, use and/or disclosure has been
authorized by that Customer. Nothing in this section shall alter any
rights that either Party may have to use or access such Customer's
information, as provided under Applicable Laws. All such access, use
and/or disclosure shall be subject to Section 29.4.
1.10.2 If BA obtains the right to access ACI's OSS systems, ACI agrees to
negotiate terms for such access.
2. BELL ATLANTIC PRE-OSS SERVICES
2.1 As used in this Schedule 12.3, "BA Pre-OSS Service" means a service
which allows the performance of an activity which is comparable to an
activity to be performed through a BA OSS Service and which BA offers to
provide to ACI prior to, or in lieu of, BA's provision of the BA OSS
Service to ACI. The term "BA Pre-OSS Service" includes, but is not limited
to, the activity of placing orders for BA Retail Telecommunications
Services through a telephone facsimile communication.
2.2 Subject to the requirements of Applicable Law, (including, where
applicable, the disclosure requirements of Sections 29.15, 11.8.4 as well
as any disclosure requirements imposed by the Commission, FCC or a court of
competent jurisdiction), the BA Pre-OSS Services that will be offered by BA
shall be as determined by BA and BA shall have the right to change BA
Pre-OSS Services, from time-to-time, without the consent of ACI.
2.3 Subject to the requirements of Applicable Law, the prices for BA
Pre-OSS Services shall be as determined by BA and shall be subject to
change by BA from time-to-time.
2.4 The provisions of Sections 1.5 through 1.9 above shall also apply to
BA Pre-OSS Services. For the purposes of this Section 2.4: (a) references
in Sections 1.5 through 1.9 above to BA OSS Services shall be deemed to
include BA Pre-OSS Services; and, (b) references in Sections 1.5 through
1.9 above to BA OSS Information shall be deemed to include information made
available to ACI through BA Pre-OSS Services.
3. RATES AND CHARGES
The prices for the foregoing services shall be as set forth in BA's
Tariffs or, in the absence of an applicable BA Tariff price, in Exhibit
A or, if not set forth in either, as may be determined by BA from time
to time, subject to any necessary Commission approval or if no such
approval is required, negotiation of the Parties. If BA at any time
offers another resale support service the prices for which are not
stated in BA's Tariffs or Exhibit A, BA shall have the right to revise
Exhibit A to add such prices, subject to any necessary Commission
approval or if no such approval is required, negotiation of the Parties.
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SCHEDULE 13.6
NON-RECURRING CHARGE INSTALLMENT PAYMENT OPTION FOR
COLLOCATION AND CENTRAL OFFICE SWITCH DIALING PLANS
1. Subject to the terms and conditions specified below, ACI may, at its
option, elect to pay nonrecurring charges for collocation and central office
switch dialing plans (if applicable) on an installment basis over an 18 month
period.
2. ACI will be eligible for this payment option only if ACI and its affiliates
(as affiliates are defined in the Act), if any, have gross revenue of less than
$2 billion per year arising from the provision of telecommunications services or
facilities at the time the order is placed. BA may require ACI to establish its
eligibility under this section to BA's reasonable satisfaction.
3. The following non-recurring charges are subject to this installment payment
option:
(a) For physical collocation: all elements associated with conditioning
the space for collocation room construction (including but not limited to
power plant upgrades, HVAC and asbestos removal), cage construction,
overhead lighting and AC outlet, as well as cable installation.
(b) For virtual collocation: all elements associated with equipment
installation and cable installation.
(c) All non-recurring charges associated with office dialing plans.
4. For physical collocation, the first payment will reflect 20% of the
estimate rendered for construction of the room (common area), or pro rata amount
if the room has already been built. Eighteen subsequent monthly payments will
commence once the collocation site is complete (subject to tariffed interval)
and will be based on the balance of room construction plus cage construction,
overhead lighting, AC outlet and cable installation charges.
5. For virtual collocation, the first payment will reflect 20% of the total
estimated cost for the entire virtual collocation arrangement. Eighteen
subsequent monthly payments will commence once the collocation site is complete
and service is rendered (subject to tariffed interval) and will be based on the
balance of charges due.
6. For office dialing plans, the first payment will reflect 20% of the
estimate to develop and implement the plan. Eighteen subsequent monthly
payments will commence once the plan is in place (usually between 60 and 120
days).
7. The amount of each subsequent monthly installment payment shall equal the
total remaining non-recurring charge that would otherwise apply, divided by 18
payments, and increased by an annual factor of 13.9%. This factor is intended
to reflect BA's cost of money (11.9%) and anticipated bad debt (2%) for a total
of 13.9%. The result is that each of the 18 payments shall consist of 6.12% of
the original total amount of non-recurring charge before deduction of the
initial 20% payment. An additional payment of $199.10 per month will apply for
the duration of the installment period, based on the costs to BA of
administering the installment option.
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8. The charges under this installment option are designed to be revenue
neutral to BA compared to the payment of a one-time charge, and are subject to
periodic prospective adjustments as often as quarterly to reflect actual bad
debt experience, churn rates, administrative costs, or changes in the cost of
money.
9. If the service is removed before all installment payments have been made,
the remaining unpaid amount of the non-recurring charge shall be due and
payable.
10. This installment payment option is offered by BA in fulfillment of a
condition imposed by the FCC in approving the merger of Bell Atlantic
Corporation and NYNEX Corporation. The availability, terms and conditions of
this payment option are subject to change based on any change in, or definitive
reinterpretation of, the underlying merger condition.
11. Unless expressly renewed by BA, this installment payment option will not be
available for orders with due dates after August 14, 2001, according to standard
intervals.
12. Service provided under this installment payment option is subject to all
other terms and conditions of this Agreement or applicable tariffs, including
those relating to deposits, billing, form of payment, late payment charges, and
dispute resolution, if any. ACI hereby grants to BA a continuing security
interest in and to all of ACI's personal property including ACI's now-owned and
hereafter acquired accounts, goods, general intangibles, equipment, inventory,
and contract rights and in the proceeds and products thereof. The security
interest granted hereby is to secure payment and performance of the obligations
of ACI hereunder. ACI hereby agrees to execute all documents, including
financing statements, required by BA to evidence, perfect and enforce the
security interest granted hereunder. In the event of a default, BA shall have
all rights and remedies available to it under the Uniform Commercial Code in
addition to any rights and remedies available under law or equity.
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SCHEDULE 27.0
PERFORMANCE MONITORING REPORTS, STANDARDS AND REMEDIES
1. Performance Monitoring Reports
1.1. Subject to the provisions of this Schedule 27.0, BA shall provide to ACI
performance monitoring reports ("Performance Monitoring Reports") for services
and facilities provided by Bell Atlantic. Subject to the provisions of Appendix
1, the Performance Monitoring Reports will include the measurements set forth in
subsections (a) through (d) of this Section 1.1, to the extent the measurements
set forth in a subsection are applicable to the services set forth in such
subsection: (a) for services provided to Bell Atlantic's retail customers, in
the aggregate, the measurements stated in Appendix 1, Section 6, "Retail"; (b)
for services and facilities provided to any Bell Atlantic local exchange
affiliate purchasing Interconnection,(1) if Bell Atlantic decides to operate a
wholesale carrier, the measurements stated in Appendix 1, Section 2, "Unbundled
Network Elements", Section 3, "Resale", and Section 4, "Network Interconnection
Trunks"; (c) for services and facilities provided to carriers purchasing
Interconnection, in the aggregate, the measurements stated in Appendix 1,
Section 1, "OSS", Section 2, "Unbundled Network Elements", Section 3, "Resale",
Section 4, "Network Interconnection Trunks", and Section 5, "CLEC Billing"; and,
(d) for services and facilities provided to ACI, the measurements stated in
Appendix 1, Section 2, "Unbundled Network Elements", Section 3, "Resale", and
Section 4, "Network Interconnection Trunks".(2)
1.2 The Performance Monitoring Reports shall be provided on a calendar quarter
basis (January through March, April through June, July through September,
October through December) with monthly information detail. The Performance
Monitoring Reports shall be provided within forty-five (45) days after the
completion of each calendar quarter. The first Performance Monitoring Reports
shall cover the calendar quarter of July through September, 1998.
2. Performance Metrics, Standards and Remedies
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(1) As used in this Schedule 27.0, Section 1.1, "Interconnection" includes
interconnection, transport and termination, services for resale, and/or access
to unbundled network elements, under Section 251 of the Act, as amended.
(2) The measurements listed in subsections (b), (c) and (d), do not include
Section 4, "Network Interconnection Trunks", Measurement 19, "% Common Final
Trunk Blockage". The measurements listed in subsections (b) and (d) do not
include Section 2, "Unbundled Network Elements", Measurement 7, "% Flow Through
Orders", and Section 3, "Resale", Measurement 7, "% Flow Through Orders".
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2.1 Appendix 2 sets out performance standards for 21 service quality
measurement items ("Performance Metrics") listed in the Performance Monitoring
Reports. BA shall measure on a calendar quarter basis BA's performance for each
Performance Metric for service provided to ACI.
2.2 If for any calendar quarter BA fails to meet the standard for a Performance
Metric for service provided to ACI, BA will conduct an investigation with regard
to the failure. The investigation will review the validity of the measurement
for the Performance Metric, and, if the measurement is concluded to be valid,
identify the cause of the failure. After identifying the cause of the failure,
BA will take commercially reasonable action to correct the failure resulting
from such cause. ACI shall provide all information and support reasonably
requested by BA in order to enable BA to conduct the investigation and to
correct any failure.
2.3.1 BA shall not be obligated to take investigative or corrective action
pursuant to Section 2.2, above, to the extent the failure to meet the standard
for a Performance Metric is caused by a Delaying Event. As used in this
Schedule 27.0, "Delaying Event" means: (a) a failure by ACI to perform any of
its obligations set forth in this Agreement; (b) any delay, act or failure to
act by ACI or a customer, end-user, agent, affiliate, representative, vendor, or
contractor of ACI; (c) any Force Majeure Event as defined in Section 28.3; (d)
any event, delay, act or failure to act, beyond the reasonable control of BA;
or, (e) such other event, delay, act or failure to act upon which the Parties
may agree. In calculating a Performance Metric, BA may adjust the performance
data to exclude any negative effect upon BA's meeting the standard for the
Performance Metric caused by a Delaying Event. If, pursuant to this Section
2.3.1, BA adjusts performance data to exclude a negative effect upon BA's
meeting the standard for a Performance Metric caused by a Delaying Event, BA
shall provide to ACI a reasonably detailed description of the adjustment. If
ACI disputes the appropriateness of the adjustment, either Party may seek
resolution of the dispute in accordance with Section 28.11 of the Agreement.
2.3.2 BA shall not be obligated to take investigative or corrective action
pursuant to Section 2.2 for any Performance Metric that shows a failure to meet
a performance standard if BA can reasonably show that (a) the measurement for
the Performance Metric does not have a statistically valid basis, or (b) the
data measured for service provided to ACI cannot be validly compared to the
measurement to which Appendix 2 specifies such data is to be compared (e.g., the
measurement for service provided to BA retail customers). If, pursuant to the
preceding sentence of this Section 2.3.2, BA excludes from action under Section
2.2 any Performance Metric, BA shall provide to ACI a reasonably detailed
explanation of the
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basis for the exclusion. If ACI disputes the appropriateness of the exclusion,
either Party may seek resolution of the dispute in accordance with Section 28.11
of the Agreement.
2.3.3 BA may exclude from consideration in calculating Performance Metrics any
activities where ACI has requested a date due or other performance interval
different from (greater or less than) that which BA provides for its own retail
customers or its other telecommunications carrier customers.
2.3.4 BA shall not be obligated to take investigative or corrective action
pursuant to Section 2.2 for any Performance Metric where the data for two or
more months in a calendar quarter have been excluded from consideration pursuant
to the provisions of this Agreement.
2.4 For each Performance Metric related to UNE or Resale Services that requires
calculation of a percentage, a minimum of 200 items per calendar quarter for the
denominator shall be a prerequisite (e.g., a/200 x 100 = b%). Lack of the
minimum 200 items will result in BA being deemed to have met the standard for
that Performance Metric. For each Performance Metric related to Interconnection
Trunks that requires calculation of a percentage, a minimum of 50 items per
calendar quarter for the denominator shall be a prerequisite (e.g., a/50 x 100 =
b%). Lack of the minimum 50 items will result in BA being deemed to have met
the standard for that Performance Metric.
2.5 As used in Appendix 2 for those Performance Metrics where "Parity" is the
standard, "Parity" will be determined in accordance with Appendix 4,
"Statistical Methodology for Determining 'Parity' Range".
3. Performance Measurements, Standards and Remedies
3.1 Appendix 3 sets forth eight (8) performance categories ("Performance
Categories"). Each Performance Category is composed of one or more performance
measurements, which are listed in the left-hand column of each Performance
Category matrix ("Performance Measurements"). Each Performance Category
point-score, when calculated, will be the sum of the point-scores of the
Performance Measurements composing that Performance Category, and may be "0", a
positive number (+1 or higher), or a negative number (-1 or less).
3.2 BA shall measure on a calendar quarter basis BA's performance for each
Performance Measurement for service provided to ACI. No later than sixty (60)
days after the completion of each calendar quarter, BA shall forward to ACI a
statement showing BA's performance for each Performance Measurement for service
provided to ACI and a calculation of each Performance Category point-score
("Performance Statement").
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3.3 If for any calendar quarter BA fails to obtain a point-score of "0" or
higher for a Performance Measurement for service provided to ACI, BA will
conduct an investigation with regard to the failure. The investigation will
review the validity of the measurement for the Performance Measurement, and, if
the measurement is concluded to be valid, identify the cause of the failure.
After identifying the cause of the failure, BA will take commercially reasonable
action to correct the failure resulting from such cause. ACI shall provide
all information and support reasonably requested by BA in order to enable BA to
conduct this investigation and to correct any failure to obtain a point-score of
"0" or higher for the Performance Measurement.
3.4.1 Subject to the provisions of this Schedule 27.0 and other applicable
provisions of this Agreement, if the point-score for a Performance Category for
service provided to ACI is a negative number (-1 or less) for two (2)
consecutive calendar quarters, BA shall give a billing credit to ACI in the
amount provided for in Appendix 3 ("Performance Credit"). A Performance Credit
shall be given for the second consecutive calendar quarter and for each
subsequent consecutive calendar quarter for which the point-score for the
Performance Category is a negative number (-1 or less). Each Performance
Statement shall include a statement showing any Performance Credit due to ACI.
Each Performance Credit which is due shall be applied to an appropriate ACI bill
no later than thirty (30) days after the Performance Statement stating that the
Performance Credit is due is delivered to ACI.
3.4.2 If the point-score for a Performance Category for service provided to ACI
is a positive number (+1 or more), BA may use the positive point-score for that
Performance Category to off-set a negative point-score for that Performance
Category for the next calendar quarter.
3.4.3.1 BA shall not be obligated to take investigative or corrective action
pursuant to Section 3.3, or to pay a Performance Credit, to the extent the
negative point-score for a Performance Measurement or Performance Category is
caused by a Delaying Event, as defined in Section 2.3.1, above. In calculating
a Performance Measurement, BA may adjust the performance data to exclude any
negative effect on BA's meeting the performance standard for the Performance
Measurement caused by a Delaying Event. If, pursuant to this Section 3.4.3.1,
BA adjusts performance data to exclude a negative effect on BA's meeting the
performance standard for a Performance Measurement caused by a Delaying Event,
BA shall provide to ACI a reasonably detailed description of the adjustment. If
ACI disputes the appropriateness of the adjustment, either Party may seek
resolution of the dispute in accordance with Section 28.11 of the Agreement.
4
<PAGE>
3.4.3.2 BA may exclude from consideration in calculating Performance Category
Point Scores and Performance Credits, and shall not be obligated to take
investigative or corrective action pursuant to Section 3.3 with regard to, any
Performance Measurement that shows a failure to meet a performance standard if
BA can reasonably show that (a) the measurement for the Performance Measurement
does not have a statistically valid basis, or (b) the data measured for service
provided to ACI cannot be validly compared to the measurement to which Appendix
3 specifies such data is to be compared (e.g., the measurement for service
provided to BA retail customers). If, pursuant to the preceding sentence of
this Section 3.4.3.2, BA excludes from consideration in calculating Performance
Category Point Scores and Performance Credits and from action under Section 3.3
any Performance Measurement, BA shall provide to ACI a reasonably detailed
explanation of the basis for the exclusion. If ACI disputes the appropriateness
of the exclusion, either Party may seek resolution of the dispute in accordance
with Section 28.11 of the Agreement.
3.4.3.3 BA may exclude from consideration in calculating Performance
Measurements any activities where ACI has requested a date due or other
performance interval different from (greater or less than) that which BA
provides for its own retail customers or its other telecommunications carrier
customers.
3.4.3.4 BA may also exclude from consideration in calculating Performance
Category point-scores and Performance Credits, and shall not be obligated to
take investigative or corrective action pursuant to Section 3.3 with regard to,
any Performance Measurement where the data for two or more months in a calendar
quarter have been excluded from consideration pursuant to the provisions of this
Agreement.
3.4.4 For each Performance Measurement related to OSS, UNE, Resale Services or
Billing, that requires calculation of a percentage, a minimum of 200 items per
calendar quarter for the denominator shall be a prerequisite (e.g., a/200 x 100
= b%). Lack of the minimum 200 items will result in BA receiving a "0 Points"
score for that Performance Measurement. For each Performance Measurement
related to Interconnection Trunks that requires calculation of a percentage, a
minimum of 50 items per calendar quarter for the denominator shall be a
prerequisite (e.g., a/50 x 100 = b%). Lack of the minimum 50 items will result
in BA receiving a "0 Points" score for that Performance Measurement.
3.4.5 As used in Appendix 3 for those Performance Measurements where "Parity"
is the standard, "Parity" will be determined in accordance with Appendix 4,
"Statistical Methodology for Determining 'Parity' Range".
5
<PAGE>
4. Notwithstanding anything in this Agreement to the contrary, the Performance
Metrics, Performance Metrics standards, Performance Measurements, Performance
Measurements standards, Performance Categories, and Performance Credits,
provided for in this Schedule 27.0 shall also apply to ACI with regard to OSS,
UNE, Resale Services, Interconnection Trunks, and other services and
arrangements, purchased by BA from ACI. ACI shall for OSS, UNE, Resale
Services, Interconnection Trunks, and other services and arrangements, purchased
by BA from ACI, provide to BA Performance Monitoring Reports and Performance
Statements similar to those to be provided by BA to ACI. If ACI fails to meet a
standard for a Performance Metric or a Performance Measurement or incurs a
negative point-score on a Performance Category, ACI shall (a) undertake
correction of the failure, to the same extent as BA would be required to
undertake correction of the failure under this Schedule 27.0, and (b) give
Performance Credits to BA, to the same extent as BA would be required to give
Performance Credits to ACI under this Schedule 27.0.
5. Appendix 1 sets out definitions for terms that are used in this Schedule
27.0. Except as clearly stated otherwise in a particular instance, these
definitions apply throughout this Schedule 27.0.
6. ACI agrees that the information contained in the Performance Reports and the
information contained in the Performance Statements is confidential and
proprietary to BA, and shall be used by ACI solely for internal performance
assessment purposes, for purposes of joint ACI and BA assessments of service
performance, and for reporting to the Commission, the FCC, or courts of
competent jurisdiction, under cover of an agreed-upon protective order, for the
sole purpose of enforcing BA's obligations under this Agreement. ACI shall not
otherwise disclose the information contained in the Performance Reports or
Performance Statements to third-persons.
7. BA shall provide ACI with access to the available data and information
necessary for ACI to verify the accuracy of the Performance Monitoring Reports
provided by BA to ACI. ACI agrees that such data and information is
confidential and proprietary to Bell Atlantic and shall be used by ACI solely
for the purpose of verifying the accuracy of the Performance Monitoring Reports.
ACI shall not disclose such data and information to third-persons. BA shall
be obligated to retain data and information for access by ACI under this Section
7 only for the period of time required by Applicable Laws.
8. In providing Performance Reports to ACI, providing Performance Statements to
ACI, providing ACI with access to data and information pursuant to Section 7,
above, and otherwise performing its obligations under this Schedule 27.0, BA
shall not be obligated, and may decline, to disclose to ACI any individually
identifiable information pertaining to a person other
6
<PAGE>
than ACI, including, but not limited to, any other carrier customer of BA or
any retail customer of BA. However, nothing contained in this Section 8
shall be deemed to limit any right ACI may have: (a) under Section 5.8,
"Call Detail", of the Agreement; or, (b) under Applicable Laws to obtain
Customer Proprietary Network Information (as defined in Section 222 of the
Act, 47 U.S.C. Section 222) from BA with the consent of the end-user customer
to whom such Customer Proprietary Network Information pertains.
9. The Parties acknowledge that this Schedule 27.0 is intended to implement
obligations of BA under the FCC's Memorandum Opinion and Order in "In the
Applications of NYNEX Corporation, Transferor, and Bell Atlantic Corporation,
Transferee, For Consent to Transfer Control of NYNEX Corporation and Its
Subsidiaries", File No. NSD-L-96-10, Released August 14, 1997. This Schedule
27.0 shall be interpreted and construed in a manner consistent with the FCC's
Memorandum Opinion and Order.
7
<PAGE>
SCHEDULE 27.0
APPENDIX 1
PERFORMANCE MONITORING REPORTS
1. OSS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
KEY SERVICE QUALITY MEASUREMENTS NOTES
- -------------------------------------------------------------------------------------------
<S> <C>
OSS:
- -------------------------------------------------------------------------------------------
PRE-ORDER PROCESS:
1. PRE-ORDER RESPONSE TIME: NOT CARRIER SPECIFIC
- -------------------------------------------------------------------------------------------
- a. Customer Service Records
- b. Other Pre-Order (Aggregate of the following):
- Due Date Availability
- Product & Service Availability Information
- Address Validation
- Telephone number availability and reservation
- -------------------------------------------------------------------------------------------
2. AVAILABILITY OF BELL ATLANTIC INTERFACE TO OSS ACCESS: NOT CARRIER SPECIFIC
- -------------------------------------------------------------------------------------------
- % ECG Uptime
- -------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
2. UNBUNDLED NETWORK ELEMENTS ("UNE"):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
KEY SERVICE QUALITY MEASUREMENTS NOTES
- -------------------------------------------------------------------------------------------
<S> <C>
ORDERING PROCESS:
- -------------------------------------------------------------------------------------------
3. ORDER CONFIRMATION TIMELINESS:
- -------------------------------------------------------------------------------------------
POTS:
- -------------------------------------------------------------------------------------------
- a. Average Response Time: Order Confirmation
- Automated (Flow-Through) Orders
- Non-Automated Orders:
- < 10 Lines
- > or = 10 Lines
- -------------------------------------------------------------------------------------------
- b. % On Time - Order Confirmation
- < 10 Lines
- > or = 10 Lines
- -------------------------------------------------------------------------------------------
SPECIALS:
- Average Response Time: Order Confirmation
- Automated (Flow-Through) Orders
- Non-Automated Orders:
- < 10 Lines
- > or = 10 Lines
- -------------------------------------------------------------------------------------------
4. REJECT TIMELINESS
- -------------------------------------------------------------------------------------------
POTS:
- a. Average Response Time - Rejects
- Automated (Flow-Through) Orders
- Non-Automated Orders:
- < 10 Lines
- > or = 10 Lines
- -------------------------------------------------------------------------------------------
- b. % On Time -Rejects
- < 10 Lines
- > or = 10 Lines
- -------------------------------------------------------------------------------------------
SPECIALS:
- Average Response Time - Rejects
- Automated (Flow-Through) Orders
- Non-Automated Orders:
- < 10 Lines
- > or = 10 Lines
- -------------------------------------------------------------------------------------------
5. % REJECTS:
- -------------------------------------------------------------------------------------------
- % Rejects
- -------------------------------------------------------------------------------------------
6. TIMELINESS OF COMPLETION NOTIFICATION:
- -------------------------------------------------------------------------------------------
- Average Response Time - Notice of Completion
- -------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
2. UNBUNDLED NETWORK ELEMENTS:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
KEY SERVICE QUALITY MEASUREMENTS NOTES
- -------------------------------------------------------------------------------------------
<S> <C>
7. % FLOW THROUGH ORDERS TRACKED
NOT CARRIER SPECIFIC
- -------------------------------------------------------------------------------------------
PROVISIONING PROCESS
- -------------------------------------------------------------------------------------------
8. AVERAGE INTERVAL - OFFERED
- -------------------------------------------------------------------------------------------
POTS:
- Avg. Interval Offered -Dispatch
- Avg. Interval Offered - No Dispatch
- -------------------------------------------------------------------------------------------
SPECIALS:
- Avg. Interval Offered
- -------------------------------------------------------------------------------------------
9. AVERAGE INTERVAL - COMPLETED
- -------------------------------------------------------------------------------------------
POTS:
- Avg. Interval Completed - Dispatch
- Avg. Interval Completed - No Dispatch
- -------------------------------------------------------------------------------------------
SPECIALS:
- Avg. Interval Completed
- -------------------------------------------------------------------------------------------
10. % COMPLETED W/IN 5 BUSINESS DAYS - TOTAL
- -------------------------------------------------------------------------------------------
POTS:
- % Completed w/in 5 Days (< 5 Lines):
- -------------------------------------------------------------------------------------------
11. % MISSED INSTALLATION APPOINTMENT -BA REASONS
- -------------------------------------------------------------------------------------------
POTS:
- % Missed Installation Appt. - Dispatch
- % Missed Installation Appt. - No Dispatch
- -------------------------------------------------------------------------------------------
SPECIALS:
- % Missed Installation Appt.
- -------------------------------------------------------------------------------------------
12. % MISSED INSTALLATION APPOINTMENT - FACILITIES
- -------------------------------------------------------------------------------------------
POTS:
- % Missed Installation Appointment - Facilities
- -------------------------------------------------------------------------------------------
SPECIALS:
- % Missed Installation Appointment - Facilities
- -------------------------------------------------------------------------------------------
13. % INSTALLATION TROUBLES W/IN 30 DAYS
- -------------------------------------------------------------------------------------------
POTS:
- % Installation Troubles within 30 days
- -------------------------------------------------------------------------------------------
SPECIALS:
- % Installation Troubles within 30 days
- -------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
2. UNBUNDLED NETWORK ELEMENTS:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
KEY SERVICE QUALITY MEASUREMENTS NOTES
- -------------------------------------------------------------------------------------------
<S> <C>
MAINTENANCE AND REPAIR PROCESS
- -------------------------------------------------------------------------------------------
14. NETWORK TROUBLE REPORT RATE
- -------------------------------------------------------------------------------------------
POTS:
- Trouble Report Rate - Loop
- Trouble Report Rate - Central Office
- -------------------------------------------------------------------------------------------
SPECIALS:
- Network Trouble Report Rate (Loop + CO)
- -------------------------------------------------------------------------------------------
15. % MISSED REPAIR APPOINTMENTS
- -------------------------------------------------------------------------------------------
POTS:
- % Missed Repair Appt - Loop
- % Missed Repair Appt - Central Office
- -------------------------------------------------------------------------------------------
16. MEAN TIME TO REPAIR
- -------------------------------------------------------------------------------------------
POTS:
- Mean Time to Repair - Loop (Run Clock)
- Mean Time to Repair - Central Office (Run Clock)
- -------------------------------------------------------------------------------------------
SPECIALS:
- Mean Time to Repair (Stop Clock)
- -------------------------------------------------------------------------------------------
17. % OUT OF SERVICE > 24 HOURS
- -------------------------------------------------------------------------------------------
POTS:
- % Out of Service > 24 Hours
- -------------------------------------------------------------------------------------------
SPECIALS:
- % Out of Service > 24 Hours
- -------------------------------------------------------------------------------------------
18. % REPEAT REPORTS W/IN 30 DAYS
- -------------------------------------------------------------------------------------------
POTS:
- % Repeat Reports w/in 30 Days
- -------------------------------------------------------------------------------------------
SPECIALS:
- % Repeat Reports w/in 30 Days
- -------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
3. RESALE:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
KEY SERVICE QUALITY MEASUREMENTS NOTES
- -------------------------------------------------------------------------------------------
<S> <C>
3. ORDER CONFIRMATION TIMELINESS:
- -------------------------------------------------------------------------------------------
POTS:
- a. Average Response Time: Order Confirmation
- Automated (Flow-Through) Orders
- Non-Automated Orders:
- < 10 Lines
- > or = 10 Lines
- -------------------------------------------------------------------------------------------
- b. % On Time - Order Confirmation
- < 10 Lines
- > or = 10 Lines
- -------------------------------------------------------------------------------------------
SPECIALS:
- Average Response Time: Order Confirmation
- Automated (Flow-Through) Orders
- Non-Automated Orders:
- < 10 Lines
- > or = 10 Lines
- -------------------------------------------------------------------------------------------
4. REJECT TIMELINESS
- -------------------------------------------------------------------------------------------
POTS:
- a. Average Response Time - Rejects
- Automated (Flow-Through) Orders
- Non-Automated Orders:
- < 10 Lines
- > or = 10 Lines
- -------------------------------------------------------------------------------------------
- b. % On Time -Rejects
- < 10 Lines
- > or = 10 Lines
- -------------------------------------------------------------------------------------------
SPECIALS
- Average Response Time - Rejects
- Automated (Flow Through) Orders
- Non-Automated Orders:
- < 10 Lines
- > or = 10 Lines
- -------------------------------------------------------------------------------------------
5. % REJECTS:
- -------------------------------------------------------------------------------------------
- % Rejects
- -------------------------------------------------------------------------------------------
6. TIMELINESS OF COMPLETION NOTIFICATION:
- -------------------------------------------------------------------------------------------
- Average Response Time - Notice of Completion
- -------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
3. RESALE:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
KEY SERVICE QUALITY MEASUREMENTS NOTES
- -------------------------------------------------------------------------------------------
<S> <C>
7. % FLOW THROUGH ORDERS TRACKED
NOT CARRIER SPECIFIC
- -------------------------------------------------------------------------------------------
PROVISIONING PROCESS
- -------------------------------------------------------------------------------------------
8. AVERAGE INTERVAL - OFFERED
- -------------------------------------------------------------------------------------------
POTS:
- Avg. Interval Offered - Dispatch
- Avg. Interval Offered - No Dispatch
- -------------------------------------------------------------------------------------------
SPECIALS:
- Avg. Interval Offered
- -------------------------------------------------------------------------------------------
9. AVERAGE INTERVAL - COMPLETED
- -------------------------------------------------------------------------------------------
POTS:
- Avg. Interval Completed - Dispatch
- Avg. Interval Completed -No Dispatch
- -------------------------------------------------------------------------------------------
SPECIALS:
- Avg. Interval Completed
- -------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
3. RESALE:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
KEY SERVICE QUALITY MEASUREMENTS NOTES
- -------------------------------------------------------------------------------------------
<S> <C>
10. % COMPLETED W/IN 5 BUSINESS DAYS - TOTAL
- -------------------------------------------------------------------------------------------
POTS:
- % Completed w/in 5 Days (< 5 Lines):
- -------------------------------------------------------------------------------------------
11. % MISSED INSTALLATION APPOINTMENT -BA REASONS
- -------------------------------------------------------------------------------------------
POTS:
- % Missed Installation Appt. (BA) - Dispatch
- % Missed Appt. (BA) - No Dispatch
- -------------------------------------------------------------------------------------------
SPECIALS:
- % Missed Appt. (BA)
- -------------------------------------------------------------------------------------------
12. % MISSED INSTALLATION APPOINTMENT - FACILITIES
- -------------------------------------------------------------------------------------------
POTS:
- % Missed Installation Appointment - Facilities
- -------------------------------------------------------------------------------------------
SPECIALS:
- % Missed Installation Appointment - Facilities
- -------------------------------------------------------------------------------------------
13. % INSTALLATION TROUBLES W/IN 30 DAYS
- -------------------------------------------------------------------------------------------
POTS:
- % Installation Trouble within 30 days
- -------------------------------------------------------------------------------------------
SPECIALS:
- % Installation Trouble within 30 days
- -------------------------------------------------------------------------------------------
MAINTENANCE AND REPAIR PROCESS
- -------------------------------------------------------------------------------------------
14. NETWORK TROUBLE REPORT RATE
- -------------------------------------------------------------------------------------------
POTS:
- Network Trouble Report Rate (Loop + CO)
- -------------------------------------------------------------------------------------------
SPECIALS:
- Network Trouble Report Rate (Loop + CO)
- -------------------------------------------------------------------------------------------
15. % MISSED REPAIR APPOINTMENTS
- -------------------------------------------------------------------------------------------
POTS:
- % Missed Repair Appt - Loop
- % Missed Repair Appt - Central Office
- -------------------------------------------------------------------------------------------
16. MEAN TIME TO REPAIR
- -------------------------------------------------------------------------------------------
POTS:
- Mean Time to Repair (Run Clock)
- -------------------------------------------------------------------------------------------
SPECIALS:
- Mean Time to Repair (Stop Clock)
- -------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
3. RESALE:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
KEY SERVICE QUALITY MEASUREMENTS NOTES
- -------------------------------------------------------------------------------------------
<S> <C>
17. % OUT OF SERVICE > 24 HOURS
- -------------------------------------------------------------------------------------------
POTS:
- % Out of Service > 24 Hours
- -------------------------------------------------------------------------------------------
SPECIALS:
- % Out of Service > 24 Hours
- -------------------------------------------------------------------------------------------
18. % REPEAT REPORTS W/IN 30 DAYS
- -------------------------------------------------------------------------------------------
POTS:
- % Repeat Reports w/in 30 Days
- -------------------------------------------------------------------------------------------
SPECIALS:
- % Repeat Reports w/in 30 Days
- -------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
4. NETWORK INTERCONNECTION TRUNKS:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
KEY SERVICE QUALITY MEASUREMENTS NOTES
- -------------------------------------------------------------------------------------------
<S> <C>
ORDERING PROCESS:
- -------------------------------------------------------------------------------------------
3. ORDER CONFIRMATION TIMELINESS:
- a. Average Response Time: Firm Order Confirmation
- -------------------------------------------------------------------------------------------
- b. % > 10 days
- -------------------------------------------------------------------------------------------
4. REJECT TIMELINESS MANUAL TRACKING
- -------------------------------------------------------------------------------------------
- a. Average Response Time: Rejects
- b. % > 10 days
- -------------------------------------------------------------------------------------------
5. % Rejects:
- -------------------------------------------------------------------------------------------
- % Rejects
- -------------------------------------------------------------------------------------------
6. TIMELINESS OF COMPLETION NOTIFICATION:
- -------------------------------------------------------------------------------------------
- Average Response Time - Notice of Completion MANUAL TRACKING
(REQUIRES SERIAL NUMBER)
- -------------------------------------------------------------------------------------------
PROVISIONING PROCESS
- -------------------------------------------------------------------------------------------
8. AVERAGE INTERVAL - OFFERED
- -------------------------------------------------------------------------------------------
- Average Interval - Offered
- -------------------------------------------------------------------------------------------
9. AVERAGE INTERVAL - COMPLETED
- -------------------------------------------------------------------------------------------
- Average Interval - Completed
- -------------------------------------------------------------------------------------------
10. [INTENTIONALLY OMITTED]
- -------------------------------------------------------------------------------------------
11. % MISSED INSTALLATION APPOINTMENT -BA REASONS
- -------------------------------------------------------------------------------------------
- % Missed Installation Appointment (BA REASONS)
- -------------------------------------------------------------------------------------------
12. % MISSED INSTALLATION APPOINTMENT - FACILITIES
- -------------------------------------------------------------------------------------------
- % Missed Installation Appointment - Facilities
- -------------------------------------------------------------------------------------------
13. % INSTALLATION TROUBLES W/IN 30 DAYS
- -------------------------------------------------------------------------------------------
- % Installation Trouble within 30 days
- -------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
4. NETWORK INTERCONNECTION TRUNKS:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
KEY SERVICE QUALITY MEASUREMENTS NOTES
- -------------------------------------------------------------------------------------------
<S> <C>
MAINTENANCE AND REPAIR PROCESS
- -------------------------------------------------------------------------------------------
14. NETWORK TROUBLE REPORT RATE
- -------------------------------------------------------------------------------------------
- Network Trouble Report Rate
- -------------------------------------------------------------------------------------------
15. [INTENTIONALLY OMITTED]
- -------------------------------------------------------------------------------------------
16. MEAN TIME TO REPAIR
- -------------------------------------------------------------------------------------------
- Mean Time to Repair (Stop Clock)
- -------------------------------------------------------------------------------------------
17. % OUT OF SERVICE > 24 HOURS
- -------------------------------------------------------------------------------------------
- % Out of Service > 24 Hours
- -------------------------------------------------------------------------------------------
18. % REPEAT REPORTS W/IN 30 DAYS
- -------------------------------------------------------------------------------------------
- % Repeat Reports w/in 30 Days
- -------------------------------------------------------------------------------------------
NETWORK PERFORMANCE
- -------------------------------------------------------------------------------------------
19. % COMMON FINAL TRUNK BLOCKAGE
- -------------------------------------------------------------------------------------------
20. % DEDICATED FINAL TRUNK BLOCKAGE
- -------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
5. CLEC BILLING (ALL SERVICES, INTERCONNECTION, UNE AND RESALE):
<TABLE>
- -------------------------------------------------------------------------------------------
BILLING:
- -------------------------------------------------------------------------------------------
<S> <C>
21. TIMELINESS OF DAILY USAGE FEED
- -------------------------------------------------------------------------------------------
- TIMELINESS OF USAGE INFORMATION
- % Usage sent in 3 business days
- % Usage sent in 4 business days
- % Usage sent in 5 business days
- % Usage sent in 8 business days
- -------------------------------------------------------------------------------------------
22. TIMELINESS OF CARRIER BILL
- -------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
6. RETAIL:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
KEY SERVICE QUALITY MEASUREMENTS NOTES
- -------------------------------------------------------------------------------------------
<S> <C>
PROVISIONING PROCESS
- -------------------------------------------------------------------------------------------
8. AVERAGE INTERVAL - OFFERED
- -------------------------------------------------------------------------------------------
POTS:
- Avg. Interval Offered - Dispatch
- Avg. Interval Offered - No Dispatch
- -------------------------------------------------------------------------------------------
SPECIALS:
- Avg. Interval Offered
- -------------------------------------------------------------------------------------------
9. AVERAGE INTERVAL - COMPLETED
- -------------------------------------------------------------------------------------------
POTS:
- Avg. Interval Completed - Dispatch
- Avg. Interval Completed - No Dispatch
- -------------------------------------------------------------------------------------------
SPECIALS:
- Avg. Interval Completed
- -------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
6. RETAIL:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
KEY SERVICE QUALITY MEASUREMENTS NOTES
- -------------------------------------------------------------------------------------------
<S> <C>
10. % COMPLETED W/IN 5 BUSINESS DAYS - TOTAL
- -------------------------------------------------------------------------------------------
POTS:
- % Completed w/in 5 Days (< 5 Lines):
- -------------------------------------------------------------------------------------------
11. % MISSED INSTALLATION APPOINTMENT -BA REASONS
- -------------------------------------------------------------------------------------------
POTS:
- % Missed Installation Appt. (BA) - Dispatch
- % Missed Appt. (BA) - No Dispatch
- -------------------------------------------------------------------------------------------
SPECIALS:
- % Missed Appt. (BA)
- -------------------------------------------------------------------------------------------
12. % MISSED INSTALLATION APPOINTMENT - FACILITIES
- -------------------------------------------------------------------------------------------
POTS:
- % Missed Installation Appointment - Facilities
- -------------------------------------------------------------------------------------------
SPECIALS:
- % Missed Installation Appointment - Facilities
- -------------------------------------------------------------------------------------------
13. % INSTALLATION TROUBLES W/IN 30 DAYS
- -------------------------------------------------------------------------------------------
POTS:
- % Installation Trouble within 30 days
- -------------------------------------------------------------------------------------------
SPECIALS:
- % Installation Trouble within 30 days
- -------------------------------------------------------------------------------------------
MAINTENANCE AND REPAIR PROCESS
- -------------------------------------------------------------------------------------------
14. NETWORK TROUBLE REPORT RATE
- -------------------------------------------------------------------------------------------
POTS:
- Network Trouble Report Rate - Total
- Network Trouble Report Rate - Loop
- Network Trouble Report Rate - Central Office
- -------------------------------------------------------------------------------------------
SPECIALS:
- Network Trouble Report Rate (Loop + CO)
- -------------------------------------------------------------------------------------------
15. % MISSED REPAIR APPOINTMENTS
- -------------------------------------------------------------------------------------------
POTS:
- % Missed Repair Appt. - Loop
- % Missed Repair Appt. - Central Office
- -------------------------------------------------------------------------------------------
16. MEAN TIME TO REPAIR
- -------------------------------------------------------------------------------------------
POTS:
- Mean Time to Repair - Total (Run Clock)
- Mean Time to Repair - Loop (Run Clock)
- Mean Time to Repair - Central Office (Run Clock)
- -------------------------------------------------------------------------------------------
SPECIALS:
- Mean Time to Repair (Stop Clock)
- -------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
6. RETAIL:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
KEY SERVICE QUALITY MEASUREMENTS NOTES
- -------------------------------------------------------------------------------------------
<S> <C>
17. % OUT OF SERVICE > 24 HOURS
- -------------------------------------------------------------------------------------------
POTS:
- % Out of Service > 24 Hours
- -------------------------------------------------------------------------------------------
SPECIALS:
- % Out of Service > 24 Hours
- -------------------------------------------------------------------------------------------
18. % REPEAT REPORTS W/IN 30 DAYS
- -------------------------------------------------------------------------------------------
POTS:
- % Repeat Reports w/in 30 Days
- -------------------------------------------------------------------------------------------
SPECIALS:
- % Repeat Reports w/in 30 Days
- -------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
DEFINITIONS
The following definitions apply to the terms used in this Schedule 27.0.
PRODUCT DEFINITIONS:
- --------------------------------------------------------------------------------
Products: Definition:
- --------------------------------------------------------------------------------
- - POTS services All non-designed lines/circuits that
originate at a customer's premise and
terminate on an OE (switch Office
Equipment). All others are considered
specials. POTS includes Centrex, Basic
ISDN and PBX trunks.
- --------------------------------------------------------------------------------
UNE POTS includes Basic 2-Wire Analog
Loop, Customer specified signaling loops,
Analog Line Port, and Number Portability.
- --------------------------------------------------------------------------------
UNE Loop includes orders for Loop only.
Includes both new loops and "coordinated
cutover" loop orders. "Coordinated
cutover" loops are orders where a live
customer is converted to a CLEC re-using
the outside plant facilities.
Coordination of all parties is necessary
to minimize disruption of service to the
end user
- --------------------------------------------------------------------------------
UNE- OTHER orders include Analog Line
Port and Number Portability orders.
- --------------------------------------------------------------------------------
- - Special Services Special Services ("Specials") are
services or elements that require design
intervention. These include such
services/elements as: high capacity links
(DS1, or DS3), Primary rate ISDN, digital
services, and multiplexing.
- --------------------------------------------------------------------------------
- - Interconnection Trunks Includes switched local interconnection
trunks carrying traffic between BA and
CLEC offices. Includes End Office and
Tandem trunks.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- - Number of Installation Orders Total number of "N", "T", or "C" type
orders. These orders include new orders,
orders where the service is moving to a
different location, or changes for
existing service.
- --------------------------------------------------------------------------------
22
<PAGE>
KEY SERVICE QUALITY MEASUREMENT DEFINITIONS:
- --------------------------------------------------------------------------------
PRE-ORDERING:
- --------------------------------------------------------------------------------
1. Response Time: NOTE: ALL PRE-ORDER MEASURES ARE REPORTED
ON AN AGGREGATED BASIS AND ARE NOT CLEC
SPECIFIC . "Response time" is defined as
time that elapses from the receipt of a
transaction by the gateway to
presentation of the result through the
gateway.
METHODOLOGY: BELL ATLANTIC to sample 10*
transactions per hour from 8 a.m. to 5
p.m. via Sentinel system. Sentinel will
replicate the transaction of a BELL
ATLANTIC service representative going
directly to the OSS as well as a CLEC
representative coming in through ECG.
- --------------------------------------------------------------------------------
- Customer Service Record Customer Service Records can range from 1
to about 200 pages.
BA may combine measurement data for PA
and DE for this measurement.
BA may combine measurement data for DC,
MD, VA and WV for this measurement.
- --------------------------------------------------------------------------------
- Other Pre-Order Includes average response time for (1)
product & service availability, (2) due
date availability, (3) address
validation, and (4) telephone number
availability.
BA may combine measurement data from all
BA--South states (DE, DC, MD, NJ, PA, VA,
WV) for this measurement.
- --------------------------------------------------------------------------------
23
<PAGE>
KEY SERVICE QUALITY MEASUREMENT DEFINITIONS:
- --------------------------------------------------------------------------------
2. OSS Interface Availability "System availability" measures the hours
of actual availability compared to
scheduled availability.
- --------------------------------------------------------------------------------
ORDERING:
- --------------------------------------------------------------------------------
3. Order Confirmation Timeliness:
- --------------------------------------------------------------------------------
- Avg. Response Time: Average response time from EDI or GUI(3)
Automated Orders receipt of a valid service request to EDI
or GUI distribution of order
confirmation. Includes orders received
via EDI or GUI that flow-through to
legacy OSS ordering and provisioning
systems.
- --------------------------------------------------------------------------------
- Avg. Response Time: Non- Average response time from receipt of a
Automated valid service request to distribution of
order confirmation. Includes orders
received via EDI or GUI that require
manual input to legacy OSS ordering and
provisioning systems. Does not include
orders requiring negotiated intervals.
- --------------------------------------------------------------------------------
- Trunks: % > 10 Days For Interconnection Trunks, the percent
of ASR (Access Service Requests) where
the Firm Order Confirmation is sent more
than 10 days after receipt of a valid
Access Service Request (ASR). All ASRs
must be electronically transmitted for
FOC/Reject measure to apply.
- --------------------------------------------------------------------------------
- Application Date/Time Orders received after 12 Noon Eastern
Time will be considered received the next
business day.
- --------------------------------------------------------------------------------
- -----------------
(3) As of the effective date of this Agreement, BA's GUI may not be fully
available for use in the BA-South states (DE, DC, MD, NJ, PA, VA, WV).
Accordingly, references in this Schedule 27.0 to BA's GUI are to BA's GUI when
and to the extent it is available for use by ACI.
24
<PAGE>
KEY SERVICE QUALITY MEASUREMENT DEFINITIONS:
- --------------------------------------------------------------------------------
4. Reject Notice Timeliness:
- --------------------------------------------------------------------------------
- Avg. Response Time - Average response time from EDI or GUI
Automated receipt of a service request to EDI or
GUI distribution of reject or query.
Includes orders received via EDI or GUI
that flow-through to legacy OSS ordering
and provisioning systems.
- --------------------------------------------------------------------------------
- Avg. Response Time - Non- Average response time from EDI or GUI
Automated receipt of a service request to EDI or
GUI distribution of reject or query.
Includes orders received via EDI or GUI
that require manual input to legacy OSS
ordering and provisioning systems.
- --------------------------------------------------------------------------------
5. % Rejects The percent of total orders received that
are rejected or queried by BA.
- --------------------------------------------------------------------------------
6. Timeliness of Completion The average interval between actual order
Notification completion date to the distribution of
order completion notification. The
current process for notification is a
telephone call for UNEs and
Interconnection Trunks. Resale order
completions are transmitted either
electronically via EDI or GUI or via FAX.
Does not include orders requiring
negotiated intervals. This measurement
is currently under development for
Network Interconnection Trunks and will
be furnished for Network Interconnection
Trunks when available.
- --------------------------------------------------------------------------------
7. % Flow Through Orders The number of orders processed via EDI or
GUI directly to legacy ordering OSS
systems without manual intervention as a
percent of total orders.
- --------------------------------------------------------------------------------
PROVISIONING:
- --------------------------------------------------------------------------------
8. Average Interval - Offered Average number of business days between
application date and committed due date.
The application date is the date that a
valid service request is received. For
orders received after 12 Noon Eastern
Time the next business day is considered
the application date. Includes "W" coded
orders only. Does not include orders
requiring negotiated intervals.
- --------------------------------------------------------------------------------
25
<PAGE>
KEY SERVICE QUALITY MEASUREMENT DEFINITIONS:
- --------------------------------------------------------------------------------
9. Average Interval - Completed Average number of business days between
application date and completed date.
Completion date is the field completion
date noted on the Service Order. Includes
"W" coded orders only. Orders completed
late due to a CLEC or CLEC end user
caused delay are excluded from this
performance measure. Does not include
orders requiring negotiated intervals.
- --------------------------------------------------------------------------------
10. % Completed w/in 5 business For POTS orders of less than 5 lines.
days - Total The percentage of lines completed in 5
business days. Includes "W" coded orders
only. Standard interval Unbundled Loop
orders will be excluded from this
measure.
- --------------------------------------------------------------------------------
11. % Missed Installation % of all orders for which there was a
Appointment - BA - Total missed installation appointment caused by
BA. Excludes missed installation
appointments caused by CLEC or end user
delays.
- --------------------------------------------------------------------------------
- % Missed Installation Same as above, for orders that require
Appointment - Dispatch the assignment of loop facilities,
switching office equipment, or both.
- --------------------------------------------------------------------------------
- % Missed Appointment - No Same as above, for orders that require
Dispatch switching translations work only. These
are primarily "feature orders".
- --------------------------------------------------------------------------------
12. % Missed Installation % of all Orders for which there was a
Appointment - Facilities missed installation appointment due to
lack of facilities.
- --------------------------------------------------------------------------------
13. % Installation Troubles w/in Troubles received on lines within one
30 Days month of service order activity as a
percent of lines ordered in one month.
This measurement is currently under
development and will be furnished when
available.
- --------------------------------------------------------------------------------
26
<PAGE>
KEY SERVICE QUALITY MEASUREMENT DEFINITIONS:
- --------------------------------------------------------------------------------
MAINTENANCE:
- --------------------------------------------------------------------------------
14. Network Trouble Report Total Initial Customer Troubles reported
Rate on regulated services by customer, where
the trouble disposition was found to be a
network problem (Disposition Codes 3, 4
and 5) per 100 lines/circuits in service.
Excludes Subsequents reports (additional
customer calls while the trouble is
pending), Customer Provided Equipment
(CPE) troubles, and troubles reported but
not found upon dispatch (Found OK and
Test OK). Also excludes troubles closed
due to customer action. Trouble reports
on unregulated services, such as Voice
Messaging, are excluded.
- --------------------------------------------------------------------------------
- Trouble Report Rate - Loop Same as above, Disposition Codes 3 (Drop
Wire) and 4 (Outside Plant) only.
Troubles found to be in the Outside Plant
facilities.
- --------------------------------------------------------------------------------
- Trouble Report Rate - Same as above, Disposition Code 5
Central Office (Central Office) only. Troubles found to
be within the Central Office, including
translation troubles.
- --------------------------------------------------------------------------------
15. % Missed Repair Appointments For Initial Customer Trouble Reports,
found to be network troubles (disposition
codes, 3, 4 and 5). The BA process for
POTS troubles is to give an "arrive by"
appointment.
- --------------------------------------------------------------------------------
- % Missed Repair Appt. - Same as above, for troubles where a
Loop dispatch was required outside of the BA
Central Office and the trouble was found
in Outside Plant (disposition codes 3
and 4). Troubles where there was both an
inside and an outside dispatch are
included if the final resolution was a
loop trouble.
- --------------------------------------------------------------------------------
- % Missed Repair Appt. - Same as above, for troubles where a
Central Office dispatch may have been required outside
of the BA Central Office, but the trouble
was resolved within the Central Office.
Includes translation type troubles as
well as Central Office type troubles.
- --------------------------------------------------------------------------------
16. Mean Time to Repair For Initial Customer Trouble Reports,
found to be network troubles, the average
duration time from trouble receipt to
trouble clear time. Running clock for
POTS troubles. Stop Clock for Special
troubles.
- --------------------------------------------------------------------------------
17. % Out of Service > 24 Hours Network troubles (disposition codes, 3,
4, and 5) out of service, cleared in
greater than 24 hours, as a percentage of
total network troubles (disposition
codes, 3, 4, and 5) out of service. Out
of Service means that there is no dial
tone, the customer can not call out or
the customer can not be called. The Out
of Service period commences when the
trouble is reported to BA's designated
trouble reporting interface.
- --------------------------------------------------------------------------------
27
<PAGE>
KEY SERVICE QUALITY MEASUREMENT DEFINITIONS:
- --------------------------------------------------------------------------------
18. % Repeat Reports w/in 30 The percent of troubles that originated
days as a disposition code other than customer
action, Front End close out, CPE found
troubles, or a customer code, that have
an additional trouble within 30 days and
a network trouble found disposition code
of 3, 4, or 5.
- --------------------------------------------------------------------------------
NETWORK PERFORMANCE:
- --------------------------------------------------------------------------------
19. % Common Final Trunk Blockage Common Final Trunks carry traffic between
BA end offices and the BA Tandem,
including local traffic to BA customers
as well as CLEC customers.
BLOCKAGE: The system used to measure
trunk performance is TNDS (Total Network
Data System). Monthly trunk blockage
studies are based on a time consistent
busy hour. The percentage of BA trunk
groups exceeding the applicable blocking
design (either B.01 or B.005) will be
reported. For B.01 design, this is trunk
groups exceeding a threshold of about 3%
blocking. For B.005 design, this is
trunk groups exceeding a threshold of
about 2% blocking.
BA may combine measurement data for PA
and DE for this measurement.
- --------------------------------------------------------------------------------
20. % Dedicated Final Trunk DEDICATED FINAL TRUNKS: A dedicated
Blockage final trunk group does not overflow.
These dedicated final trunk groups carry
local traffic from a BA Access Tandem to
a CLEC switch.
BLOCKAGE: The system used to measure
trunk performance is TNDS (Total Network
Data System). Monthly trunk blockage
studies are based on a time consistent
busy hour. The percentage of BA to CLEC
dedicated final trunk groups exceeding
the applicable blocking design (either
B.01 or B.005) will be reported. For
B.01 design, this is trunk groups
exceeding a threshold of about 3%
blocking. For B.005 design, this is
trunk groups exceeding a threshold of
about 2% blocking.
BA may combine measurement data for PA
and DE for this measurement.
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
BILLING:
- --------------------------------------------------------------------------------
21. Timeliness of Daily Usage Measures the number of business days from
Feed the call event date to the output file
header date on the daily usage feed.
Measured in % in 3, 4, 5, and 8 business
days.
- --------------------------------------------------------------------------------
22. Timeliness of Carrier Bill Measures the percent of carrier bills
ready for distribution to the carrier
within 10 business days of the bill date.
- --------------------------------------------------------------------------------
29
<PAGE>
SCHEDULE 27.0
APPENDIX 2
PERFORMANCE METRICS, STANDARDS AND REMEDIES
A. UNBUNDLED NETWORK ELEMENTS
1. ORDERING AND PROVISIONING
- --------------------------------------------------------------------------------
Performance Metric Standard
- --------------------------------------------------------------------------------
% Installation Troubles within 30 Days (POTS) Parity
(UNE KSQM 13)(4)
- --------------------------------------------------------------------------------
% Installation Troubles within 30 Days (Specials) Parity
(UNE KSQM 13)
- --------------------------------------------------------------------------------
2. MAINTENANCE
- --------------------------------------------------------------------------------
Performance Metric Standard
- --------------------------------------------------------------------------------
Mean Time to Repair - Loop (POTS) Parity
(UNE KSQM 16)
- --------------------------------------------------------------------------------
Mean Time to Repair - Central Office (POTS) Parity
(UNE KSQM 16)
- --------------------------------------------------------------------------------
Mean Time to Repair (Specials) Parity
(UNE KSQM 16)
- --------------------------------------------------------------------------------
B. RESALE SERVICES
1. ORDERING AND PROVISIONING
- --------------------------------------------------------------------------------
Performance Metric Standard
- --------------------------------------------------------------------------------
Average Interval Offered (POTS) - Dispatch Parity
(Resale KSQM 8)
- --------------------------------------------------------------------------------
Average Interval Offered (POTS) - No Dispatch Parity
(Resale KSQM 8)
- --------------------------------------------------------------------------------
Average Interval Offered (Specials) Parity
(Resale KSQM 8)
- --------------------------------------------------------------------------------
Average Interval Completed (POTS) - Dispatch Parity
(Resale KSQM 9)
- --------------------------------------------------------------------------------
Average Interval Completed (POTS) - No Dispatch Parity
(Resale KSQM 9)
- --------------------------------------------------------------------------------
- ---------------
(4) "(UNE KSQM 13)" identifies the Key Service Quality Measurement listed in
Appendix 1 which is the basis for measurement of this Performance Metric.
30
<PAGE>
- --------------------------------------------------------------------------------
Average Interval Completed (Specials) Parity
(Resale KSQM 9)
- --------------------------------------------------------------------------------
% Installation Troubles within 30 Days (POTS) Parity
(Resale KSQM 13)
- --------------------------------------------------------------------------------
% Installation Troubles within 30 Days (Specials) Parity
(Resale KSQM 13)
- --------------------------------------------------------------------------------
2. MAINTENANCE
- --------------------------------------------------------------------------------
Performance Metric Standard
- --------------------------------------------------------------------------------
Mean Time to Repair (POTS) Parity
(Resale KSQM 16)
- --------------------------------------------------------------------------------
Mean Time to Repair (Specials) Parity
(Resale KSQM 16)
- --------------------------------------------------------------------------------
C. INTERCONNECTION TRUNKS
1. ORDERING AND PROVISIONING
- --------------------------------------------------------------------------------
Performance Metric Standard
- --------------------------------------------------------------------------------
FOC Timeliness GREATER THAN OR EQUAL TO 90% in 10 Days
(Network Interconnection Trunks {"IT"} KSQM 3.b)
- --------------------------------------------------------------------------------
Rejects Timeliness GREATER THAN OR EQUAL TO 90% in 10 Days
(IT KSQM 4.b)
- --------------------------------------------------------------------------------
Average Interval Offered Parity
(IT KSQM 8)
- --------------------------------------------------------------------------------
Average Interval Completed Parity
(IT KSQM 9)
- --------------------------------------------------------------------------------
D. NETWORK PERFORMANCE
1. FINAL TRUNK GROUP BLOCKING
- --------------------------------------------------------------------------------
Performance Metric Standard
- --------------------------------------------------------------------------------
Dedicated Final Trunk Group Blockage (CLEC Trunks) Parity
(IT KSQM 20)
- --------------------------------------------------------------------------------
Common Final Trunk Group Blockage (Retail Trunks) (B.01 Design Standard
(IT KSQM 19) or B.005 Design
Standard, as
applicable)
- --------------------------------------------------------------------------------
31
<PAGE>
PARITY
"Parity" will be determined in accordance with the statistical methodology set
forth in Appendix 4, "Statistical Methodology for Determining 'Parity' Range".
"Parity" for UNE and Resale Services will be based upon a comparison of BA's
performance for the above Performance Metrics with BA's performance for the
appropriate corresponding Retail measurements set forth in Appendix 1, or, in
the absence of appropriate corresponding Retail measurements set forth in
Appendix 1, Retail measurements as reasonably determined and provided by BA.
"Parity" for "Dedicated Final Trunk Group Blockage (CLEC Trunks)" will be based
upon a comparison of BA's performance for the above Performance Metric with BA's
performance for the appropriate corresponding measurement for BA's comparable
retail trunks, as reasonably determined and provided by BA.
DEFINITIONS, CONDITIONS, REQUIREMENTS & EXCLUSIONS FOR APPENDIX 2
See, "UNE Definitions, Conditions, Requirements & Exclusions", "Resale
Definitions, Conditions, Requirements & Exclusions", "Interconnection Trunk
Definitions, Conditions, Requirements & Exclusions", and "Billing Definitions,
Conditions, Requirements & Exclusions", in Appendix 3, which are incorporated
here by reference. As used in this Appendix 2, references to Performance
Measurements in "UNE Definitions, Conditions, Requirements & Exclusions",
"Resale Definitions, Conditions, Requirements & Exclusions", "Interconnection
Trunk Definitions, Conditions, Requirements & Exclusions", and "Billing
Definitions, Conditions, Requirements & Exclusions", in Appendix 3, shall be
deemed to be references to Performance Metrics.
RESALE SERVICES
1. Ordering and Provisioning. Average Interval Offered and Average Interval
Completed Performance Measurements do not include orders with negotiated
intervals.
INTERCONNECTION TRUNKS
1. FOC and Rejects measurements apply only to electronically received ASRs.
2. FOC and Rejects measurements apply only to additions to existing trunk
groups, adding less than 96 trunks, with no routing or translations changes.
3. Average Interval Offered measurement comparison is to IXC Feature Group D
switched access trunks provided by BA to IXCs.
4. Average Interval Offered measurement applies only to additions to existing
trunk groups, adding less than 96 trunks, with no routing or translations
changes.
5. Average Interval Completed comparison is to IXC Feature Group D switched
access trunks provided by BA to IXCs.
6. Average Interval Completed measurement applies only to additions to existing
trunk groups, adding less than 96 trunks, with no routing or translations
changes.
32
<PAGE>
SCHEDULE 27.0
APPENDIX 3
PERFORMANCE MEASURMENTS, STANDARDS AND REMEDIES
A. OPERATIONAL SUPPORT SYSTEMS
1. PERFORMANCE CATEGORY 1 -- OSS PRE-ORDER RESPONSE TIME AND AVAILABILITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Performance Measurement Misses Standard Equals Standard Exceeds Standard
- 1 point 0 points + 1 point
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Response Time - Customer Service Records > 8.5 seconds difference 7.0 to 8.5 seconds < 7.0 seconds difference
(OSS KSQM 1.a)(5) difference
- ---------------------------------------------------------------------------------------------------------------------------------
Response Time - Aggregated Other Pre-Order > 8.5 seconds difference 7.0 to 8.5 seconds < 7.0 seconds difference
Transactions difference
(OSS KSQM 1.b)
- ---------------------------------------------------------------------------------------------------------------------------------
Access Platform Availability(1) < 99 % Availability > or = 99% Availability
(OSS KSQM 2)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes (a) scheduled maintenance and (b) unavailability of Operations
Support Systems (e.g., BOSS, Livewire) other than the access platform.
CALCULATION OF PERFORMANCE CREDIT:
TOTAL SCORE:
0 or Greater Points = No Performance Credit
-1 to -2 points = 1 % of OSS Charges for the Measured Calendar Quarter
-3 points = 2 % of OSS Charges for the Measured Calendar Quarter
- ------------------
(5) "(OSS KSQM 1)" identifies the Key Service Quality Measurement listed in
Appendix 1 which is the basis for measurement of this Performance Measurement.
33
<PAGE>
OSS DEFINITIONS, CONDITIONS, REQUIREMENTS & EXCLUSIONS:
The following definitions, conditions, requirements and exclusions shall apply.
In addition, all applicable definitions, conditions, requirements and exclusions
set out in other provisions of this Schedule 27.0 shall apply (including, but
not limited to, definitions, conditions, requirements and exclusions, pertaining
to measurements set out in Appendix 1).
RESPONSE TIME:
1. Performance Measurements and Performance Credits apply only to use of the
ECG gateway or such successor OSS gateway as shall be implemented and designated
for measurement under this Performance Category by Bell Atlantic.
2. Performance Measurements and Performance Credits will be calculated only if
the ECG gateway (or such successor OSS gateway as shall be implemented and
designated for measurement under this Performance Category by Bell Atlantic) has
been fully tested by the Parties and accepted by ACI, and is used by ACI for all
transactions.
3. Performance Measurements apply only to CSR Retrieval and Aggregated Other
Pre-Order Transactions. Aggregated Other Pre-Order Transactions will initially
include Telephone Number Availability and Reservation, and Address Validation.
Product & Service Availability Information and Due Date Availability will be
added in the future.
4. ACI shall provide to BA forecasts of volumes at least six (6) months prior
to the commencement of the measured calendar quarter. Forecasts for UNE and
Resale Services volumes (including both number of orders to be submitted and
number of items of service to be ordered) shall be submitted by ACI for each
month. Forecasts for Interconnection Trunk volumes (including both number of
orders to be submitted and number of items of service to be ordered) shall be
submitted by ACI either (a) for each month or (b) for each quarter, in which
case the quarterly volume will be pro-rated to a monthly volume. If submission
volumes for any one month in a measured calendar quarter vary from forecasted
volumes for such month stated in timely submitted forecasts by more than 10%
(plus or minus), BA may exclude that month from consideration in calculating
Performance Measurements and Performance Credits and determining whether BA is
obligated to take investigative or corrective action under Section 3.3. If ACI
fails to timely provide the forecasts of volumes to BA, BA may exclude
Performance Category 1 and the Performance Measurements in Category 1 from
calculation of Performance Credits and from taking investigative and corrective
action under Section 3.3.
5. When the ACI submitted work load for any one hour in a day is more than
twice (2x) the daily average hour ACI submitted work load(6), all transactions
for that day will be deemed to have at least met "Equals Standard" ("O" Points).
6. These Performance Measurements are not carrier specific.
ACCESS PLATFORM AVAILABILITY:
1. This Performance Measurement is not carrier specific. This Performance
Measurement measures the overall availability performance of the OSS access
platform and is not service or function specific.
2. Performance Measurements and Performance Credits will be calculated only if
the ECG gateway (or such successor OSS gateway as shall be implemented and
designated for measurement under this Performance Category by Bell Atlantic) has
been fully tested by the Parties and accepted by ACI, and is used by ACI for all
transactions.
- ------------------------
(6) In calculating "the daily average hour ACI submitted work load", the
"daily" period used for the calculation shall be deemed to be twelve (12) hours
in length.
34
<PAGE>
B. UNBUNDLED NETWORK ELEMENTS:
1. PERFORMANCE CATEGORY 2 - UNE ORDERING AND PROVISIONING:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Performance Measurement Misses Standard Equals Standard Exceeds Standard
- 1 point 0 points + 1 point
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
POTS - OC Timeliness: < 10 Lines < 89.5 % < or = 24 Hours(1) 89.5 - 90.5% < or = 24 > 90.5% < or = 24 Hours(1)
(UNE KSQM 3.b) Hours(1)
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
POTS - OC Timeliness: > or = 10 Lines < 89.5 % < or = 96 Hours(1) 89.5 - 90.5% < or = 96 > 90.5% < or = 96 Hours(1)
(UNE KSQM 3.b) Hours(1)
- --------------------------------------------------------------------------------------------------------------------------
POTS - Reject Timeliness: < 10 Lines < 89.5 % < or = 24 Hours(1) 89.5 - 90.5% < or = 24 > 90.5% < or = 24 Hours(1)
(UNE KSQM 4.b) Hours(1)
- --------------------------------------------------------------------------------------------------------------------------
POTS - Reject Timeliness: > or = 10 Lines < 89.5 % < or = 96 Hours(1) 89.5 - 90.5% < or = 96 > 90.5% < or = 96 Hours(1)
(UNE KSQM 4.b) Hours(1)
- --------------------------------------------------------------------------------------------------------------------------
Missed Installation Appointments: Moderate to High Parity(2) Moderate to High
POTS - Dispatch probability less than probability better than
(UNE KSQM 11) Parity(2) Parity(2)
- --------------------------------------------------------------------------------------------------------------------------
Missed Installation Appointments: Moderate to High Parity(2) Moderate to High
POTS - No Dispatch probability less than probability better than
(UNE KSQM 11) Parity(2) Parity(2)
- --------------------------------------------------------------------------------------------------------------------------
Missed Installation Appointments: Moderate to High Parity(2) Moderate to High
Specials probability less than probability better than
(UNE KSQM 11) Parity(2) Parity(2)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
OC = Order confirmation
(1) Orders received after 12:00 Noon Eastern Time shall have the "clock" start
at 8:00 a.m. on the next business day.
(2) "Parity" will be determined in accordance with the statistical methodology
set forth in Appendix 4, "Statistical Methodology for Determining 'Parity'
Range". "Parity" will be based upon a comparison of BA's performance for the
above Performance Measurements with BA's performance for the appropriate
corresponding Retail measurements set forth in Appendix 1, or, in the absence of
appropriate corresponding Retail measurements set forth in Appendix 1, Retail
measurements to be reasonably determined and provided by BA.
CALCULATION OF PERFORMANCE CREDIT:
TOTAL SCORE:
0 or Greater Points = No Performance Credits
- -1 to -3 points = 5 % of UNE POTS and Specials Non-Recurring Charges for ACI for
the measured calendar quarter times the Missed Installation Factor(1)
-4 to -5 points = 10 % of UNE POTS and Specials Non-Recurring Charges for ACI
for the measured calendar quarter times the Missed Installation Factor(1)
-6 to -7 points = 15 % of UNE POTS and Specials Non-Recurring Charges for ACI
for the measured calendar quarter times the Missed Installation Factor(1)
(1) Missed Installation Factor = (Missed Installation Appointments for UNE POTS
and Specials provided by BA to ACI for the measured calendar quarter as a
percentage of Installation Appointments for UNE POTS and Specials provided by BA
to ACI for the measured calendar quarter) - (Missed Installation Appointments
for POTS and Specials provided by BA to BA
35
<PAGE>
retail customers for the measured calendar quarter as a percentage of
Installation Appointments for POTS and Specials provided by BA to BA retail
customers for the measured calendar quarter).
If more than 10% of ACI's orders are rejected or queried by BA(7), BA shall not
be obligated to calculate this Performance Category, to pay a Performance Credit
in connection with this Performance Category, or to take investigative or
corrective action under Section 3.3 with regard to any Performance Measurement
in this Performance Category.
- ------------------
(7) Orders that are rejected or queried by BA because of a failure in the
operation of a BA ordering system will not be included in calculations to
determine the percentage of ACI's orders that are rejected or queried by BA.
36
<PAGE>
2. PERFORMANCE CATEGORY 3 - UNE MAINTENANCE:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Performance Measurement Misses Standard Equals Standard Exceeds Standard
- 1 point 0 points + 1 point
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
POTS: % Out of Service > 24 Hours Moderate to High Parity(1) Moderate to High
(UNE KSQM 17) probability less than probability better than
Parity(1) Parity(1)
- -----------------------------------------------------------------------------------------------------------------------------------
SPECIALS: % Out of Service > 24 Hours Moderate to High Parity(1) Moderate to High
(UNE KSQM 17) probability less than probability better than
Parity(1) Parity(1)
- -----------------------------------------------------------------------------------------------------------------------------------
POTS: % Repeat Reports w/in 30 Days Moderate to High Parity(1) Moderate to High
(UNE KSQM 18) probability less than probability better than
Parity(1) Parity(1)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) "Parity" will be determined in accordance with the statistical methodology
set forth in Appendix 4, "Statistical Methodology for Determining 'Parity'
Range". "Parity" will be based upon a comparison of BA's performance for the
above Performance Measurements with BA's performance for the appropriate
corresponding Retail measurements set forth in Appendix 1, or, in the absence of
appropriate corresponding Retail measurements set forth in Appendix 1, Retail
measurements to be reasonably determined and provided by BA.
CALCULATION OF PERFORMANCE CREDIT:
TOTAL SCORE:
0 or Greater Points = No Performance Credit
-1 point = 2 % of UNE POTS and Specials Recurring Charges for ACI for the
measured calendar quarter times the Lines Out of Service Factor(1)
-2 points = 4 % of UNE POTS and Specials Recurring Charges for ACI for the
measured calendar quarter times the Lines Out of Service Factor(1)
-3 points = 6 % of UNE POTS and Specials Recurring Charges for ACI for the
measured calendar quarter times the Lines Out of Service Factor(1)
(1) Lines Out of Service Factor = (Percentage of ACI UNE POTS and Specials lines
network troubles out of service > 24 hours - Percentage of BA retail customer
POTS and Specials lines network troubles out of service > 24 hours) x (ACI UNE
POTS and Specials lines with network troubles out of service > 24 hours, as a
percentage of the measured calendar quarter average total ACI UNE POTS and
Specials lines in service).
ADJUSTMENT OF PERFORMANCE CREDIT:
In the repair/maintenance function, mutual responsibilities exist. The
responsibility for testing unbundled loops and the identification of a required
dispatch for UNE reside with ACI. Reductions will be made in the Performance
Credit if necessary access is not available, or if a dispatch is made and no
trouble is found(8), or if trouble is found to be on the ACI customer's side of
the network demarcation point (e.g., in premises wiring or customer premises
equipment), at a statistically higher rate than BA experiences for BA's own
retail customers.
- ------------------------
(8) BA will not include in calculations to determine reductions in the
Performance Credit a dispatch where no trouble is found if a trouble which
should have been found on such dispatch is found on a subsequent dispatch.
37
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Misses Standard Equals Standard Exceeds Standard
- 1 point 0 points + 1 point
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
% No Access Moderate to High Parity(1) Moderate to High
probability less than probability better than
Parity(1) Parity(1)
- -----------------------------------------------------------------------------------------------------------------------------------
% Found OK or Trouble Found on Customer Premises Moderate to High Parity(1) Moderate to High
probability less than probability better than
Parity(1) Parity(1)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) "Parity" will be determined in accordance with the statistical methodology
set forth in Appendix 4, "Statistical Methodology for Determining 'Parity'
Range".
TOTAL SCORE:
0 or Greater Points = No Adjustment to Maintenance Performance Credit
-1 point = 25 % Reduction of Maintenance Performance Credit
-2 points = 50 % Reduction of Maintenance Performance Credit
38
<PAGE>
UNE DEFINITIONS, CONDITIONS, REQUIREMENTS & EXCLUSIONS:
The following definitions, conditions, requirements and exclusions shall apply.
In addition, all applicable definitions, conditions, requirements and exclusions
set out in other provisions of this Schedule 27.0 shall apply (including, but
not limited to, definitions, conditions, requirements and exclusions, pertaining
to measurements set out in Appendix 1).
ORDERING (OC TIMELINESS AND REJECT TIMELINESS):
1. Unbundled Switching Network Elements are included for measurement after the
establishment of unbundled switching in the switch through the joint
planning/services establishment process.
2. Performance Measurements and Performance Credits will apply only if: (a)
EDI Issue 7 implementing LSOG Issue 2 ordering interface specifications (or such
later ordering interface specifications, supported by BA, as BA shall have made
available for ACI's use) is in place and is being used by ACI for all UNE
ordering which can be performed via EDI; or, (b) BA's GUI is in place and being
used by ACI for all UNE ordering which can be performed via BA's GUI. ACI must
implement later specifications of EDI and later versions of GUI within 90 days
(or such other shorter period as may be required by this Agreement) after BA has
made them available for ACI's use.
3. ACI shall provide to BA forecasts of UNE volumes at least six (6) months
prior to the commencement of the measured calendar quarter. Forecasts for UNE
volumes (including both number of orders to be submitted and number of items of
service to be ordered) shall be submitted by ACI for each month. If submission
volumes for any one month in a measured calendar quarter vary from forecasted
volumes for such month stated in submitted forecasts by more than 10% (plus or
minus), BA may exclude that month from consideration in calculating Performance
Measurements and Performance Credits and determining whether BA is obligated to
take investigative or corrective action under Section 3.3. If ACI fails to
timely provide the forecasts of UNE volumes to BA, BA may exclude Performance
Category 2 and the Performance Measurements in Category 2 from calculation of
Performance Credits and from taking investigative and corrective action under
Section 3.3.
4. When the ACI submitted work load for any one hour in a day is more than
twice (2x) the daily average hour ACI submitted work load(9), all transactions
for that day will be deemed to have at least met "Equals Standard" ("O" Points).
5. OC and Reject Timeliness Performance Measurements do not apply to orders
with negotiated due dates.
- ---------------------
(9) In calculating "the daily average hour ACI submitted work load", the
"daily" period used for the calculation shall be deemed to be twelve (12) hours
in length.
39
<PAGE>
PROVISIONING (MISSED INSTALLATION APPOINTMENTS):
1. ACI Missed Installation Appointments do not include appointments missed or
rescheduled due to the delay, act or omission of ACI, ACI's contractors or
vendors,(10) or ACI's customers (including, but not limited to, inability to
access customer interfaces and terminals).
2. If the Expedited Due Dates(11) for any one month in a measured calendar
quarter exceed 10% of the total appointments for that month, BA will not be
obligated to calculate Performance Category 2 for that month, or the Performance
Measurements in Performance Category 2 for that month, and may exclude
Performance Category 2 for that month, and the Performance Measurements in
Performance Category 2 for that month, from calculation of Performance Credits
and from taking investigative and corrective action under Section 3.3.
3. ACI Missed Installation Appointments will be included in the computation
only if:
a. LOOP ORDERS:
(i) ANI to ACI telephone number, verification successful from DEMARC
by BA field technician.
(ii) All order information submitted by ACI was valid, accurate and
complete (e.g., street address, end user local contact (LCON),
floor/unit number, appropriate ACI transmission equipment assignment
information).
(iii) ACI and ACI's customer were available and ready for service at
appointed date and time.
(iv) Verifiable ACI dial tone and correct ACI telephone number at POT
bay testable by BA technician, by 8:00 a.m. on the date due minus one
(1) day.
(v) Accurate account and end user information was submitted on the
service request.
(vi) Orders were completed as submitted without cancellation after
Order Confirmation.
(vii) ACI and ACI's customer were available for testing and
cooperative coordination as requested by BA.
4. ACI shall provide to BA forecasts of UNE volumes at least six (6) months
prior to the commencement of the measured calendar quarter. Forecasts for UNE
volumes (including both number of orders to be submitted and number of items of
service to be ordered) shall be submitted by ACI for each month. If submission
volumes for any one month in a measured calendar quarter vary from forecasted
volumes for such month stated in submitted forecasts by more than 10% (plus or
minus), BA may exclude that month from consideration in calculating Performance
Measurements and Performance Credits and determining whether BA is obligated to
take investigative or corrective action under Section 3.3. If ACI fails to
timely provide the forecasts of UNE volumes to BA, BA may exclude Performance
Category 2 and the Performance Measurements in Category 2 from calculation of
Performance Credits and from taking investigative and corrective action under
Section 3.3.
5. If more than 10% of ACI's orders in a month fall out of BA's provisioning
systems (i.e., require manual investigation and/or correction), or require
correction of ACI provided information during provisioning, BA may exclude the
Missed Installation Appointments Performance Measurements for that month from
the calculation of calendar quarter Performance Measurements and Performance
Credits.
6. Performance Measurement calculations for provisioning will exclude UNEs
provided pursuant to negotiated installation intervals.
MAINTENANCE:
- --------------------------
(10) For the purposes of Paragraph 1, above, the phrase "ACI's contractors or
vendors" does not include BA.
(11) An "Expedited Due Date" is any due date with a shorter interval than the
standard interval being offered by BA for the transaction at the time the
transaction is requested.
40
<PAGE>
1. Out of Service Over 24 Hours: Excluded will be reports where access was
required but not available during the first 24 hours.
2. Measured Trouble Reports include those found to be in the Network:
Disposition Codes 03 (Drops), 04 (Loops) and 05 (Inside Central Office).
3. UNE loops that meet the standards identified in appropriate BA unbundled
loop Technical References will not be treated as Out of Service.
4. ACI shall establish a toll free 800 number for BA repair technicians to call
for trouble related questions and trouble closeout.
5. The ACI repair center and toll free number must be available 24 hours per
day, seven days per week.
41
<PAGE>
C. RESALE SERVICES:
1. PERFORMANCE CATEGORY 4 - RESALE SERVICES ORDERING AND PROVISIONING:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Performance Measurement Misses Standard Equals Standard Exceeds Standard
- 1 point 0 points + 1 point
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
POTS - OC Timeliness < 10 Lines < 89.5 % < or = 24 Hours(1) 89.5 - 90.5% < or = 24 > 90.5% < or = 24 Hours(1)
(Resale KSQM 3.b) Hours(1)
- ---------------------------------------------------------------------------------------------------------------------------------
POTS - OC Timeliness > or = 10 Lines < 89.5 % < or = 96 Hours(1) 89.5 - 90.5% < or = 96 > 90.5% < or = 96 Hours(1)
(Resale KSQM 3.b) Hours(1)
- ---------------------------------------------------------------------------------------------------------------------------------
POTS - Reject Timeliness < 10 Lines < 89.5 % < or = 24 Hours(1) 89.5 - 90.5% < or = 24 > 90.5% < or = 24 Hours(1)
(Resale KSQM 4.b) Hours(1)
- ---------------------------------------------------------------------------------------------------------------------------------
POTS - Reject Timeliness > or = 10 Lines < 89.5 % < or = 96 Hours(1) 89.5 - 90.5% < or = 96 > 90.5% < or = 96 Hours(1)
(Resale KSQM 4.b) Hours(1)
- ---------------------------------------------------------------------------------------------------------------------------------
Missed Installation Appointments: Moderate to High Parity(2) Moderate to High
POTS - Dispatch probability less than probability better than
(Resale KSQM 11) Parity(2) Parity(2)
- ---------------------------------------------------------------------------------------------------------------------------------
Missed Installation Appointments: Moderate to High Parity(2) Moderate to High
POTS - No Dispatch probability less than probability better than
(Resale KSQM 11) Parity(2) Parity(2)
- ---------------------------------------------------------------------------------------------------------------------------------
Missed Installation Appointments: Moderate to High Parity(2) Moderate to High
Specials probability less than probability better than
(Resale KSQM 11) Parity(2) Parity(2)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
OC = Order Confirmation
(1) Orders Received after 12:00 Noon Eastern Time will have the "clock" start at
8:00 a.m. on the next business day.
(2) "Parity" will be determined in accordance with the statistical methodology
set forth in Appendix 4, "Statistical Methodology for Determining 'Parity'
Range". "Parity" will be based upon a comparison of BA's performance for the
above Performance Measurements with BA's performance for the appropriate
corresponding Retail measurements set forth in Appendix 1, or, in the absence of
appropriate corresponding Retail measurements set forth in Appendix 1, Retail
measurements to be reasonably determined and provided by BA.
CALCULATION OF PERFORMANCE CREDIT:
TOTAL SCORE:
0 or Greater Points = No Performance Credit
-1 to -3 points = 5 % of Resale Services Non-Recurring Charges for ACI for the
measured calendar quarter multiplied by the Missed Installation Factor(1)
-4 to -5 points = 10 % of Resale Services Non-Recurring Charges for ACI for the
measured calendar quarter multiplied by the Missed Installation Factor(1)
-6 to -7 points = 15 % of Resale Services Non-Recurring Charges for ACI for the
measured calendar quarter multiplied by the Missed Installation Factor(1)
(1) Missed Installation Factor = (Missed Installation Appointments for Resale
Services provided by BA to ACI for the measured calendar quarter as a percentage
of Installation Appointments for Resale Services provided by BA to ACI for the
measured calendar quarter) - (Missed Installation Appointments for
corresponding retail services provided by BA to BA retail customers for the
measured calendar quarter as a percentage of Installation Appointments for
corresponding retail services provided by BA to BA retail customers for the
measured calendar quarter).
42
<PAGE>
If more than 10% of ACI's orders are rejected or queried by BA,(12) BA shall not
be obligated to calculate this Performance Category, to pay a Performance Credit
in connection with this Performance Category, or to take investigative or
corrective action under Section 3.3 with regard to any Performance Measurement
in this Performance Category.
2. PERFORMANCE CATEGORY 5 - RESALE SERVICES MAINTENANCE:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Performance Measurement Misses Standard Equals Standard Exceeds Standard
- 1 point 0 points + 1 point
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
POTS: % Out of Service > 24 Hours Moderate to High Parity(1) Moderate to High
(Resale KSQM 17) probability less than probability better than
Parity(1) Parity(1)
- -----------------------------------------------------------------------------------------------------------------------------------
SPECIALS: % Out of Service > 24 Hours Moderate to High Parity(1) Moderate to High
(Resale KSQM 17) probability less than probability better than
Parity(1) Parity(1)
- -----------------------------------------------------------------------------------------------------------------------------------
POTS - % Repeat Reports w/in 30 Days Moderate to High Parity(1) Moderate to High
(Resale KSQM 18) probability less than probability better than
Parity(1) Parity(1)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) "Parity" will be determined in accordance with the statistical methodology
set forth in Appendix 4, "Statistical Methodology for Determining 'Parity'
Range". "Parity" will be based upon a comparison of BA's performance for the
above Performance Measurements with BA's performance for the corresponding
Retail measurements set forth in Appendix 1, or, in the absence of appropriate
corresponding Retail measurements set forth in Appendix 1, Retail measurements
to be reasonably determined and provided by BA.
CALCULATION OF PERFORMANCE CREDIT:
TOTAL SCORE:
0 or Greater Points = No Performance Credit
-1 point = 2 % of Resale Services Recurring Charges for ACI for the measured
calendar quarter multiplied by the Lines Out of Service Factor.(1)
-2 points = 4 % of Resale Services Recurring Charges for ACI for the measured
calendar quarter multiplied by the Lines Out of Service Factor.(1)
-3 points = 6 % of Resale Services Recurring Charges for ACI for the measured
calendar quarter multiplied by the Lines Out of Service Factor.(1)
(1) Lines Out of Service Factor = (Percentage of ACI Resale Services POTS and
Specials lines network troubles out of service > 24 hours - Percentage of BA
retail customer POTS and Specials lines network troubles out of service > 24
hours) x (ACI Resale Services POTS and Specials lines with network troubles out
of service > 24 hours, as a percentage of the measured calendar quarter average
total ACI Resale Services POTS and Specials lines in service).
ADJUSTMENT OF PERFORMANCE CREDIT:
In the repair function, mutual responsibilities exist. The responsibility for
authorizing a dispatch resides with ACI. Reductions will be made in the
Performance Credit if necessary access is not available, or if a dispatch is
made and no
- ---------------------
(12) Orders that are rejected or queried by BA because of a failure in the
operation of a BA ordering system will not be included in calculations to
determine the percentage of ACI's orders that are rejected or queried by BA.
43
<PAGE>
trouble is found,(13) or if trouble is found to be on the ACI customer's side of
the network demarcation point (e.g., in premises wiring or customer premises
equipment), at a statistically higher rate than the same performance that BA
experiences for BA's own retail customers.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Measurement Misses Standard Equals Standard Exceeds Standard
- 1 point 0 points + 1 point
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
% No Access Rate Moderate to High probability Parity(1) Moderate to High probability
less than Parity(1) better than Parity(1)
- ----------------------------------------------------------------------------------------------------------------------------------
% Found OK or Trouble Found on Moderate to High probability Parity(1) Moderate to High probability
Customer Premises less than Parity(1) better than Parity(1)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) "Parity" will be determined in accordance with the statistical methodology
set forth in Appendix 4, "Statistical Methodology for Determining 'Parity'
Range".
TOTAL SCORE:
0 or Greater Points = No Adjustment to Maintenance Performance Credit
-1 point = 25 % Reduction of Maintenance Performance Credit
-2 points = 50 % Reduction of Maintenance Performance Credit
- ----------------------
(13) BA will not include in calculations to determine reductions in the
Performance Credit a dispatch where no trouble is found if a trouble which
should have been found on such dispatch is found on a subsequent dispatch.
44
<PAGE>
RESALE DEFINITIONS, CONDITIONS, REQUIREMENTS & EXCLUSIONS:
The following definitions, conditions, requirements and exclusions shall apply.
In addition, all applicable definitions, conditions, requirements and exclusions
set out in other provisions of this Schedule 27.0 shall apply (including, but
not limited to, definitions, conditions, requirements and exclusions, pertaining
to measurements set out in Appendix 1).
ORDERING (OC TIMELINESS AND REJECT TIMELINESS):
1. Performance Measurements and Performance Credits will apply only if: (a)
EDI Issue 7 implementing LSOG Issue 2 ordering interface specifications (or such
later ordering interface specifications, supported by BA, as BA shall have made
available for ACI's use) is in place and is being used by ACI for all Resale
Services ordering which can be performed via EDI; or, (b) BA's GUI is in place
and being used by ACI for all Resale Services ordering which can be performed
via BA's GUI. ACI must implement later specifications of EDI and later versions
of GUI within 90 days (or such other shorter period as may be required by this
Agreement) after BA has made them available for ACI's use.
2. ACI shall provide to BA forecasts of Resale Services volumes at least six
(6) months prior to the commencement of the measured calendar quarter.
Forecasts for Resale Services volumes (including both number of orders to be
submitted and number of items of service to be ordered) shall be submitted by
ACI for each month. If submission volumes for any one month in a measured
calendar quarter vary from forecasted volumes for such month stated in submitted
forecasts by more than 10% (plus or minus), BA may exclude that month from
consideration in calculating Performance Measurements and Performance Credits
and determining whether BA is obligated to take investigative or corrective
action under Section 3.3. If ACI fails to timely provide the forecasts of
Resale Services volumes to BA, BA may exclude Performance Category 4 and the
Performance Measurements in Category 4 from calculation of Performance Credits
and from taking investigative or corrective action under Section 3.3.
3. When ACI submitted work load for any one hour in a day is more than twice
(2x) the daily average hour ACI submitted work load,(14) all transactions for
that day will be deemed to have at least met "Equals Standard" ("O" Points).
4. OC and Reject Timeliness Performance Measurements do not apply to orders with
negotiated due dates.
PROVISIONING (MISSED INSTALLATION APPOINTMENTS):
1. ACI Missed Installation Appointments do not include appointments missed or
rescheduled due to the delay, act or omission of ACI, ACI's contractors or
vendors,(15) or ACI's customers (including, but not limited to, inability to
access interfaces and terminals).
2. If the Expedited Due Dates(16) for any one month in a measured calendar
quarter exceed 10% of the total appointments for that month, BA will not be
obligated to calculate Performance Category 4 for that month, or the Performance
Measurements in Performance Category 4 for that month, and may exclude
Performance Category 4 for that month, and the Performance Measurements in
Performance Category 4 for that month, from calculation of Performance Credits
and from taking investigative or corrective action under Section 3.3.
3. ACI Missed Installation Appointments will be included in the computation
only if:
- -----------------------
(14) In calculating "the daily average hour ACI submitted work load", the
"daily" period used for the calculation shall be deemed to be twelve (12) hours
in length.
(15) For the purposes of Paragraph 1, above, the phrase "ACI's contractors or
vendors" does not include BA.
(16) An "Expedited Due Date" is any due date with a shorter interval than the
standard interval being offered by BA for the transaction at the time the
transaction is requested.
45
<PAGE>
(a) All order information submitted by ACI was valid (e.g., street
address, end user local contact (LCON), Floor/unit number).
(b) ACI and ACI's customer were available and ready for service at the
appointed date and time. Access to Terminal Equipment was available.
(c) Accurate account and customer information was submitted by ACI.
(d) Orders were completed as submitted without cancellation after Order
Confirmation.
(e) ACI and ACI's customer were available for testing and cooperative
coordination as requested by BA.
4. ACI shall provide to BA forecasts of Resale Services volumes at least six
(6) months prior to the commencement of the measured calendar quarter.
Forecasts for Resale Services volumes (including both number of orders to be
submitted and number of items of service to be ordered) shall be submitted by
ACI for each month. If submission volumes for any one month in a measured
calendar quarter vary from forecasted volumes for such month stated in submitted
forecasts by more than 10% (plus or minus), BA may exclude that month from
consideration in calculating Performance Measurements and Performance Credits
and determining whether BA is obligated to take investigative or corrective
action under Section 3.3. If ACI fails to timely provide the forecasts of
Resale Services volumes to BA, BA may exclude Performance Category 4 and the
Performance Measurements in Category 4 from calculation of Performance Credits
and from taking investigative or corrective action under Section 3.3.
5. If more than 10% of ACI's orders in a month fall out of BA's provisioning
systems (i.e., require manual investigation and/or correction), or require
correction of ACI provided information during provisioning, BA may exclude
Missed Installation Appointment Performance Measurements for that month from the
calculation of calendar quarter Performance Measurements and Performance
Credits.
6. Performance Measurement calculations for provisioning will exclude Resale
Services provided pursuant to negotiated installation intervals.
MAINTENANCE:
1. Out of Service Over 24 Hours: Excluded will be reports where access was
required but not available during the first 24 hours.
2. Measured Trouble Reports include those found to be in the Network:
Disposition Codes 03 (Drops), 04 (Loops) and 05 (Inside Central Office).
3. ACI shall establish a toll free 800 number for BA repair technicians to call
for trouble related questions and trouble closeout.
4. The ACI repair center and toll free number must be available 24 hours per
day, seven days per week.
46
<PAGE>
D. INTERCONNECTION TRUNKS
1. PERFORMANCE CATEGORY 6 - INTERCONNECTION TRUNK PROVISIONING
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Performance Measurement Misses Standard Equals Standard Exceeds Standard
-1 Point 0 Points + 1 Point
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provisioning - Missed Installation > 1.65 Standard +/- 1.65 Standard > 1.65 Standard
Appointments(1) Deviations worse than Deviations from Deviations better than
(IT KSQM 11) mean BA mean BA mean BA
Performance for BA Performance for BA Performance for BA
IXC Feature Group D IXC Feature Group D IXC Feature Group D
Trunks. Trunks. Trunks.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Orders Received after 12:00 Noon Eastern Time will have the "clock" start
at 8:00 a.m. on the next business day.
CALCULATION OF PERFORMANCE CREDIT:
<TABLE>
<CAPTION>
Total Score:
------------
Score % Credit Applied to
----- -------- -----------
<S> <C> <C>
0 or greater No Performance Credits
-1 point 10 % Trunk Non-Recurring Charges for ACI for the
measured calendar quarter
multiplied by the Missed Installation Factor(3)
</TABLE>
(3) Missed Installation Factor = (Missed ACI Trunk Installation Appointments for
the measured calendar quarter as a percentage of ACI Trunk Installation
Appointments for the measured calendar quarter) - (Missed Installation
Appointments for BA IXC Feature Group D trunks for the measured calendar quarter
as a percentage of BA IXC Feature Group D Trunk Installation Appointments for
the measured calendar quarter).
ADJUSTMENT OF PERFORMANCE CREDIT:
In the provisioning function, mutual responsibilities exist. In addition to
trunks provided by BA to ACI, ACI will provide trunks to BA. If the percentage
of Missed Appointments for trunks ordered by BA from ACI exceeds the percentage
of missed appointments for trunks ordered by ACI from BA performance, the
Performance Credit will be reduced as stated below. (The percentage missed
appointment calculation comparison requires a minimum sample size of 50 trunks
on both sides to be valid.) ACI shall maintain due date intervals for trunks to
be provided by ACI to BA that are no longer than BA's due date intervals for
comparable trunks.
47
<PAGE>
TRUNKS ORDERED BY BA FROM ACI
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Measurement 100% reduction in Credit 50% Reduction in Credit
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Provisioning of Trunks for BA by ACI - Missed
Installation Appointments: > 5 percentage points > 2 but < or = 5 percentage points worse than
worse than BA Performance BA Performance
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
2. PERFORMANCE CATEGORY 7 - INTERCONNECTION TRUNK MAINTENANCE AND REPAIR
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Performance Approaches Standard Equals Standard Exceeds Standard
Measurement - 1 point 0 points + 1 point
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
% Out of Service > 24 Hours > 1.65 Standard +/- 1.65 Standard > 1.65 Standard
(IT KSQM 17) Deviations worse than Deviations from Deviations better than
mean BA mean BA mean BA
Performance for BA Performance for BA Performance for BA
IXC Feature Group D IXC Feature Group D IXC Feature Group D
Trunks. Trunks. Trunks.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
CALCULATION OF PERFORMANCE CREDIT:
<TABLE>
<CAPTION>
Total Score:
------------
Score % Credit Applied to
----- -------- ----------
<S> <C> <C>
0 or greater No Performance Credits
-1 point $ 1.00 Per DS1 Trunk per Day out of service Lines Out of Service Factor
</TABLE>
(1) Lines Out of Service Factor = (Percentage of ACI Interconnection Trunks
network troubles out of service > 24 hours - Percentage of BA IXC Feature Group
D Trunk network troubles out of service > 24 hours) x (ACI Interconnection
Trunks with network troubles out of service > 24 hours, as a percentage of the
measured calendar quarter average total ACI Interconnection Trunks in service).
48
<PAGE>
INTERCONNECTION TRUNK DEFINITIONS, CONDITIONS, REQUIREMENTS & EXCLUSIONS:
The following definitions, conditions, requirements and exclusions shall apply.
In addition, all applicable definitions, conditions, requirements and exclusions
set out in other provisions of this Schedule 27.0 shall apply (including, but
not limited to, definitions, conditions, requirements and exclusions, pertaining
to measurements set out in Appendix 1).
PROVISIONING:
1. Performance Measurement calculations for provisioning will be performed only
if for the measured calendar quarter a minimum of 50 trunks was installed by BA
for ACI and a minimum of 100 IXC Feature Group D trunks was installed by BA for
IXCs.
2. Orders must be received electronically, using a BA supported version of BA's
electronic Access Service Request System.
3. Performance Measurement calculations for provisioning will exclude trunks
provided pursuant to negotiated installation intervals.
4. Performance Measurement calculations for provisioning will be based on
comparisons by trunk type (e.g., DS0 with DS0, DS1 with DS1).
5. ACI shall provide to BA forecasts of Interconnection Trunk volumes at least
six (6) months prior to the commencement of the measured calendar quarter.
Forecasts for Interconnection Trunk volumes (including both number of orders to
be submitted and number of items of service to be ordered) shall be submitted by
ACI either (a) for each month or (b) for each quarter, in which case the
quarterly volume will be pro-rated to a monthly volume. If submission volumes
for any one month in a measured calendar quarter vary from forecasted volumes
for such month stated in submitted forecasts by more than 10% (plus or minus),
BA may exclude that month from consideration in calculating Performance
Measurements and Performance Credits and determining whether BA is obligated to
take investigative or corrective action under Section 3.3. If ACI fails to
timely provide the forecasts of volumes to BA, BA may exclude Performance
Category 6 and the Performance Measurements in Category 6 from calculation of
Performance Credits and from taking investigative or corrective action under
Section 3.3.
6. ACI Missed Installation Appointments do not include:
a. Installation Appointments missed or rescheduled due to the delay, act
or omission of ACI, ACI's contractors or vendors(17), or ACI's
customers.
b. Missed Installation Appointments for ACI installations being made to
rehome trunks or for network grooming.
7. ACI Missed Installation Appointments will be included in the computation
only if they result in a blockage of traffic that is in excess of standard
design blocking thresholds and that is identified and reported to BA by ACI.
8. ACI Missed Installation Appointments will be included in the computation
only if:
a. All order information submitted by ACI was valid.
b. ACI was prepared to accept the installation of service at the
scheduled time.
- -------------
(17) For the purposes of Paragraph 6, above, the phrase "ACI's contractors or
vendors" does not include BA.
49
<PAGE>
c. Orders were completed as submitted without cancellation after order
confirmation.
d. ACI and ACI's customer were available for testing and cooperative
coordination as requested by BA.
9. ACI Missed Installation Appointments include only missed installation
appointments for interconnection trunks used one-way.
MAINTENANCE:
1. This Performance Category will be measured no earlier than the later of the
quarter commencing April 1, 1998, or completion of the WFA inventory for ACI and
BA trunks and validation of applicable field procedures.
2. Measured Trouble Reports include those found to be in the Network:
Disposition Codes 04 (Outside Plant) and 05 (Inside Central Office).
3. Applies only to trunks used as per applicable technical specifications.
4. ACI trunks will be included in the computation only if ACI was available for
testing and cooperative coordination if requested by BA.
5. Applies only to trunks where blockage exceeding standard design blocking
thresholds has been identified and reported by ACI.
6. Applies only to interconnection trunks used one-way.
50
<PAGE>
E. BILLING
1. PERFORMANCE CATEGORY 8 - TIMELINESS OF DAILY USAGE FEED ("DUF") FOR UNE
SWITCHING AND RESALE SERVICES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Performance Measurement Approaches Standard Equals Standard Exceeds Standard
- 1 point 0 points + 1 point
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Timeliness of Daily < 90% of recorded call 90% to 95% of > 95% of recorded call
Usage Feed events in 5 Business recorded call events in 5 events in 5 Business
(CLEC Billing KSQM 21) Days Business Days Days
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CALCULATION OF PERFORMANCE CREDIT
TOTAL SCORE:
0 or Greater Points = No Performance Credit
- -1 point = 0.25 % of DUF Charges (for UNE Switching and Resale Services) for ACI
for the measured calendar quarter.
BILLING DEFINITIONS, CONDITIONS, REQUIREMENTS & EXCLUSIONS:
The following definitions, conditions, requirements and exclusions shall apply.
In addition, all applicable definitions, conditions, requirements and exclusions
set out in other provisions of this Schedule 27.0 shall apply (including, but
not limited to, definitions, conditions, requirements and exclusions, pertaining
to measurements set out in Appendix 1).
1. UNE usage (Daily Usage Feed) information is limited to only Unbundled
Switching. Measurement with regard to Unbundled Switching will begin no earlier
than 4/1/98.
2. Excluded are delays or failures to provide information provided by third
parties.
3. Excluded are delays or failures to provide information where the cause of
the delay or failure also affects BA's ability to collect and utilize
information for itself.
4. Measurement will be made for lines that have been equipped at ACI's request
to collect daily usage feed information.
51
<PAGE>
SCHEDULE 27.0
APPENDIX 4
STATISTICAL METHODOLOGY FOR DETERMINING "PARITY" RANGE
1. FOR PERFORMANCE MEASURES WHERE THE MEASURE IS A YES OR NO ON EACH MEASURED
ITEM: (E.G., % MET OR NOT MET):
MEASUREMENT OBJECTIVE:
To determine if the level of service provided to ACI is, on average, similar to
or different from the level of service BA provides to other BA customers.
The following methodology applies to service in which in each instance of its
provision, the outcome can be categorized as a success or a failure (e.g., was
the appointment missed, was a customer's line out of service for more than 24
hours, etc.).
Now, let x = the ith customers score on service; where
ij
x = 0 if the outcome is categorized as a success
ij
x = 1 if the outcome is categorized as a failure
ij
More specifically, let
[SIGMA]X = the number of ACI customers' instances of service categorized
lij as a failure
The standard of service against which the instances of service to ACI's
customers will be compared is the average of that provided by BA to its own
customers, viz.
[SIGMA]X where N is the number of instances of provision of
0ij 0j
P = ------------
0j N service j to BA's customers
0j
The service index calculated for ACI for service j and which will be compared
against the service standard Poj is given by:
[SIGMA]X where N is the number of instances of provision of
lij lj
P = ------------
lj N service j ACI's customers
lj
It is assumed that N(0j) will be large relative to N(1j); and that N(1j) may
in fact, for certain j, be small.
The assumption can be made that the N(1j) constitutes a sample taken from a
larger population comprised of N(0j) ; i.e., instances of service provision like
those provided to BA customers. In this case the N(1j) are not technically a
subset (i.e., sample) of N(0j). But for the purposes of the model we assume
that if ACI customers are being treated the same as BA customers, then the
distribution of the x(0ij) and the x(1ij); should be identical, hence our
viewing N(1j) as a sample of N(0j).
If such an assumption is correct then the value P(1j) should be similar to the
value P(0j). If it is not correct, then the two values would be expected to be
different with the magnitude of the difference reflecting how different the two
populations are, and by implication, how different the service level to each.
52
<PAGE>
The question that arises is how close must P(1j) and P(0j) be to conclude that
the two populations received similar levels of service and how different must
they be to conclude they did not.
If we assume N(1j) is a sample taken from a universe identical to the BA
universe, then it is possible to derive the distribution of possible values of
P(1j) that could occur when drawing a sample of size N(1j) from such a universe.
If N(1j) is adequately large, (viz., if N(1j) is greater than 30) these values
will follow a normal distribution and have:
Expected value = E (x) = N P
lj 0j
and
the Variance = Var (x) = N P (1-P )
lj 0j 0j
If the CLEC population is in fact identical (or very nearly so) to the BA
population, then most values of P(1j) would lie close to P(0j), and if the
populations were not identical than most values of P(1j) would lie further from
P(0j) with the magnitude of the differences reflecting how different the two
underlying populations are and, by implication, how different the level of
service provided the two populations.
It is possible to evaluate how likely it is that the N(0j) and the N(1j)
instances of service are, on average, the same by evaluating how likely it would
be by chance alone to observe a difference as large as the one in fact observed,
viz. P(0j) - P(1j).
53
<PAGE>
The procedure for performing this evaluation is as follows:
1. Calculate the BA service standard for service j as follows:
[SIGMA]X
0ij
P = ----------
0j N
0j
2. Calculate the level of service provided to ACI as follows:
[SIGMA]X
1ij
P = ----------
1j N
1j
3. Calculate an index of service level comparability, z, as follows:
P - P
0j 1j
-------------------
Z = ----------------
|
| P (1 - P )
| 0j 0j
| --------------
| N
\| 1j
4. Evaluate the probability of similar or dissimilar services for BA and CLEC
customers as follows:
< -0.83 - Probability is moderate to high that ACI
("Misses Standard") customers are more poorly served than BA
customers.
-0.83 to 0.83 ("Parity") - Probability is weak that ACI customers are
more poorly served than BA customers, or the
("Equals Standard") probability is high that ACI customers are
served the same as BA customers, or the
probability is weak that ACI customers are
better served than BA customers.
>0.83 - Probability is moderate to high that ACI
("Exceeds Standard") customers are better served than BA
customers.
For the purposes of Performance Metrics listed in Appendix 2 to which the
statistical methodology set forth in this Appendix 4, Section 1 is applicable,
and Performance Measurements listed in Appendix 3 to which the statistical
methodology set forth in this Appendix 4, Section 1 is applicable, BA's
performance will be deemed: (a) to have missed or failed to meet the "Parity"
standard ("Misses Standard") if the result is < -0.83 ("Probability is moderate
to high that ACI customers are more poorly served than BA customers"); (b) to
have equaled or met the "Parity" standard ("Equals Standard") if the result is
- -0.83 to 0.83 (i.e., "Probability is weak that ACI customers are more poorly
served than BA customers, or the probability is high that ACI customers are
served the same as BA customers, or the probability is weak that ACI customers
are better served than BA customers"); or, (c) to have exceeded the "Parity"
standard ("Exceeds Standard") if the result is > 0.83 ("Probability is moderate
to high that ACI customers are better served than BA customers").
54
<PAGE>
2. FOR PERFORMANCE MEASURES WHERE THE MEASURE IS A VARIABLE MEASURE: (E.G.,
CYCLE TIME):
MEASUREMENT OBJECTIVE:
To determine, for those services for which performance level is measured as an
elapsed time, if the level of service provided to ACI is, on average, similar to
or different from the level of service BA provides to other BA customers.
METHODOLOGY:
The following methodology applies to service in which in each instance of its
provision, the outcome is represented as a measurement of an interval of time
(e.g., 10 minutes, 2.5 hours, 3.5 days, etc.). For example, "time to restore
service."
Define the variable X, as duration of interval being measured (e.g., time to
restore service in hours)
Now, let N = the number of instances of service j for BA customers
j
n = the number of instances of service j for ACI customers
j
x = BA's ith customer's score on service j i=1,2,3...N
ij j
x = ACI's ith customer's score on service j i=1,2,3...n
ij j
1. Calculate the AVERAGE duration for service j for all Bell Atlantic
customers as follows:
N
j
[SIGMA]x
x + x + x ...x ij
1j 2j 3j Nj i=1
Average duration of BA customers = [MU] = ------------------- = ----------
N N
j j
2. Calculate the STANDARD DEVIATION of the duration scores on service j for
all BA customers as follows:
Standard deviation of BA customer's scores =
<TABLE>
<S><C>
--------------------
----------------------------------------------------------- | N
| 2 2 2 2 | j 2
|(x - [mu]) + (x - [mu]) + (x - [mu]) + ... (x - [mu]) |[SIGMA](x - [mu])
| 1j 2j 3j Nj | i=1 ij
[sigma] = |---------------------------------------------------------- = |--------------------
x \| N \| N
\ j \ j
</TABLE>
55
<PAGE>
3. Calculate the AVERAGE duration for service j for all ACI customers as
follows:
N
j
x' + x' + x' ...x' [SIGMA]x'
_ 1j 2j 3j nj i=1 ij
Average duration of ACI customers X' = ------------------- = ----------
j n n
j j
4. Calculate an INDEX of parity:
Having determined the following values:
N = the number of instances of service j for BA customers
j
n = the number of instances of service j for ACI customers
j
[mu] = the average duration for all BA customers
[sigma] = the standard deviation of duration scores for all BA customers
x
_
X = the average duration for all ACI customers
j
Derive an index of parity as follows:
_
X - [mu]
j x
Index of Parity = t = ----------
[sigma]
x
-------
---
|n
\| j
\
where values of the index less than 0.0 indicate ACI customers are being
serviced on average with less delay (i.e., better) than BA customers, values of
the index greater than 0.0 indicate ACI customers are being serviced on average
with more delay (i.e., worse) than BA customers,
and
where greater absolute values of the index, t, indicate increasingly less
likelihood that the observed differences between ACI and BA customers' is due to
chance variation, or what is called sampling error, and greater likelihood the
difference is due to other than chance factors.
5. INTERPRET THE INDEX OF PARITY by referring to the PARITY TRANSLATION TABLE
and following these steps:
a. Note the value of nj as determined previously, and calculate the
value nj-1
b. Locate the value of nj-1 in the first column of the parity index
translation table
c. Inspect the ranges of values of t in the row of the table
corresponding to your value of nj-1, locating the range containing
the value of t corresponding to the one you calculated.
d. Look at the top of the column containing the value of t
corresponding to the one you calculated and read the interpretation
of the calculated index.
For the purposes of Performance Metrics listed in Appendix 2 to which the
statistical methodology set forth in this Appendix 4, Section 2 is applicable,
and Performance Measurements listed in Appendix 3 to which the statistical
methodology set forth in this Appendix 4, Section 2 is applicable, BA's
performance will be deemed: (a) to have missed or failed to meet the "Parity"
standard ("Misses Standard") if the result as shown on the PARITY TRANSLATION
TABLE is "Probability that CLEC customers Serviced worse than BA's Customers is
High" or "Probability that CLEC customers
56
<PAGE>
Serviced worse than BA's Customers is Moderate"; (b) to have equaled or met the
"Parity" standard ("Equals Standard") if the result as shown on the PARITY
TRANSLATION TABLE is "Probability that CLEC customers Serviced worse than BA's
Customers is Weak", "Probability CLEC & BA Customers Serviced the Same is High",
or "Probability that CLEC Customers Serviced Better than BA's Customers is
Weak"; or, (c) to have exceeded the "Parity" standard ("Exceeds Standard") if
the result as shown on the PARITY TRANSLATION TABLE is "Probability CLEC
Customers Serviced Better than BA's Customers is Moderate" or "Probability that
CLEC Customers Serviced Better than BA's Customers is High").
57
<PAGE>
EXHIBIT A
BELL ATLANTIC - PENNSYLVANIA, INC.
DETAILED SCHEDULE OF ITEMIZED CHARGES
A. BA SERVICES, FACILITIES, AND ARRANGEMENTS:(1)
<TABLE>
<CAPTION>
SERVICE OR ELEMENT DESCRIPTION: RECURRING CHARGES: NON-RECURRING CHARGE:
------------------------------ ----------------- --------------------
<S> <C> <C>
I. LOCAL CALL TERMINATION(2)
Traffic Delivered at BA End Office $.001864/MOU Not Applicable
Traffic Delivered at BA Tandem or Local
Serving Wire Center $.002902/MOU Not Applicable
</TABLE>
(1) Unless a citation is provided to a generally applicable BA tariff, all
listed rates and services available only to ACI when purchasing these services
for use in the provision of Telephone Exchange Service, and apply only to Local
Traffic and local Ancillary Traffic. BA rates and services for use by ACI in
the carriage of Toll Traffic shall be subject to BA's tariffs for Exchange
Access Service. Adherence to these limitations is subject to a reasonable
periodic audit by BA.
As applied to wholesale discount rates, unbundled Network Elements or call
transport and/or termination of Local Traffic purchased for the provision of
Telephone Exchange Service or Exchange Access, the rates and charges set forth
in Exhibit A shall apply until such time as they are replaced by new rates as
may be approved or allowed into effect by the Commission from time to time
pursuant to the FCC Regulations, subject to a stay or other order issued by any
court of competent jurisdiction. At such time(s) as such new rates have been
approved or allowed into effect by the Commission, the Parties shall amend
Exhibit A to reflect the new approved rates.
(2) See note 6 regarding measurement and calculation of local traffic
termination charges.
1
<PAGE>
<TABLE>
<CAPTION>
SERVICE OR ELEMENT DESCRIPTION: RECURRING CHARGES: NON-RECURRING CHARGE:
------------------------------ ----------------- --------------------
<S> <C> <C>
II. UNBUNDLED TRANSPORT
A. DEDICATED TRANSPORT
Voice Grade/DS-0 $10.37/Month & VOICE GRADE/DS-0, DS-1, DS-3
$.03/Mile/Month & DDS:
$1.05/Service Order,
DS-1 $37.66/Month & $353.70/Initial Facility &
$.66/Mile/Month $24.00/Additional Facility
(if purchased when initial
DS-3 $526.72/Month & facility ordered)
$18.66/Mile/Month
DDS $10.74/Month &
$.04/Mile /Month
B. COMMON TRANSPORT
Tandem Switching $.000836/MOU Not Applicable
Transport Fixed $.000152/MOU Not Applicable
Transport Per Mile $.000004/MOU Not Applicable
2
<PAGE>
<CAPTION>
SERVICE OR ELEMENT DESCRIPTION: RECURRING CHARGES: NON-RECURRING CHARGE:
------------------------------ ----------------- --------------------
<S> <C> <C>
II. UNBUNDLED TRANSPORT (CONTINUED)
C. ENTRANCE FACILITIES
ALL:
$1.05/Service Order plus
installation charges for
each initial and additional
facility purchased at the
time of order:
$497.06/Initial &
2Wire Voice Grade Channel Termination $16.78/Month $289.47/Additional
$498.73/Initial &
4Wire Voice Grade Channel Termination $33.76/Month $290.02/Additional
$548.06/Initial &
DS-1 to Voice Grade Multiplexing $77.83/Month $548.06/Additional
$668.37/Initial &
DS-1 Channel Termination $180.59/Month $331.87/Additional
$548.06/Initial &
DS-3 to DS-1 Multiplexing $257.61/Month $548.06/Additional
$668.37/Initial &
DS-3 Channel Termination $1059.65/Month $331.87/Additional
D. DIGITAL CROSS-CONNECT SYSTEM
Service Establishment Not Applicable $1890.82
Database Modification Not Applicable $148.68/Modification Request
Reconfiguration by BA personnel Not Applicable $31.98 Programming
Charge/Half Hour
DS-0 Cross-Connect $20.54/Port/Month $26.17/Port
DS-1 Cross-Connect $71.92/Port/Month $32.71/Port
3
<PAGE>
<CAPTION>
SERVICE OR ELEMENT DESCRIPTION: RECURRING CHARGES: NON-RECURRING CHARGE:
------------------------------ ----------------- --------------------
<S> <C> <C>
II. UNBUNDLED TRANSPORT (CONTINUED)
E. MID-SPAN MEET ARRANGEMENTS To be charged in
accordance with
the requirements
of Section 4.3 of
the Agreement
F. TRANSIT ARRANGEMENTS (FOR INTERCONNECTIONS
BETWEEN ACI AND CARRIERS OTHER THAN BA)
Tandem Switching $.000836/MOU Per Section II. above and
V., as applicable
Switched Transport $.000152/MOU
$.000004/MOU/Mile
III. UNBUNDLED SWITCHING(3)
A. LOCAL SWITCHING PORTS
POTS/PBX/Centrex $2.67/Port/Month $1.05/Service Order Per
Port: $2.97/Installation
$1.32/Disconnect
ISDN (BRI) $10.28/Port/Month $1.05/Service Order Per
Port: $2.97/Installation
$1.32/Disconnect
ISDN (PRI) $135.13/Port/Month $1.05/Service Order Per
Port: $113.36/Installation
$1.32/Disconnect
Public/Semi-Public $3.52/Port/Month $1.05/Service Order
Per Port: $2.97/Installation
$1.32/Disconnect
DID $5.98/Port/Month $1.05/ Service Order
Per Port:
$692.07/Installation
$1.32/Disconnect
B. TANDEM SWITCHING USAGE $.0008360/MOU Not Applicable
C. LOCAL SWITCHING USAGE
Originating With Vertical Features $.011067/MOU Not Applicable
Terminating With Vertical Features $.006143/MOU Not Applicable
</TABLE>
- -------------------
(3) In addition to the recurring and non-recurring rates set forth herein
for unbundled switching elements, BA may levy upon purchaser of such
elements any access charges (or portion thereof) permitted by Applicable Laws.
4
<PAGE>
<TABLE>
<CAPTION>
SERVICE OR ELEMENT DESCRIPTION: RECURRING CHARGES: NON-RECURRING CHARGE:
------------------------------ ----------------- --------------------
<S> <C> <C>
IV. UNBUNDLED LOOPS
POTS (Analog 2-Wire) DENSITY CELL: SERVICE ORDER: $1.05
1 - $11.52/Month INSTALLATION:
2 - $12.71/Month If premises visit not
3 - $16.12/Month required - $2.97 initial and
4 - $23.11/Month each additional loop; Not
Applicable if existing loop
& port together
If premises visit required -
$66.85, initial loop;
$22.59, additional loop
DISCONNECT:
$1.32 per loop
ISDN DENSITY CELL: SERVICE ORDER: $1.05
1 - $13.16/Month INSTALLATION:
2 - $14.35/Month If premises visit not
3 - $17.75/Month required - $12.91 initial
4 - $24.74/Month and each additional loop;
Not Applicable if existing
loop & port together
If premises visit required -
$76.78, initial loop;
$32.52, additional loop
DISCONNECT:
$1.32 per loop
5
<PAGE>
<CAPTION>
SERVICE OR ELEMENT DESCRIPTION: RECURRING CHARGES: NON-RECURRING CHARGE:
------------------------------ ----------------- --------------------
<S> <C> <C>
IV. UNBUNDLED LOOPS (CONTINUED)
Customer Specified Signaling - 2 Wire DENSITY CELL: SERVICE ORDER: $1.05
1 - $11.52/Month INSTALLATION:
2 - $12.71/Month If premises visit not
3 - $16.12/Month required - $2.97 initial and
4 - $23.11/Month each additional loop; Not
Applicable if existing loop
& port together
If premises visit required -
$66.85, initial loop;
$22.59, additional loop
DISCONNECT:
$1.32 per loop
COORDINATED CUTOVER:
If premises visit not
required - $3.24 per order
If premises visit required -
$12.10 per order
DESIGNED CIRCUIT:
$40.93 per order
6
<PAGE>
<CAPTION>
SERVICE OR ELEMENT DESCRIPTION: RECURRING CHARGES: NON-RECURRING CHARGE:
------------------------------ ----------------- --------------------
<S> <C> <C>
IV. UNBUNDLED LOOPS (CONTINUED)
Customer Specified Signaling - 4 Wire DENSITY CELL: SERVICE ORDER: $1.05
1 - $22.40/Month INSTALLATION:
2 - $26.36/Month If premises visit not
3 - $33.03/Month required - $2.97 initial and
4 - $45.47/Month each additional loop; Not
Applicable if existing loop
& port together
If premises visit required -
$66.85, initial loop;
$22.59, additional loop
DISCONNECT:
$1.32 per loop
COORDINATED CUTOVER:
If premises visit not
required - $3.24 per order
If premises visit required -
$12.10 per order
DESIGNED CIRCUIT:
$40.93 per order
7
<PAGE>
<CAPTION>
SERVICE OR ELEMENT DESCRIPTION: RECURRING CHARGES: NON-RECURRING CHARGE:
------------------------------ ----------------- --------------------
<S> <C> <C>
IV. UNBUNDLED LOOPS (CONTINUED)
DS1 DENSITY CELL: SERVICE ORDER: $1.05
1 - $132.51/Month INSTALLATION:
2 - $139.37/Month If premises visit not
3 - $168.59/Month required - $2.97 initial and
4 - $252.46/Month each additional loop; Not
Applicable if existing loop
& port together
If premises visit required -
$66.85, initial loop;
$22.59, additional loop
DISCONNECT:
$1.32 per loop
COORDINATED CUTOVER:
If premises visit not
required - $3.24 per order
If premises visit required -
$12.10 per order
DESIGNED CIRCUIT:
$40.93 per order
2 Wire ADSL Loops Interim pricing is Interim pricing is equal to
equal to Analog 2W, Analog 2W, with True Up at
with True Up at the the time Commission approved
time Commission rates go into effect
approved rates go pursuant to Tariff
into effect pursuant
to Tariff
2 Wire & 4 Wire HDSL Loops TBD TBD
V. COLLOCATION CROSS-CONNECTION
A. VOICE GRADE LOOP
Physical DS0 CO side to equipment $.41/Month
Not Applicable
Virtual DS0 with RFT CO side MDF to $1.20/Month Not Applicable
equipment
Virtual DS1 with EDSX (1DS1 + 24 DS0's $60.21/Month BOTH:
with IDLC) $1.05/Service Order
$544.36/Initial Installation
Virtual DS1 with CFA (24DS0s with IDLA) $44.08/Month & $210.46/Additional
Installations
8
<PAGE>
<CAPTION>
SERVICE OR ELEMENT DESCRIPTION: RECURRING CHARGES: NON-RECURRING CHARGE:
------------------------------ ----------------- --------------------
<S> <C> <C>
V. COLLOCATION CROSS-CONNECTION (CONTINUED)
B. OTHER
Physical DS3 $84.27/Month ALL:
$1.05/Service Order
Physical DS1 $15.72/Month $481.36/Initial Installation
& $194.71/Additional
Virtual DS3 $88.81/Month Installations
Virtual DS1 $16.12/Month
VI. TIME AND MATERIALS
Special Construction As applicable per BA-PA PUC
1 sec. 9
Service Technician (service work on unbundled Not Applicable $1.05/Service Order
loops outside of the Central Office) $26.24/Premises Visit
$12.10 Labor Charge/ Quarter
Hour After First Quarter
Hour
Central Office Technician Not Applicable $1.05/Service Order
$10.42 Labor Charge/ Quarter
Hour or Fraction Thereof
VII. SIGNALING AND DATABASES
A. STP PORT
Termination $640.02/Month $94.15/Port
Access $.47/Mile/Month $1.05/Service Order
$274.06/Initial Facility &
$24.01/Additional Facility
B. 800/888 DATABASE
Basic Query $.000835/Query Not Applicable
Vertical Query $.000343/Query Not Applicable
9
<PAGE>
<CAPTION>
SERVICE OR ELEMENT DESCRIPTION: RECURRING CHARGES: NON-RECURRING CHARGE:
------------------------------ ----------------- --------------------
<S> <C> <C>
VII. SIGNALING AND DATABASES (CONTINUED)
C. LIDB VALIDATION
LIDB Point Codes Not Applicable $85.84/Point Code
Calling Card $.015542/Query Not Applicable
Billed Number Screening $.015542/Query Not Applicable
Storage of ACI's Data in LIDB Database Not Applicable $1,469.92 Service
Establishment
D. AIN SERVICE CREATION (ASC) SERVICE
1. DEVELOPMENTAL CHARGES
Service Establishment Not Applicable $884.08
Service Creation Access Port $123.86/Port/Month Not Applicable
Service Creation Usage
a. Remote Access $1,328.47/Day Not Applicable
b. On-Premise $1,328.47/Day Not Applicable
Certification & Testing $76.99/Hour Not Applicable
Help Desk Support $81.48/Hour Not Applicable
2. SERVICE CHARGES
Subscription Charge $5.44/Month Not Applicable
Database Queries
a. Network Query $.0007/Query Not Applicable
b. ACI Network Query $.0007/Query Not Applicable
c. ACI Switch Query $.0007/Query Not Applicable
Trigger Charge
a. Line Based $.0010/Query Not Applicable
b. Office Based $.0010/Query Not Applicable
Utilization Element $.0003/Query Not Applicable
Service Activation Charge
a. Network Service Activation Not Applicable $8.37/Service Activated/Line
b. ACI Network Service Activation Not Applicable $8.37/Service Activated/Line
c. ACI Switch Service Activation Not Applicable $8.37/Service Activated/Line
D. AIN SERVICE CREATION (ASC) SERVICE
(CONTINUED)
Service Modification
DTMF Update $.1080/Occurrence Not Applicable
Switch Based Announcement $.005/Announcement Not Applicable
VIII. DIRECTORY LISTINGS & BOOKS
10
<PAGE>
<CAPTION>
SERVICE OR ELEMENT DESCRIPTION: RECURRING CHARGES: NON-RECURRING CHARGE:
------------------------------ ----------------- --------------------
<S> <C> <C>
Primary Listing (on initial UNE service Not Applicable Not Applicable
order). For each residence telephone
number, two (2) listings in the White
Page directory are provided. For each
business telephone number listed (except
numbers of Centrex or Centrex-like
services or indialing service station
lines) one (1) listing is provided in the
White Page Directory and one (1) listing
in the Yellow Page directory of the type
provided to BA-PA end user business
customers for which no specific charge
applies.
<S> <C>
Other Tariffed Listing Services (For Retail rates less wholesale discount. For retail
listings ordered in excess of the primary rates see BA-PA tariff No. 1 sec. 5.B.
listings provided or other listing types,
or listings ordered at a time other than
initial UNE service order, or listings
ordered not associated with a UNE service
order.)
Books & delivery (annual home area No charge for normal numbers of books delivered to
directories only) end users; bulk deliveries to ACI per separate
arrangement
11
<PAGE>
<CAPTION>
SERVICE OR ELEMENT DESCRIPTION: RECURRING CHARGES: NON-RECURRING CHARGE:
------------------------------ ----------------- --------------------
<S> <C> <C>
IX. OPERATOR SERVICES/DIRECTORY ASSISTANCE
Direct Access $.0342/Query $32,135.28/Link & $15,206.81
Service Establishment
Directory Assistance $.3664/Call Not Applicable
Directory Transport
Tandem Switching $.000730/Call Not Applicable
Tandem Switched Transport $.000132/Call & Not Applicable
$.000003/Mile/Call
Operator Services - Live $.01280/Operator Not Applicable
Work
Second
Operator Services - Automated $.00158/Automated Not Applicable
Work
Second
Branding for Directory Assistance and/or Not Applicable $1,358.62/Message
Operator Services
Carrier-to-Carrier LSV/VCI Requests $.01280/Operator Not Applicable
Work
Second
12
<PAGE>
<CAPTION>
SERVICE OR ELEMENT DESCRIPTION: RECURRING CHARGES: NON-RECURRING CHARGE:
------------------------------ ----------------- --------------------
<S> <C> <C>
X. ACCESS TO OPERATION SUPPORT SYSTEMS
A. PRE-ORDERING $.22/Query Not Applicable
B. ORDERING $3.34/Transaction Not Applicable
C. PROVISIONING Included in Ordering Not Applicable
D. MAINTENANCE & REPAIR
1. ECG ACCESS $.22/Query Not Applicable
2. EB/OSI ACCESS $1.16/Trouble Ticket Not Applicable
E. BILLING
1. CD-ROM $246.59/CD-ROM Not Applicable
2. DAILY USAGE FILE
a. EXISTING MESSAGE RECORDING $.000258/Message Not Applicable
b. DELIVERY OF DUF
Data Tape $17.18/Tape $61.39/Programming Hour
Network Data Mover $.000094/Message Not Applicable
CMDS $.000094/Message $61.39/Programming Hour
c. DUF TRANSPORT
9.6 kb Communications Port $10.24/Month $7,437.36/Port
56 kb Communications Port $28.29/Month $30,778.91/Port
256 kb Communications Port $28.29/Month $51,236.88/Port
T1 Communications Port $359.31/Month $182,827.99/Port
Line Installation Not Applicable $61.39/Programming Hour/Port
Port Set-up Not Applicable $9.85/Port
Network Control Programming Coding Not Applicable $61.39/Programming Hour/Port
XI. EXCHANGE ACCESS SERVICE
Interstate Per BA-FCC tariff number 1
Intrastate Per BA-PA tariff number 302
13
<PAGE>
<CAPTION>
SERVICE OR ELEMENT DESCRIPTION: RECURRING CHARGES: NON-RECURRING CHARGE:
------------------------------ ----------------- --------------------
<S> <C> <C>
XII. NUMBER PORTABILITY
Interim (using RCF) $1.50/Month/Ported $5.00/Service Order
Number $4.00/Installation/No. at
same location
<S> <C>
Permanent Per permanent funding mechanism when established.
Access pass-through to number portability In accordance with Section 14.5 of Agreement
purchaser
XIII. 911/E911
Transport Per section II above.
Data Entry and Maintenance No Charge
XIV. POLES CONDUITS & ROW Per contract rates pursuant to 47 U.S.C. sec. 224
Illustrative:
Duct: $5.45/Foot/Year
Pole: $3.98/Attachment/Year
<S> <C> <C>
XV. NETWORK INTERFACE DEVICE (NID) $.68/Month Not Applicable
XVI. ACCESS TO TELEPHONE NUMBERS (NXX CODES ISSUED No Charge
PER ICCF CODE ADMINISTRATION GUIDELINES)
XVII. LOCAL DIALING PARITY No Charge
XVIII. CUSTOMIZED ROUTING
To Reseller Platform $.142360/Line/Month $3.84/Line
To BA Platform for Re-Branding $.08330/Call $3.84/Line
Customized Routing Transport Per section II above.
14
<PAGE>
<CAPTION>
SERVICE OR ELEMENT DESCRIPTION: RECURRING CHARGES: NON-RECURRING CHARGE:
------------------------------ ----------------- --------------------
XIX. WHOLESALE DISCOUNT FOR RESALE OF RETAIL TELECOMMUNICATIONS SERVICES(4)
<S> <C>
Resale of retail services if ACI provides own 20.69%
operator services platform
Resale of retail services if ACI uses Bell 18.43%
Atlantic operator services platform
Pennsylvania Gross Receipts Tax Discount Discount as per BA-PA PUC 1 sec. 1.8.1 tariff.
</TABLE>
- ----------------------
(4) Excludes telecommunications services designed primarily for wholesale, such
as switched and special exchange access service, and, subject to Section 12 of
the Agreement, the following additional arrangements that are not subject to
resale: limited duration (90 days or less) promotional offerings, public coin
telephone service, and technical and market trials. Taxes shall be collected
and remitted by the reseller and BA in accordance with legal requirements and as
agreed between the Parties. Surcharges (e.g., 911, telecommunications relay
service, universal service fund) shall be collected by the reseller and either
remitted to the recipient agency or NECA, or passed through to BA for remittance
to the recipient agency or NECA, as appropriate and agreed between the Parties.
End user common line charges shall be collected by the reseller and remitted to
BA.
Pending establishment of mechanized billing procedures adapted to resale,
BA will apply the wholesale discount for resale as a "bottom-of-the-bill"
discount rate and will utilize a "true-up" process to correct possible
inadvertent application of the wholesale discount to the exclusions identified
herein and to reflect other adjustments as the Companies agree.
15
<PAGE>
B. ACI SERVICES, FACILITIES, AND ARRANGEMENTS:
<TABLE>
<CAPTION>
SERVICE OR ELEMENT DESCRIPTION: RECURRING CHARGES: NON-RECURRING CHARGE:
------------------------------ ----------------- --------------------
<S> <C> <C>
I. LOCAL CALL TERMINATION(5)
Traffic Delivered at End Office $.001864/MOU Not Applicable
Traffic Delivered at Tandem or Local Serving
Wire Center $.002902/MOU Not Applicable
II. NUMBER PORTABILITY
Interim $1.50/Month/Ported $5.00/Service Order
Number $4.00/Installation/No. at
same location
Permanent Per permanent funding mechanism when established.
Access pass-through to number portability In accordance with Section 14.5 of Agreement
purchaser
III. EXCHANGE ACCESS SERVICE
Interstate Per ACI FCC exchange access tariff.
Intrastate Per ACI PA tariff exchange access tariff.
IV. LOCAL DIALING PARITY No Charge
V. ALL OTHER ACI SERVICES AVAILABLE TO BA FOR Available at ACI's tariffed or otherwise generally
PURPOSES OF EFFECTUATING LOCAL EXCHANGE COMPETITION available rates, not to exceed BA rates for
equivalent services available to ACI.
VI. OTHER SERVICES $.03/Call No Charge
INFORMATION SERVICE BILLING FEE
</TABLE>
- -----------------------
(5) See note 6 regarding measurement and calculation of local traffic
termination charges.
16
<PAGE>
6 LOCAL TRAFFIC TERMINATION RATES
A. CHARGES BY BA
(a) Traffic delivered to BA Local Serving Wire Center ("LSWC") or BA
Access Tandem: $.002902 per mou.
(b) Traffic delivered directly to terminating BA End Office: $.001864 per
mou.
B. CHARGES BY ACI
1. Single-tiered interconnection structure:
ACI's rates for the termination of BA's Local Traffic under the
single-tiered interconnection structure shall be recalculated once each
year on each anniversary of the Effective Date (the "Rate Determination
Date"). The methodology for recalculating the rates is as follows:
LSWC/ACCESS TANDEM MINUTES = Total minutes of use of Local Traffic
delivered by ACI to the BA LSWC or BA Access Tandem for most recent
billed quarter.
END OFFICE MINUTES = Total minutes of use Local Traffic delivered
by ACI directly to the terminating BA End Office for most recent
billed quarter.
TOTAL MINUTES = Total minutes of use of Local Traffic delivered
by ACI to BA for most recent billed quarter.
ACI Charge at the ACI-IP =
(LSWC/ACCESS TANDEM MINUTES x $.002902) + (END OFFICE MINUTES x $.001864)
--------------------------------------------------------------------------
TOTAL MINUTES
For the first year after the Effective Date, the ACI charge shall be
calculated based on the traffic data of the quarter immediately preceding
such Effective Date, or if no such traffic exists, on the proportion of
local call termination trunks to BA End Offices and to BA LSWC/Access
Tandems.
2. Multiple-tiered interconnection structure (if offered by ACI to any
carrier)
(a) Local Traffic delivered to ACI LSWC or ACI Access Tandem: $.002902
(b) Local Traffic delivered to terminating ACI End Office/node: $.001864
C. MISCELLANEOUS NOTES
1. In the event a Party desires to deliver Local Traffic to a LSWC (i) that is
not located within 25 miles of the Tandem Office that it subtends, or (ii) where
the Tandem Office that it subtends is not located within 25 miles of the Tandem
Office that is subtended by the terminating End Office, or (iii) that is not
located within 25 miles of the Tandem Office that is subtended by the
terminating End Office, then the Party shall (x) in addition to paying the
LSWC/Access Tandem termination rate described above, purchase the necessary
facilities from the terminating Party to transport such Traffic to a qualifying
LSWC or Access Tandem that is not subject to any of conditions (i), (ii), or
(iii) above, (y) purchase such other service(s) as the terminating Party may
offer under applicable tariff to remedy such condition(s), or (z) enter into a
new compensation arrangement as the Parties may agree. Notwithstanding the
foregoing, nothing in this Agreement shall obligate BA to provide switching
services at a LSWC when it functions as such.
2. The ACI termination rate under the single-tiered interconnection structure
set forth above is intended to be a Local Traffic termination rate for
Interconnection to the ACI-IP within each LATA that is reciprocal and equal to
the actual rates that will be charged by BA to ACI under the two-tiered Local
Traffic termination rate structure described above that will apply after the
first anniversary of the Effective Date. The single ACI termination rate is
also intended to provide financial incentives to ACI to deliver traffic directly
to BA's terminating End Offices once ACI's traffic volumes reach an appropriate
threshold.
17
<PAGE>
Exhibit B BONA FIDE REQUEST PROCESS FOR FURTHER UNBUNDLING
1. The Parties recognize that, because ACI plans to maintain a
technologically advanced network, it is likely to seek further unbundling
of Network Elements or the introduction of new Network Elements.
Accordingly, ACI may request such new unbundled Network Elements or
arrangements from time to time by submitting a request in writing ("Bona
Fide Request" or "BFR"). Bell Atlantic shall promptly consider and analyze
ACI's submission of a Bona Fide Request that Bell Atlantic provide: (a) a
method of Interconnection or access to a Network Element not otherwise
provided under this Agreement at the time of such Bona Fide Request; (b) a
method of Interconnection or access to a Network Element that is different
in quality to that which Bell Atlantic provides to itself, its Affiliates,
or its subscribers at the time of such request; (c) Collocation at a
location other than a Bell Atlantic Central Office; and (d) such other
arrangement, service, or Network Element for which a Bona Fide Request is
required under this Agreement. Items (a) through (d) above may be referred
to individually as a "BFR Item." The Bona Fide Request process set forth
herein does not apply to those services requested pursuant to Report &
Order and Notice of Proposed Rulemaking 91-141 (rel. October 19, 1992),
Paragraph 259 and Footnote 603 or subsequent orders.
2. A Bona Fide Request shall be submitted in writing and shall contain
information required to perform a preliminary analysis of the requested BFR
Item. Such information will include a technical description of each BFR
Item and reasonable estimates of the number or volume requested, the
location(s) of each BFR Item, and the date(s) each BFR Item is desired.
ACI shall submit each BFR via United States Postal Service or private
courier, return receipt requested.
3. ACI may cancel a Bona Fide Request at any time, but shall pay Bell
Atlantic's reasonable and demonstrable costs of processing and/or
implementing the Bona Fide Request up to the date of cancellation; except
ACI shall not be charged for preliminary analysis if costs do not exceed
one hundred dollars ($100). Bell Atlantic shall notify ACI if costs will
exceed five thousand dollars ($5,000). Bell Atlantic shall provide ACI
with weekly status reports on the progress of its analysis and shall
include the cost of such status reports in the costs of processing the BFR.
4. Within fifteen (15) business days after its receipt of a Bona Fide
Request, Bell Atlantic shall provide to ACI a preliminary analysis of the
BFR Item. The preliminary analysis shall respond in one of the following
ways:
4.1 confirm that Bell Atlantic will offer the BFR Item and identify
the date (no more than ninety (90) days after the date of the
preliminary analysis) when Bell Atlantic will deliver a firm price
proposal, including service description, pricing and an estimated
schedule for availability ("Bona Fide Request Price Proposal");
<PAGE>
4.2 provide a detailed explanation that such BFR Item is not
technically feasible and/or that the BFR Item does not qualify as one
that is required to be provided under the Act;
4.3 inform ACI that Bell Atlantic must do laboratory testing to
determine whether the BFR Item is technically feasible;
4.4 inform ACI that Bell Atlantic must do field testing to determine
whether the BFR Item is technically feasible;
4.5 inform ACI that it is necessary for the Parties to undertake a
joint technical/operational field test in order to determine both
technical feasibility and operational cost impacts of the BFR Item; or
4.6 request face-to-face meetings between technical representatives
of both Parties to further explain the BFR Item. No later than five
(5) business days following such meetings, Bell Atlantic will provide
a preliminary analysis in one of the ways identified in Sections 4.1
through 4.5. Both Parties shall make reasonable efforts to schedule
such meetings as expeditiously as possible.
5. Within ten (10) business days after receiving Bell Atlantic's
preliminary analysis from Section 4.3, 4.4, or 4.5, ACI shall:
5.1 in the case of Sections 4.3 or 4.4, (i) negotiate a mutually
agreeable, reasonably expeditious schedule for Bell Atlantic's
testing, (ii) a mutually agreeable date (no more than ninety (90) days
after the testing has shown the BFR Item is technically feasible) when
Bell Atlantic will deliver a Bona Fide Request Price Proposal, and
(iii) a mutually agreeable arrangement for sharing the testing costs;
or
5.2 in the case of Section 4.5, (i) negotiate a mutually agreeable,
reasonably expeditious schedule for joint technical/operational field
testing, (ii) a mutually agreeable date (no more than 90 days after
the testing has shown the BFR Item is technically feasible) when Bell
Atlantic will deliver a Bona Fide Request Price Proposal, and a
mutually agreeable arrangement for sharing the testing costs.
6. In handling a Bona Fide Request pursuant to Section 4, Bell Atlantic
shall, to the extent possible, utilize information from previously
developed Bona Fide Requests in order to shorten its response times. ACI
may take advantage of previously canceled BFR work performed by Bell
Atlantic on the same BFR Item or a substantially similar BFR Item, to the
extent applicable.
7. Within ten (10) business days after receiving Bell Atlantic's
preliminary analysis from Section 4.1, ACI shall:
<PAGE>
7.1 accept Bell Atlantic's date to deliver a Bona Fide Request Price
Proposal;
7.2 negotiate as expeditiously as possible a different date for Bell
Atlantic to deliver a Bona Fide Request Price Proposal; or
7.3 cancel the Bona Fide Request.
8. Unless the Parties otherwise agree, a BFR Item shall be priced in
accordance with Section 252(d)(1) of the Act and any applicable FCC or
Commission rules, regulations, or orders. Consistent with Applicable Law,
the price for each BFR Item shall include the reasonable and demonstrable
costs incurred by Bell Atlantic in responding to the BFR, to the extent
that Bell Atlantic has not previously been reimbursed for such costs.
9. Within ninety (90) days after its receipt of the Bona Fide Request
Price Proposal, ACI must either place an order for such BFR Item pursuant
to the Bona Fide Request Price Proposal or, if it believes such Bona Fide
Request Price Proposal is inconsistent with the requirements of the Act,
seek arbitration by the Commission, including the use of any available
expedited procedures. If, within ninety (90) days after its receipt of the
Bona Fide Request Price Proposal, ACI fails to confirm an order for such
BFR Item or seek arbitration by the Commission, Bell Atlantic may treat the
Bona Fide Request as canceled by ACI. If within ninety (90) days after
issuance of a Commission order finding that a Bona Fide Request Price
Proposal is consistent with the requirements of the Act, ACI fails to place
an order for such BFR Item, Bell Atlantic may treat the Bona Fide Request
as canceled by ACI.
10. If a Party to a Bona Fide Request believes that the other Party is not
requesting, or negotiating, or processing the Bona Fide Request in good
faith, or disputes a determination, or price or cost quote, or is failing
to act in accordance with Section 251 of the Act, such Party may seek
mediation or arbitration by the Commission, including the use of any
available expedited procedures, after giving the other Party written notice
at least ten (10) days in advance.
<PAGE>
EXHIBIT C
DIRECTORY ASSISTANCE AND INTRALATA
CALL COMPLETION SERVICES AGREEMENT
THIS AGREEMENT is made, effective this _____ day of _____________ 19___, by
and between BELL ATLANTIC - __________________, INC., (hereinafter referred to
as "Bell Atlantic"), a __________________________ corporation, with offices at
_____________________________________, and _______________________________,
hereinafter referred to as "Carrier", a ______________________ corporation with
offices at _______________________________________.
1. SCOPE AND TERM OF AGREEMENT
---------------------------
1.1 SCOPE This Agreement sets forth the terms and conditions which shall
govern the use of and payment for Directory Assistance (DA) Service and
IntraLATA Operator Service (hereinafter collectively referred to as
"Services") to be provided by Bell Atlantic, or its affiliated companies, to
Carrier. Carrier shall subscribe to and pay for Services for Carrier's local
exchange customers in the ___________ LATA(s).
1.2 TERM The initial term of this Agreement shall commence as of 12:01 a.m.
on the date first written above and will expire six (6) months following the
Cutover Date as defined in Section 3.2. At the end of this initial term, or
any subsequent renewal term, this Agreement shall automatically renew for an
additional period of six (6) months unless either party provides written
notice to the other of its intent to terminate at least three (3) months
prior to the expiration of the then current term.
2. DESCRIPTION OF SERVICES
-----------------------
2.1 DIRECTORY ASSISTANCE (DA) SERVICE
a) Directory Assistance Service shall consist of 1) directory transport
by Bell Atlantic from the point of Bell Atlantic's interconnection with
Carrier's trunks to Bell Atlantic's designated DA locations, and 2) the
provision of telephone number listings by Bell Atlantic operators in response
to calls from Carrier's local exchange customers located in the LATA(s)
designated in Section 1.1.
b) A maximum of two requests for telephone numbers will be accepted per DA
call. A "DA call" as used in this Agreement shall mean a call answered by or
forwarded to Bell Atlantic, regardless of whether a telephone number is
requested, provided, or available. The listings that will be available to
Carrier's customers are those telephone numbers that are listed in Bell
Atlantic's DA records for the LATA(s) designated in Section 1.1.
1
<PAGE>
2.2 IntraLATA Call Completion Service IntraLATA Call Completion Service
consists of the live and automated local and toll call completion services
specified in Appendix B including the completion of collect, card and
bill-to-third party calls; busy line verification; customer requested
interrupt; and other assistance to Carrier's local exchange customers located
in the LATA(s) designated in Section 1.1.
2.3 BRANDING Branding is a service option that permits the Carrier to
deliver a customized front-end announcement to its callers, identifying the
Carrier as the customer service provider. Carrier shall provide the
information required by Bell Atlantic to create this announcement. Branding
also requires that the Carrier maintain dedicated trunking arrangements to
the designated Bell Atlantic DA or operator switch locations.
2.4 END USER BILLING Bell Atlantic will provide Carrier with unrated EMR
records for use in the billing of Carrier's end users for Services. The rating,
billing, and settlement of end-user charges for the calls are the responsibility
of Carrier.
2.5 SERVICE METHODS Bell Atlantic agrees to provide Services in accordance
with Bell Atlantic's service standards and methods. Bell Atlantic will notify
Carrier in writing of any significant policy changes to operator services or
directory assistance standards and methods prior to implementation.
2.6 CUSTOMIZED SERVICE FEATURES AND OPTIONS Carrier may request
custom-designed service features or optional services to be provided in
conjunction with the Services hereunder. Upon mutual agreement of the
parties, such features and options will be provided pursuant to this
Agreement. Bell Atlantic, if requested, shall provide Carrier with an
estimate of the charges for such custom-designed supplements, changes, or
options prior to implementation.
3. COMMENCEMENT AND IMPLEMENTATION OF SERVICE
- ------------------------------------------3.1 REQUIRED INFORMATION Each
party shall make good-faith efforts to carry out its respective
responsibilities in meeting a jointly established schedule for
implementation. All records and other required information specified in
Appendix C, as well as a fully completed Technical Questionnaire, will be
furnished by Carrier at least ninety (90) days prior to the commencement of
services (i.e., the Cutover Date described in Section 3.2). Notices of any
changes, additions, or deletions to such records and information shall be
provided promptly in writing by Carrier to Bell Atlantic. Bell Atlantic will
review these change requests and determine any potential impact on the
Cutover Date. Written confirmation of any impact will be provided to Carrier.
2
<PAGE>
3.2 CUTOVER DATE The Cutover Date for Service(s) provided under this
Agreement shall be the date on which the Service(s) shall be available to all
of Carrier's local exchange customers in the LATA(s) designated in Section
1.1. The initial six-month term set forth in Section 1.2 shall commence on
the Cutover Date.
3.3 SERVICE REVIEW MEETINGS Bell Atlantic will meet and confer with Carrier
during the term of this Agreement to review and discuss the Services provided
under this Agreement. The times for meetings will be established by mutual
agreement of the parties.
4. EQUIPMENT AND FACILITIES
------------------------
4.1 BELL ATLANTIC will establish and maintain such access equipment and
related facilities as may be necessary to perform the Services under this
Agreement, provided that Carrier furnishes Bell Atlantic the information
specified in Appendix C, and any changes in such information, in a timely and
accurate manner. Any additional services that Carrier seeks during the term
of this Agreement will be subject to mutual agreement and the availability of
facilities and equipment.
4.2 CARRIER will provide and maintain such equipment within its premises as is
necessary to permit Bell Atlantic to perform the agreed-upon Services in
accordance with Bell Atlantic standard equipment operation and traffic operation
procedures.
4.3 CARRIER TRANSPORT
a) Carrier shall, at its expense, arrange for and establish the trunking
and other transport, interface, and signaling arrangements required by
Bell Atlantic to provide Services to Carrier. Separate dedicated trunks for
each NPA or LATA may be required. Any trunks or other transport and access
that Carrier obtains from Bell Atlantic to deliver Carrier's calls to Bell
Atlantic shall be provided pursuant to the applicable tariffs, or other
contractual arrangements, and not under this Agreement. Bell Atlantic agrees
to coordinate the scheduling of Services to be provided under this Agreement
with the scheduling of any trunking or related services provisioned by Bell
Atlantic under such tariffs or other contractual arrangements.
b) Carrier shall specify the number of trunks required for Services.
Carrier must provide trunks with operator services signaling directly to the
locations designated by Bell Atlantic. Bell Atlantic shall provide Carrier at
least three (3) months advance notice in the event of any change in a designated
location.
5. PAYMENT FOR SERVICES
---------------------
5.1 RATES Carrier agrees to subscribe to and pay for the Services and
options selected in Appendix A. Carrier shall pay the rates set forth in
Appendix A, subject to such obligations as Bell Atlantic may have under the
Telecommunications Act of 1996, and the FCC and state regulations and decisions
thereunder, to set cost-based rates for unbundled network elements.
Specifically, when a regulatory body of competent jurisdiction has duly approved
the rates under which Bell Atlantic is required to provide Services to
competitive local exchange carriers (hereinafter referred to as "CLEC rates"),
Bell Atlantic shall charge, and Carrier shall pay, such CLEC rates for the
applicable Services.
3
<PAGE>
5.2 SETTLEMENTS Carrier shall render payment to Bell Atlantic net thirty
(30) calendar days from the date of delivery of the Services or from the date of
billing for the Services, whichever occurs later. Carrier shall pay interest on
any amount overdue at the rate of fifteen (15) percent per annum, compounded
monthly.
5.3 BILLING DISAGREEMENTS
a) Carrier may, in good faith, dispute part or all of an invoice
provided by Bell Atlantic. To dispute an invoice, Carrier must provide Bell
Atlantic with a written explanation of the questioned charges for
consideration within thirty (30) days of receipt of the invoice. Bell
Atlantic will respond to Carrier's claim within thirty (30) days of receipt
of the explanation.
b) The parties agree to negotiate any dispute in good faith to reach a
satisfactory resolution of the dispute no later than ninety (90) days after
Carrier's receipt of the invoice. Carrier shall have no obligation to pay
interest on a disputed amount while a resolution is being negotiated during
this period. In the event that the dispute is not resolved at the account
manager level within forty five (45) days after receipt of Carrier's claim,
the parties agree to submit the dispute to an Intercompany Review Board for
resolution. The Intercompany Review Board shall consist of two
representatives from each party who are authorized to resolve the dispute on
behalf of their respective companies. The Intercompany Review Board shall
conduct a joint conference to review the parties' respective positions and to
resolve the dispute.
c) Upon the resolution of the dispute, an appropriate adjustment of
billing shall be made by Bell Atlantic. Bell Atlantic shall apply any
reductions in the invoiced amount as a credit. Carrier shall promptly pay any
amounts the parties agree are due with interest thereon under Section 5.2
retroactive to the date of the original invoice. If no resolution is reached
within the specified 90-day period, either party may pursue such other
remedies and recourse as are otherwise available under or this Agreement.
5.4 TAXES The rates specified in this Agreement are exclusive of all taxes,
duties, or similar charges imposed by law. Carrier shall be liable for and
shall reimburse Bell Atlantic for any sales, use, excise, or other taxes
applicable to the Services performed under this Agreement.
5.5 CARRIER'S CUSTOMERS Carrier shall be responsible for all contacts and
arrangements with its customers concerning the provision and maintenance, and
the billing and collection, of charges for Services furnished to Carrier's
customers.
6. DEFAULTS AND REMEDIES
---------------------
4
<PAGE>
6.1 DEFAULTS If Carrier defaults in the payment of any amount due hereunder,
or if Bell Atlantic materially fails to provide Services as agreed hereunder,
and such default or failure shall continue for thirty (30) days after written
notice thereof, the other party may terminate this Agreement with thirty (30)
days written notice.
6.2 CARRIER REMEDIES In the event that Bell Atlantic, through negligence or
willful misconduct, fails to provide the Services selected and contracted for
under this Agreement, Bell Atlantic shall pay Carrier for Carrier's direct
damages resulting from such failure, up to an amount not to exceed the charges
payable under this Agreement for the Services affected.
6.3 DISCONTINUANCE BY CARRIER. In the event that Carrier discontinues using
Services,either in part or in whole, prior to expiration of the then current
term and such discontinuance is not due to Bell Atlantic's material failure
to perform as specified in Section 6.1, Carrier shall pay Bell Atlantic an
amount equal to the average monthly charges for the six-month period
immediately preceding the discontinuance multiplied by the number of months
remaining in the then-current term. If Services have been provided for a
period of less than six months, Carrier shall pay the charges for the month
with the highest usage multiplied by the number of months remaining in the
then-current six-month term. If Carrier terminates this Agreement prior to
the Cutover Date, Carrier shall pay Bell Atlantic the greater of the
following: (i) all reasonable and necessary costs already incurred by Bell
Atlantic in preparation for the commencement of services, or (ii) the sum of
fifty thousand dollars ($50,000).
6.4 OTHER REMEDIES THE EXTENT OF LIABILITY ARISING UNDER THIS AGREEMENT SHALL
BE LIMITED AS DESCRIBED IN SECTIONS 6.1, 6.2 AND 6.3 ABOVE. IN NO EVENT SHALL
EITHER PARTY BE LIABLE FOR ANY OTHER LOSS, COST, CLAIM, INJURY, LIABILITY, OR
EXPENSE RELATED TO OR ARISING OUT OF THIS AGREEMENT OR THE SERVICES PROVIDED
HEREUNDER INCLUDING, BUT NOT LIMITED TO, ANY INCIDENTAL, SPECIAL, INDIRECT, OR
CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO LOSS OF REVENUE OR PROFIT,
WHETHER RECOVERY IS SOUGHT IN TORT, CONTRACT, OR OTHERWISE, EVEN IF EITHER PARTY
HAD NOTICE OF SUCH DAMAGES.
7. CONFIDENTIAL INFORMATION
------------------------
7.1 CONFIDENTIALITY The parties agree that all confidential and proprietary
information that is marked as specified in Section 7.2 and that is disclosed by
either party to the other party for the purposes of this Agreement, including
rates and terms, shall be treated as confidential unless (a) such information
was previously or becomes known to the receiving party free of any obligation to
keep it confidential, (b) has been or is subsequently made public by the
disclosing party, or (c) is required to be disclosed by law. The receiving
party shall not, except in the performance of the Services under this Agreement
or with the
5
<PAGE>
express prior written consent of the other party, disclose or permit access
to any confidential information to any other parties. The parties agree to
advise their respective employees, agents, and representatives to take such
action as may be advisable to preserve and protect the confidentiality of
such information.
7.2 MARKING OF CONFIDENTIAL INFORMATION All information the disclosing party
considers proprietary or confidential, if in writing or other tangible form,
shall be conspicuously labeled or marked as "Proprietary" and/or "Confidential"
and, if oral, shall be identified as proprietary at the time of disclosure and
promptly confirmed in writing. Either party shall have the right to correct any
inadvertent failure to designate information as proprietary by written
notification within ten (10) days following disclosure.
8. RELATIONSHIP OF THE PARTIES
---------------------------
8.1 INDEPENDENT CONTRACTORS Bell Atlantic and Carrier shall be independent
contractors under this Agreement, and all services under this Agreement shall be
performed by Bell Atlantic as an independent contractor and not as an agent of
Carrier.
8.2 RESPONSIBILITY FOR EMPLOYEES AND AGENTS All persons furnished by Bell
Atlantic shall be considered solely Bell Atlantic's employees or agents, and
Bell Atlantic shall be responsible for compliance with all laws, rules, and
regulations relating to such persons including, but not limited to, hours of
labor, working conditions, workers' compensation, payment of wages, benefits,
unemployment, social security and other payroll taxes. Each party's employees
and agents, while on premises of the other, shall comply with all rules and
regulations, including any applicable security procedures and safeguarding of
confidential data.
9. GENERAL CONDITIONS
------------------
9.1 ASSIGNMENT Neither party may assign or delegate its rights and
obligations under this Agreement without the prior written consent of the
other party, except that either party may assign this Agreement, without such
consent, to its parent, affiliate or subsidiary, provided that the assignee
has the resources, legal authority, and ability to perform all terms of this
Agreement. Thirty (30) days advance notice of such assignment shall be
provided to the other party.
9.2 CHOICE OF LAW The validity, construction and performance of this
Agreement shall be governed by the laws of the state in which LATA(s)
designated in Section 1.7 is/are located.
9.3 COMPLIANCE WITH LAWS Each party shall comply with all applicable
federal, state, county and local laws, ordinances, regulation, rules and codes
in the performance of this Agreement. Neither party shall be liable to the
other for termination of this Agreement or
6
<PAGE>
any services to be provided hereunder necessitated by compliance with any
law, rule, regulation or court order of a duly authorized governmental body.
9.4 CONTINGENCY Neither party shall be held responsible or liable to the
other for any delay or failure in performance caused by fires, strikes,
embargoes, requirements imposed by Government regulation, civil or military
authorities, act of God or by the public enemy, or other causes beyond the
control of Carrier or Bell Atlantic. If such a contingency occurs, the party
injured by the other's inability to perform may either: a) terminate the
affected services or part thereof not already rendered; or b) suspend the
affected services or part thereof for the duration of the delaying cause and
resume performance once the delaying causes cease.
9.5 LICENSES No licenses, expressed or implied, under any patents,
copyrights, trademarks or other intellectual property rights are granted by
Bell Atlantic to Carrier under this Agreement.
9.6 NOTICES Except as otherwise specified in this Agreement, any notice
required or permitted under this Agreement shall be in writing and shall be
given to the other party at the address designated below by hand delivery,
registered return-receipt requested mail, or nationally recognized courier
service:
For Bell Atlantic: ____________________________________
____________________________________
____________________________________
____________________________________
For Carrier: ____________________________________
____________________________________
____________________________________
____________________________________
The above addresses may be changed by giving thirty (30) calendar days prior
written notice as prescribed above. Notice shall be deemed to have been given
or made on the date of delivery if received by hand, or express courier, and
three days after delivery to the U.S. Postal Service, if mailed.
9.7 PUBLICITY Bell Atlantic and Carrier agree not to publish any
advertising, sales promotions, or press releases that promote or otherwise
relate to the services provided under this Agreement and include the other
party's name, logos, trademarks, or service marks, unless it obtains the other
party's prior written consent, except that either party may disclose the fact
that Bell Atlantic provides directory assistance and/or operator services to
Carrier without such prior review or approval.
7
<PAGE>
9.8 SEVERABILITY If any provision of this Agreement or the application of any
provision shall be held by a tribunal of competent jurisdiction to be contrary
to law or unenforceable, the remaining provisions of this Agreement shall
continue in full force and effect.
9.9 SURVIVAL All obligations hereunder, incurred by either Bell Atlantic or
Carrier prior to the cancellation, termination, or expiration of this Agreement
shall survive such cancellation, termination or expiration.
9.10 CAPTIONS AND SECTION HEADINGS The captions and section headings in this
Agreement are for convenience only and do not affect the meaning or
interpretation of this Agreement.
9.11 DUPLICATE ORIGINALS This Agreement may be executed separately by the
parties in one or more counterparts. Each duplicate executed shall be deemed an
original, and all together shall constitute one and the same document.
9.12 ENTIRE AGREEMENT The terms and conditions of this Agreement, including
the Appendices attached to this Agreement, constitute the entire Agreement
between Bell Atlantic and Carrier relating to the subject matter of this
Agreement, and supersede any and all prior or contemporaneous understandings,
promises or representations, whether written or oral, between the parties
relating to the subject matter of this Agreement. Any waiver, modification
or amendment of any provision of this Agreement, or of any right or remedy
hereunder, shall not be effective unless made in writing and signed by both
parties.
IN WITNESS WHEREOF, the parties agree that the effective date of this
Agreement is the date first written above, and each party warrants that it
has caused this Agreement to be signed and delivered by its duly authorized
representative.
FOR BELL ATLANTIC - FOR CARRIER
________________________, INC.
NAME: _______________________ NAME: _________________________
TITLE: ______________________ TITLE: ________________________
SIGNATURE: __________________ SIGNATURE: ____________________
DATE: _______________________ DATE: _________________________
8
<PAGE>
APPENDIX A
CARRIER SERVICE SELECTION FORM
------------------------------
Please select desired services.
<TABLE>
<CAPTION>
MINIMUM
SERVICE
SERVICE PERIOD CHARGE SELECTION
- ------- ------- ------ ---------
<S> <C> <C> <C>
Directory Assistance (ADAS) 6 months _______/call (Directory Yes / / No / /
Transport charges below)
IntraLATA Call Completion 6 months Live: ______/op work second Yes / / No / /
Operator Services Automated: ______/auto wk sec
LIDB: ______/query
Branding ______per service, per switch Yes / / No / /
(one-time fee)
</TABLE>
Directory Transport charges are as follows. (Call miles are measured from the
BA Wire Center serving Carrier's premises to the Directory Assistance
location.)
<TABLE>
<CAPTION>
RATE PER DIRECTORY ASSISTANCE CALL
----------------------------------
<S> <C>
Tandem-Switched Transport
Fixed ................................... _______
Per mile................................. _______
Tandem Switching............................ _______
</TABLE>
NOTE: Trunking, daily usage file, and switched access costs are not included in
- ---- the above rates.
9
<PAGE>
APPENDIX B
INTRALATA CALL COMPLETION OPERATOR SERVICES CALL TYPES
------------------------------------------------------
IntraLATA Call Completion Operator Services may include the following:
a. CALLING CARD
------------
(i) LIVE: Bell Atlantic operator keys the calling card number and
call details into the system, secures validation, and releases the
call to the network.
(ii) AUTOMATED: Caller keys the calling number and call details in
response to automated prompts. Bell Atlantic secures validation and
releases the call to the network.
b. COLLECT
-------
(i) LIVE: Bell Atlantic operator obtains the calling party's name, keys
the call details if necessary, announces the call to the called party,
waits for acceptance, and releases the call to the network.
(ii) AUTOMATED: Caller provides name and call details. Bell Atlantic's
automated system obtains called party's consent and releases the call
to the network.
c. BILLED TO A THIRD PARTY
-----------------------
(i) LIVE: Bell Atlantic operator requests the calling party's name, keys
the call details if necessary, calls the third party to verify
acceptance of billing, and upon acceptance, releases the call to the
network.
(ii) AUTOMATED: Caller provides name, call details, and billing number.
Bell Atlantic's automated system verifies billed number and releases
the call to the network.
d. PERSON-TO-PERSON
----------------
Bell Atlantic operator requests the person or department the calling party
has specified, ensures the appropriate party has been reached (person or
department), and releases the call to the network.
e. COIN SENT PAID
--------------
Bell Atlantic operator keys the call details if necessary, requests the
initial deposit, and upon deposit, releases the call to the network.
10
<PAGE>
f. MISCELLANEOUS CALL ASSISTANCE (LIVE)
------------------------------------
(i) 0- CALLS: Bell Atlantic operator provides caller with dialing
instructions or assistance, transfers emergency calls, or refers
questions to the business office or repair service.
(ii) DIALING ASSISTANCE & INTERVENTION: Bell Atlantic operator dials a
number for a caller who is unwilling to dial directly or is
encountering trouble (such as wrong number, poor transmission, or
cutoff), and who requests a credit or reconnection.
(iii) TIME AND CHARGES: Bell Atlantic operator provides caller with time
and charges at the end of conversation, if requested.
(iv) INDIVIDUALS WITH DISABILITIES: Bell Atlantic operator assists a
caller requiring dialing assistance due to a disability.
g. BUSY-LINE VERIFICATION
----------------------
Bell Atlantic operator determines if the number specified by the customer
is in use, idle, or out of order. Appropriate facilities and equipment
may be required from the Carrier to enable verification of Carrier's lines.
h. CUSTOMER-REQUESTED INTERRUPT
----------------------------
At the caller's request, Bell Atlantic operator interrupts conversation in
progress on a line that is in use, as verified through Busy-Line
Verification.
i. OPERATOR NUMBER IDENTIFICATION (ONI) REQUESTS
----------------------------------------------
Bell Atlantic operator requests the calling telephone number, keys the
number into the system for identification, and releases the call for
processing.
j. TIME OF DAY
-----------
Bell Atlantic operator provides the customer with the approximate time of
day for companies that have approved tariffs. For those companies without
approved tariffs, customers are referred to directory assistance. If the
request is in connection with a call, the operator provides the approximate
time.
k. AUTOMATED COIN TOLL SERVICE (ACTS)
----------------------------------
Bell Atlantic will provide automated messages for intraLATA toll calls
that originate from coin phones. The messages will prompt callers for
the correct change and record the change upon deposit. If a caller fails
to deposit the correct amount within the time threshold (set by Bell
Atlantic), the call will default to a live operator.
l. VALIDATION SERVICES
-------------------
Bell Atlantic will launch queries for the validation of all calling card
calls, collect calls, and billed-to-third number calls to a Line
Information Data Base (LIDB). The validation costs for queries of LIDB
may be separate from the individual call rates. Bell Atlantic will also
launch queries for validations to another company's LIDB if that company
has a card honoring agreement with Bell Atlantic.
11
<PAGE>
APPENDIX C
REQUIRED INFORMATION
--------------------
Carrier shall furnish Bell Atlantic all information required by Bell Atlantic to
establish and maintain the Services to be provided to Carrier, including a
completed Technical Questionnaire. Such required information includes, but is
not limited to, the following:
1. Central office exchange names
2. Usage forecasts
3. Local central office characteristics
4. Trunking arrangements and trunk group types
5. Emergency reporting system and procedures
6. Business office information
7. Repair service information
8. Name and address request information
9. Tariffs and rate information
10. Customer dialing capabilities
11. Access to EMR records
12. Desired branding announcement (if applicable)
13. Carrier's estimated start date of Services
14. Access Service Requests (ASRs) for trunking and translations
NOTE: ASRs are not to be submitted by Carrier until Carrier and Bell Atlantic
- ----- have reviewed the Technical Questionnaire.
12
<PAGE>
EXHIBIT D
INTRALATA TELECOMMUNICATIONS SERVICES SETTLEMENT AGREEMENT
This Agreement is entered into as of ___________________, 1997, by and
between Bell Atlantic - __________________________, Inc., a ___________________
corporation, with principal offices located at ________________________________
("BA-__"), and __________________________, a ______________________ corporation,
with principal offices located at ______________________________________________
____________________________________________________ ("Carrier").
SECTION I
SCOPE
This Agreement sets forth the terms and conditions for the following:
(a) administering and processing messages in the intraLATA Toll Originating
Responsibility Plan ("ITORP"); and
(b) the settlement of compensation for the following telecommunications
traffic within a BA-__ LATA:
(1) intrastate and interstate intraLATA traffic terminated to Carrier
and originated by an Independent Telephone Company or wireless
carriers that transits the facilities of BA-__ within a BA-__ LATA,
including Message Telecommunications Service and Local Exchange
Service (the "ITORP Transit Service Traffic");
(2) intrastate and interstate intraLATA Message
Telecommunications Service and Local Exchange Service traffic
which originates from a Certified Local Exchange Carrier or
Carrier, transits BA-PA's network and terminates to Carrier, or a
wireless carrier or an Exchange Carrier other than BA-__, which
traffic is subject to a Meet-Point Billing arrangement (the
"Meet-Point Transit Service Traffic");
(3) intraLATA 800/888 Service Traffic; and
(4) intraLATA Alternately Billed Calls billed to a line-based
telephone number within the state where the call is originated.
By way of clarification, this Agreement does not cover the following: (x)
traffic that does not use BA-__ facilities; (y) interLATA traffic; and (z) any
statewide services (whether interLATA or intraLATA) provided entirely by an
Interexchange Carrier such as statewide WATS.
<PAGE>
EXHIBIT D
SECTION II
DEFINITIONS
For purposes of this Agreement, the terms set forth below shall have the
following meaning:
A. 800/888 NUMBER DATABASE shall mean the call management service
database that provides POTS telephone number translation or routing
information or both for a given 800/888 telephone number.
B. 800/888 SERVICE TRAFFIC means a toll free call originating with the
Originating Company and billed to the Terminating Company's end user.
800/888 service MOUs are recorded by the Originating Company and
provided to the Terminating Company so that it can bill its end
user(s).
C. ACCESS TANDEM shall mean a switching entity that is used to connect
and switch trunk circuits between and among End Offices and between
and among End Office switches and carriers' aggregation points, points
of termination, or points of presence, which entity has billing and
recording capabilities that are used to provide switched Exchange
Access services.
D. ALTERNATELY BILLED CALLS shall mean all intraLATA land-line Collect
Calls, Calling Card Calls and Third-Number Calls that originate and
terminate in the _________ of _____________ and are billed to a
line-based number within the jurisdiction of the __________ of
_____________ serviced by the Billing Company. Alternately Billed
Calls are identified in ITORP reports as "Received Collect/Sent
Collect Calls".
E. BASIC 800/888 NUMBER QUERY shall mean routing information obtained
from an 800/888 Number Database for originating 800/888 calls.
F. BILLING COMPANY shall mean the Local Exchange Carrier that provides
the local telephone exchange service for the number to which an
Alternately Billed Call is to be billed.
G. CALLING CARD CALL shall mean a call billed to a pre-assigned end user
line-based billing number, including calls dialed or serviced by an
operator system.
H. CARRIER COMMON LINE FACILITIES means the facilities from the end
user's premises to the End Office used to originate or terminate
Transit Service Traffic and 800/888 Service Traffic. Such carrier
common line facilities are as specified in each party's Exchange
Access Tariff.
2
<PAGE>
EXHIBIT D
I. CATEGORY 01 shall mean the EMR/billing record for usage charges
applicable to the terminating 800/888 number service subscriber.
J. CATEGORY 08 shall mean the EMR/copy record containing the information
necessary for Carrier to bill/settle intraLATA terminating charges
with other carriers.
K. CATEGORY 11 shall mean the EMR/access record containing information
necessary for Carrier to bill/settle interexchange access charges.
L. CCS/SS7 shall mean the Common Channel Signaling/Signaling System 7,
which refers to the packet-switched communication, out-of-band
signaling architecture that allows signaling and voice to be carried
on separate facilities, and thus is a signaling network that is
common to many voice channels. There are two modes of operation
defined for CCS/SS7: database query mode, and trunk signaling mode.
M. CENTRALIZED MESSAGE DISTRIBUTION SYSTEM (CMDS) shall mean the message
processing system which handles the distribution of Message Records
from the Earning Company to the Billing Company.
N. CERTIFIED LOCAL EXCHANGE CARRIER (CLEC) means a carrier certified by
the ____________ ____________to provide Local Exchange Access services
within the BA-__ operating territory in that state.
O. COLLECT CALL shall mean a non-sent paid call that is billed to the
number receiving the call, including calls dialed or serviced by an
operator system.
P. DISCOUNTED TOLL SERVICES means services in which the originating end
user is charged a rate less than would normally be assessed for calls
placed to similar points outside the end user's local calling area.
Q. EARNING COMPANY shall mean the Local Exchange Carrier that provides
local telephone exchange service for the number from which an
Alternately Billed Call originates.
R. END OFFICE means the end office switching and end user line
termination facilities used to originate or terminate switched
intraLATA telecommunications services traffic.
S. EXCHANGE means a geographic area established for the furnishing of
local telephone service under a local tariff. It usually embraces a
city, town or village and its environs. It consists of one or more
wire centers together with the associated facilities used in
furnishing communications service within the area.
T. EXCHANGE ACCESS means the facilities and services used for the purpose
of
3
<PAGE>
EXHIBIT D
originating or terminating interexchange telecommunications in
accordance with the schedule of charges, regulations and conditions
specified in lawfully established Exchange Access Tariffs.
U. EXCHANGE ACCESS TARIFFS means the tariffs lawfully established with
the Federal Communications Commission or the _____________
___________________ by an Exchange Carrier for the provision of
Exchange Access facilities and services.
V. EXCHANGE CARRIER shall mean a carrier licensed to provide
telecommunications services between points located in the same
Exchange area.
W. EXCHANGE MESSAGE RECORD (EMR) shall mean the standard used for
exchange of telecommunications message information among Local
Exchange Carriers for billable, non-billable, sample, settlement
and study data. EMR format is described in BR-010-200-010 CRIS
Exchange Message Record, a Bell Communications Research, Inc.
document that defines industry standards for Exchange Message
Records, which is hereby incorporated by reference.
X. ITORP TRANSIT SERVICE TRAFFIC shall have the meaning set forth in
Section I above titled "Scope".
Y. INDEPENDENT TELEPHONE COMPANY shall mean any entity other than BA-__
which, with respect to its operations within the ___________ of
__________________, is an incumbent Local Exchange Carrier.
Z. INTER-COMPANY NET BILLING STATEMENT shall mean the separate monthly
financial reports issued by BA-__ under ITORP to the Exchange Carriers
for settlement of amounts owed.
AA. INTRALATA TOLL ORIGINATING RESPONSIBILITY PLAN (ITORP) shall mean the
information system owned and administered by BA-__ for calculating
charges between BA-__ and Local Exchange Carriers for termination of
intraLATA calls.
BB. INTEREXCHANGE CARRIER (IXC) means a carrier that provides, directly or
indirectly, interLATA or intraLATA telephone toll services.
CC. LOCAL ACCESS AND TRANSPORT AREA (LATA) means a contiguous geographic
area: (1) established before the date of enactment of the
Telecommunications Act of 1996 by BA-__ such that no Exchange area
includes points within more than one metropolitan statistical area,
consolidated metropolitan statistical area, or state, except as
expressly permitted under the AT&T Consent Decree; or (2) established
or modified by BA-__ after such date of enactment and approved by the
Federal Communications Commission.
4
<PAGE>
EXHIBIT D
DD. LOCAL EXCHANGE CARRIER (LEC) means any person that is engaged in the
provision of Local Exchange Service or Exchange Access. Such term
does not include a person insofar as such person is engaged in the
provision of a commercial mobile service under Section 332 (c) of the
Telecommunications Act of 1996, except to the extent that the Federal
Communications Commission finds that such service should be included
in the definition of such term.
EE. LOCAL EXCHANGE SERVICE means telecommunications services provided
between points located in the same LATA.
FF. MEET-POINT BILLING (MPB) means an arrangement whereby two or more
LECs jointly provide to a third party the transport element of a
switched access Local Exchange Service to one of the LECs' End Office
switches, with each LEC receiving an appropriate share of the
transport element revenues as defined by their effective Exchange
Access tariffs.
GG. MEET-POINT TRANSIT SERVICE TRAFFIC shall have the meaning set forth in
Section 1, "Scope".
HH. MESSAGE RECORDS shall mean the message billing record in Exchange
Message Record format.
II. MESSAGE TELECOMMUNICATIONS SERVICE (MTS) means message toll telephone
communications, including Discounted Toll Services, between end users
in different Exchange areas, but within the same LATA, provided in
accordance with the schedules of charges, regulations and conditions
specified in lawfully applicable tariffs.
JJ. MINUTES OF USE (MOU) means the elapsed time in minutes used in the
recording of Transit Service Traffic and 800/888 Service Traffic.
KK. MULTIPLE BILL/SINGLE TARIFF means the MPB method whereby each LEC
prepares and renders its own Meet Point Bill in accordance with its
own tariff(s) for the portion of the jointly-provided Exchange Access
service which the LEC provides.
LL. MULTIPLE EXCHANGE CARRIER ACCESS BILLING (MECAB) means the document
prepared by the Billing Committee of the Ordering and Billing Forum,
which functions under the auspices of the Carrier Liaison Committee of
the Alliance for Telecommunications Industry Solutions, and published
by Bellcore as Special Report SR-BDS-000983, which document contains
the recommended guidelines for the billing of an Exchange Access
service provided by two or more LECs, or by one LEC in two or more
states, within a single LATA, and is incorporated herein by reference.
5
<PAGE>
EXHIBIT D
MM. ORIGINATING COMPANY means the company which originates intraLATA MTS
or Local Exchange Service on its system. (For compensation purposes,
the Originating Company shall be considered the Terminating Company
for 800/888 Service Traffic.)
NN. TERMINATING COMPANY means the company which terminates intraLATA MTS
or Local Exchange Service on its system where the charges for such
services are collected by the Originating (or Billing) Company. (For
compensation purposes, the Terminating Company shall be considered the
Originating Company for 800/888 Service Traffic.)
OO. THIRD-NUMBER CALL shall mean a call billed to a subscriber's
line-based billing number which is not the number to which the call
either terminates or originates.
PP. TRANSIT TRAFFIC shall refer to both ITORP Transit Service Traffic and
Meet-Point Transit Service Traffic.
QQ. TRANSITING COMPANY shall mean a Local Exchange Carrier which
transports intraLATA telecommunications traffic on its system between
an Originating Company and a Terminating Company.
RR. TRANSPORT FACILITIES means the facilities from the End Office to a
tandem switching facility used to originate or terminate switched
intraLATA telecommunication services traffic.
SECTION III
SETTLEMENT OF TRANSIT SERVICES
(a) ITORP TRANSIT SERVICE TRAFFIC.
(1) CALL ROUTING AND RECORDING; BILLING PERCENTAGES. BA-__ will route
ITORP Transit Service Traffic over the combined local and toll trunk groups
between BA-__ and Carrier. BA-__ and Carrier agree to designate the points
of interconnection for the purpose of terminating ITORP Transit Service
Traffic which originates from an Independent Telephone Company or wireless
carrier and terminates to Carrier. Both parties further agree to develop and
file mutually agreed to billing percentages applicable to ITORP Transit
Service Traffic in the National Exchange Carrier Association F.C.C. Tariff
No. 4, which billing percentages shall be calculated in accordance with ITORP
guidelines.
(2) EXCHANGE OF BILLING DATA. The Originating Company will provide to
BA-__ all
6
<PAGE>
EXHIBIT D
billing data relating to ITORP Transit Service Traffic for processing in
ITORP within fourteen (14) days from the date the usage occurs (to the extent
usage occurs on any given day) for traffic originating from an Independent
Telephone Company or wireless carrier, which traffic transits BA-PA's facilities
and terminates to Carrier.
(3) BILLING. BA-__ will, on behalf of Carrier, bill Exchange Carriers for
intraLATA ITORP Transit Service Traffic, and collect compensation due Carrier
based on Carrier's established and legally-approved tariffed or negotiated rates
utilizing ITORP. The charges set forth in Attachment A, attached hereto and
incorporated herein by reference, shall apply to the billing and collection
services provided by BA-__ to Carrier hereunder. Carrier will record the ITORP
Transit Service Traffic usage at its switch, and shall bill BA-__ for this
traffic in accordance with the rates set forth in the Interconnection Agreement
under Section 251 and 252 of the Telecommunications Act of 1996, dated as of
September __, 1996, by and between BA-__ and Carrier.
(b) MEET-POINT TRANSIT SERVICE TRAFFIC.
(1) CALL ROUTING AND RECORDING; BILLING PERCENTAGES. BA-__ and Carrier
will route their respective Meet-Point Transit Service Traffic over the combined
local and toll trunk groups between them. BA-__ and Carrier agree to designate
the points of interconnection for the purpose of terminating Meet-Point Transit
Service Traffic which originates from a CLEC and terminates to Carrier, or
originates from Carrier and terminates to a CLEC, Independent Telephone Company,
or a wireless carrier. Both parties further agree to develop and file mutually
agreed to billing percentages applicable to Meet-Point Transit Service Traffic
in the National Exchange Carrier Association F.C.C. Tariff No. 4, which billing
percentages shall be calculated in accordance with MECAB guidelines.
(i) END OFFICES SUBTENDING BA-__ ACCESS TANDEM. Meet-Point Transit
Service Traffic will be routed over the local and toll interconnection
facilities used to terminate similar traffic directly between BA-__
and Carrier when the Originating and Terminating Company's End Office
switches subtend BA-PA's Access Tandem. BA-__ will record this
traffic at the BA-__ Access Tandem, and forward the terminating call
records to the Terminating Company for purposes of Meet-Point Billing.
(ii) END OFFICES THAT DO NOT SUBTEND A BA-__ ACCESS TANDEM. When the
Originating and/or the Terminating Company's End Office switches do
not subtend BA-PA's Access Tandem, the Meet-Point Transit Service Traffic
must be routed over interconnection facilities other than those used to
terminate intraLATA MTS or Local Exchange Service to BA-PA's end users
The Terminating Company will record this traffic at its Access Tandem
and forward the terminating call records to BA-__ for Meet-Point
Billing purposes.
(iii) SPECIAL ACCESS. Upon request, any Meet-Point Service Transit
Traffic may be
7
<PAGE>
EXHIBIT D
routed over special access interconnection facilities between Carrier,
on the one hand, and a CLEC, an Independent Telephone Company, or a
wireless carrier, on the other.
(2) EXCHANGE OF BILLING DATA. All billing data exchanged hereunder will
be exchanged on magnetic tape or via electronic data transfer, to be delivered
at the addresses set forth below, using the Electronic Message Record format.
BA-__ will provide to Carrier the switched-access detail usage data (category
1101XX records) on magnetic tape within fourteen (14) days from the date the
usage occurs (to the extent usage occurs on any given day) for traffic
originating from a CLEC, transiting BA-PA's facilities and terminating to
Carrier, and Carrier will provide to BA-__ the switched access summary usage
data (category 1150XX records) on a magnetic tape on a monthly basis within
fourteen (14) days of receipt from BA-__ of the switched access detail usage
data referenced above.
(3) BILLING. BA-__ and Carrier will submit to CLECs separate bills
under their respective tariffs for their portion of jointly-provided
Meet-Point Transit Service Traffic. With respect to Meet-Point Transit
Service Traffic, BA-__ and Carrier will exchange billing data and render
bills under Multiple Bill/Single Tariff arrangements in accordance with the
applicable terms and conditions set forth in MECAB.
(4) ADDRESSES. Magnetic tapes to be sent hereunder to Carrier will be
sent to the following address (which address Carrier may change upon prior
written notice to BA-__):
Magnetic tapes to be sent hereunder to BA-__ will be sent to the
following address(es), as appropriate (which address(es) BA-__ may change
upon prior written notice to Carrier):
Bell Atlantic
Tape Library
1500 Tech Center Drive
Monroeville, PA 15146
SECTION V
800/888 SERVICE
800/888 Service Traffic will be exchanged among BA-__, Carrier,
Independent Telephone Companies, CLECs and wireless carriers via CCS/SS7
trunks, and all will deliver/route these calls as appropriate and provide
EMRs to the Terminating Company to enable it to bill its 800/888
8
<PAGE>
EXHIBIT D
service subscriber. These EMRs will, per industry standards, include the
following: Category 01 (800/888 number subscriber billing), Category 08 (copy
record/local exchange charges), and Category 11 (interexchange carriers
access records).
(a) DELIVERY OF TRANSLATED 800/888 NUMBER QUERIES AND CALLS OVER
CCS/SS7 LINKS AND TRUNKS. BA-__ and Carrier will launch their own Basic
800/888 Number Query for 800/888 Service Traffic originated in their
networks, and route this traffic to each other, as appropriate, utilizing
existing local and toll interconnection facilities.
(b) EXCHANGE OF RECORDS; COMPENSATION. All 800/888 Service Traffic
hereunder shall be subject to the appropriate access charges, as set forth in
the applicable tariffs. In addition, for jointly provided intraLATA 800/888
Service Traffic between two Local Exchange Carriers, the Originating Company is
responsible for billing its tariffed Basic 800/888 Number Query charge to the
Terminating Company. Carrier, when acting as an Originating Company, must
submit to BA-__, via magnetic tape(s) in EMR format, (i) the information
necessary to bill/settle intraLATA charges (EMR Category 110125), and (ii) the
usage charges applicable to the terminating 800/888-number service subscriber
(EMR Category 010125). In the event any of these records are lost or destroyed,
BA-__ and Carrier will jointly estimate the terminating access charges due to
either party hereunder as follows:
(1) Total the terminating traffic compensation paid with respect to
800/888 Service Traffic to each party hereunder for the most recent
six (6) months period preceding the month covered by the lost or
destroyed tapes.
(2) Divide the total determined in (1) preceding, by 180 days.
(3) Multiply the terminating traffic compensation per day determined in
(2) preceding, by the number of days covered by the lost or destroyed
tapes. The calculated amount will be included as an adjustment for
lost or destroyed tapes in the next Inter-Company Net Billing
Statement.
BA-__ shall have no liability whatsoever with respect to any lost, damaged
or destroyed records submitted hereunder by Carrier.
(c) SETTLEMENT. EMR records submitted by Carrier hereunder acting as
an Originating Company, as contemplated in Paragraph (b) above, will be
processed in accordance with ITORP. For purposes of calculating the access
charges due Local Exchange Carriers with respect to 800/888 Service Traffic,
the Originating Company shall be deemed the Terminating Company. Access
charges payable hereunder shall be calculated in accordance with Section VII
of this Agreement, as applicable.
9
<PAGE>
EXHIBIT D
SECTION VI
ALTERNATELY BILLED CALLS
(a) RESPONSIBILITIES OF THE BILLING COMPANY. The Billing Company
agrees to provide the Earning Company with billing services, as specified
below, with respect to Alternately Billed Calls.
(1) BILLING. Upon receipt of the appropriate Message Record from CMDS,
the Billing Company shall include this record in the bill to be issued to the
end user responsible for payment. The Billing Company shall also submit
copies of these Message Records to BA-__, at least once a month, in order to
determine monthly settlement amounts for both the Billing Company and the
Earning Company which will be reflected in the Inter-Company Net Billing
Statement. These amounts will reflect any and all applicable charges due the
Billing Company for performing billing services hereunder. In addition, as
applicable, the Inter-Company Net Billing Statement will reflect any amounts
owed by Carrier to BA-__for administering and processing ITORP.
(2) PAYMENT OF AMOUNTS OUTSTANDING. Upon receipt of the Inter-Company
Net Billing Statement from BA-__, Carrier shall, within thirty (30) days of
invoice, remit to BA-__ full payment of amounts owed under the Inter-Company
Net Billing Statement.
(b) RESPONSIBILITIES OF THE EARNING COMPANY. In connection with
Alternately Billed Calls, the Earning Company shall provide Message Records to
the Billing Company on a daily basis to the extent that any usage has been
recorded. These Message Records will be delivered by the Earning Company to the
Billing Company via the CMDS system, unless otherwise agreed to by the parties
hereto.
(c) FEES FOR SETTLEMENT OF ALTERNATELY BILLED CALLS. The billing
services provided by the Billing Company to the Earning Company with respect
to Alternately Billed Calls shall be subject to the applicable charges set
forth in Attachment A, which charges will be reflected in the Inter-Company
Net Billing Statement. These charges may be revised upon mutual written
agreement of the parties hereto.
SECTION VII
CALCULATION OF COMPENSATION
BA-__ and Carrier agree to compensate each other with respect to Transit
Services Traffic and 800/888 Service Traffic in accordance with the terms
established below, and the rate elements set forth in Attachments A and B,
attached hereto and incorporated herein by reference.
10
<PAGE>
EXHIBIT D
(a) COMPENSATION DUE TO THE TERMINATING/TRANSITING COMPANY.
Compensation due to the Terminating Company/Transiting Company will be
determined separately for each month as follows:
(1) FOR CARRIER COMMON LINE FACILITIES provided by the Terminating
Company, an amount calculated as specified for Carrier Common Line Facilities
in the Terminating Company's Exchange Access Tariff. Compensation will be
determined by multiplying a) the Terminating Company's Carrier Common Line
rate, times b) the MOU.
(2) FOR END OFFICE FACILITIES provided by the Terminating Company, an
amount calculated as specified for End Office facilities in the Terminating
Company's Exchange Access Tariff. Compensation will be determined by
multiplying a) the Terminating Company's appropriate Exchange Access End
Office rate elements, times b) the MOU.
(3) FOR TRANSPORT FACILITIES, where these facilities are provided by
the Terminating Company, or a Transiting and Terminating Company, an amount
calculated in accordance with the following steps:
(i) Determine the Terminating Company's airline miles from the End
Office which serves the Terminating Company's end user to either
the Terminating Company's Access Tandem switching facility or
the interconnection point with the Transiting Company(ies).
(ii) Determine the Transiting Company's airlines miles from the
Transiting Company(ies) Access Tandem switching facility to the
interconnection point with the Terminating Company.
(iii) Determine the sum of the total airline miles by adding (i) and
(ii) above.
(iv) Divide the Terminating Company's airline miles determined in (i)
preceding by the total airline miles determined in (iii)
preceding, to determine the ratio of local transport miles
provided by the Terminating Company.
(v) Divide the Transiting Company's airline miles determined in (ii)
preceding by the total airline miles determined in (iii)
preceding, to determine the ratio of local transport miles
provided by the Transiting Company.
(vi) Identify the rates set forth in the Exchange Access Tariff for
either the Terminating Company or Transiting Companies, or both,
as appropriate, which rates are applicable to Transport
Facilities.
(vii) Multiply the ratio determined in (iv) preceding, times the rate
calculated in (vi) preceding, times the MOU, and add the amount
set forth in (ix) below to
11
<PAGE>
EXHIBIT D
determine the amount due the Terminating Company.
(viii) Multiply the ratio determined in (v) preceding, times the rate
calculated in (vi) preceding, times the MOU, and add the amount
set forth in (ix) below to determine the amount due the
Transiting Company.
(ix) To the extent the Exchange Access Tariffs of the Terminating
or Transiting Company, or both, provide for the payment of a
fixed transport charge to be assessed with respect to a
terminating location (End Office or toll switch), multiply this
charge times the chargeable MOU.
SECTION VIII
ITORP ADMINISTRATION AND RESPONSIBILITIES
(a) RESPONSIBILITIES OF BA-__. BA-__ shall:
1. Operate and maintain the ITORP system.
2. Provide the requirements and standards for ITORP records and
tapes (ITORP User Guide).
3. Inform Carrier of any proposed change in tape creation or
distribution process at least sixty (60) days prior to the actual
implementation of the change.
4. Develop and implement all system enhancements required to
maintain the integrity of BA-PA's ITORP system.
5. Process ITORP tapes received from Carrier, or its agent, during
the next available billing cycle.
6. Review and analyze daily pre-edit reports to determine if a tape
is acceptable for ITORP processing; PROVIDED, HOWEVER, that
Carrier is not absolved, as the Originating Company, from its
responsibility to conform to ITORP input requirements.
7. Communicate with Carrier, or its agent, to resolve the problems
with tapes which are identified as being unacceptable for ITORP
processing.
8. Create and/or maintain all ITORP tables.
9. Include the monthly compensation due to and from Carrier as
identified by
12
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EXHIBIT D
ITORP on the Inter-Company Net Billing Statement. The compensation
includes 800/888 Service Traffic and Alternately Billed Services
traffic.
10. Settle with all local Exchange Carriers, via the Inter-Company
Net Billing Statement, for 800/888 Service Traffic and Alternately
Billed Services traffic originating from and/or terminating to
Carrier.
11. Distribute monthly ITORP reports.
(b) RESPONSIBILITIES OF CARRIER. Carrier shall:
1. Compensate BA-__ for the administration and processing of ITORP
as specified in Attachment A.
2. Notify BA-__ Exchange Carrier Services staff in writing of any
changes in its rates affecting ITORP tables, as specified in
Attachment A, thirty (30) days prior to the effective date of any
such changes.
3. Notify BA-__ Exchange Carrier Services staff in writing of any
network changes, such as changes in traffic routing, sixty (60)
days prior to the implementation of the change in the network.
4. Conform to BA-__'s ITORP record requirements and standards.
5. Carrier or its designated agent will forward the Exchange Message
Records to BA-__, in a timely manner for processing.
6. Inform the BA-__ Exchange Carrier Services staff in writing of
any proposed changes in the Exchange Message Record creation or
distribution process at least sixty (60) days prior to the actual
implementation of the change.
7. Reimburse BA-__ for compensating other local Exchange Carriers on
behalf of Carrier, as reflected in the Inter-Company Net Billing
Statement.
(c) FEES. Compensation for the administration and processing of ITORP
will be due BA-__ on a monthly basis, based on the number of messages
processed in ITORP for Carrier at an average total cost per message. The
processing and administrative fees applicable on a per message basis are set
forth in Attachment A. These fees may be revised by BA-__, at its
discretion and upon notice to Carrier, based on annual studies conducted by
BA-__, and Carrier hereby agrees to be bound by such revised rates. A
minimum monthly fee, as specified in Attachment A, will be assessed when
Carrier's monthly ITORP processing charges are below the stated minimum
monthly charge.
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EXHIBIT D
SECTION IX
LIABILITIES
In the event of an error on the part of BA-__ in calculating or settling
any compensation amounts hereunder, Carrier's sole remedy and BA-PA's only
obligation shall be to re-calculate the compensation amount, and to the
extent any amounts are owed to or owed by Carrier, such amounts will be
reflected as an adjustment in the next Inter-Company Net Billing Statement.
In addition and to the extent applicable, BA-PA's liability under this
Agreement and/or in connection with the settlement, payment and/or
calculation of any amounts due hereunder shall be limited as set forth in the
applicable tariffs. BA-__ shall have no obligation or liability with respect
to any billing, settlement or calculation-of-compensation errors or
omissions, including without limitation the duty to re-calculate any
compensation amounts reflected in the Inter-Company Net Billing Statement, if
such error or omission occurred more than two (2) years prior to the time in
which it is brought to BA-PA's attention in writing. Without limiting the
foregoing, in no event shall either party hereto be liable for consequential,
incidental, special or indirect damages (including without limitation loss of
profit or business) hereunder whether such damages are based in tort
(including, without limitation, under any theory of negligence), contract
breach or otherwise, and even if said party knew or should have known of the
possibility thereof.
SECTION X
RELATIONSHIP OF THE PARTIES
Nothing herein contained will be deemed to constitute a partnership or
agency relationship between the parties. Each party agrees that it will
perform its obligations hereunder as an independent contractor and not as the
agent, employee or servant of the other party. Neither party nor any
personnel furnished by such party will be deemed employees or agents of the
other party or entitled to any benefits available under any plans for such
other party's employees. Each party has and hereby retains the right to
exercise full control of and supervision over its own performance of the
obligations under this Agreement, and retains full control over the
employment, direction, compensation and discharge of all employees assisting
in the performance of such obligations, including without limitation all
matters relating to payment of such employees, including compliance with
social security taxes, withholding taxes and all other regulations governing
such matters. In addition, each party will be responsible for its own acts
and those of its own subordinates, employees, agents and subcontractors
during the performance of that party's obligations hereunder.
14
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EXHIBIT D
SECTION XI
TERM AND TERMINATION
(a) TERM - Upon execution by all parties hereto, this Agreement shall
become effective as of the date first shown on Page 1 of this Agreement, and
shall remain in effect until terminated by either party in accordance with
paragraphs (b), (c), (d), or (e) below.
(b) TERMINATION FOR BREACH - Either party may, upon prior written
notice to the other party, terminate this Agreement in the event the other
party is in default or breach of this Agreement and such breach or default is
not corrected within thirty (30) days after the breaching party has been
notified of same.
(c) TERMINATION FOR CONVENIENCE - Upon six (6) months written advance
notice to the other party, either party may terminate this Agreement.
(d) ACTS OF INSOLVENCY - Either party may terminate this Agreement or
any portion thereof, effective immediately, by written notice to the other
party, if said other party (1) applies for or consents to the appointment of
or the taking of possession by receiver, custodian, trustee, or liquidator of
itself or of all or a substantial part of its property; (2) becomes
insolvent; (3) makes a general assignment for the benefit of creditors; (4)
suffers or permits the appointment of a receiver for its business or assets;
(5) becomes subject to any proceeding under any bankruptcy or insolvency law
whether domestic or foreign, voluntarily or otherwise; or (6) fails to
contest in a timely or appropriate manner, or acquiesces in writing to, any
petition filed against it in an involuntary case under the Federal Bankruptcy
Code or any application for the appointment of a receiver, custodian,
trustee, or liquidation of itself or of all or a substantial part of its
property, or its reorganization, or dissolution.
(e) TERMINATION OF INTERCONNECTION AGREEMENT. Unless otherwise agreed
to by the parties hereto in writing, in the event that the Interconnection
Agreement under Sections 251 and 252 of the Telecommunications Act of 1996,
dated as of December __, 1996, by and between BA-__ and Carrier expires
without being renewed, or expires or is terminated and no other
interconnection agreement has been entered into by BA-__ and Carrier, then
this Agreement shall be deemed terminated effective on the date the aforesaid
Interconnection Agreement expires or is terminated.
SECTION XII
NETWORK CONFIGURATION
Each party shall provide six (6) months advance written notice to the
other party of any network configuration that may affect any of the services
or compensation contemplated under this Agreement, and the parties hereto
agree to use reasonable efforts to avoid service interruptions during any
such network change.
15
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EXHIBIT D
SECTION XIII
CONSTRUCTION AND EFFECT
All services contemplated under this Agreement are provided in
accordance with any and all applicable regulatory requirements and effective
tariffs filed with and approved by the appropriate federal and/or state
regulatory bodies, as these tariffs and requirements may be modified from
time to time. To the extent there is a conflict between the terms of any
said tariff or regulatory requirement and this Agreement, the terms of the
tariff or the regulatory requirement shall prevail. However, to the extent
not in conflict with the provisions of the applicable tariffs or regulatory
requirements, this Agreement shall supplement the tariffs or regulatory
requirements, and it shall be construed to the fullest extent possible in
harmony with such tariffs or regulatory requirements.
SECTION XIII
MISCELLANEOUS
(a) HEADINGS. Headings used in this Agreement are for reference only,
do not constitute part of this Agreement, and shall not be deemed to limit or
otherwise affect any of the provisions hereof.
(b) NOTICES. All notices, requests, demands, or other communications
required or permitted hereunder shall be in writing, shall be deemed
delivered (1) on the date of delivery when delivered by hand, (2) on the date
of transmission when sent by electronic mail or facsimile transmission during
normal business hours with telephone confirmation of receipt, (3) one (1) day
after dispatch when sent by overnight courier maintaining records of receipt,
or (4) three (3) days after dispatch when sent by registered mail, postage
prepaid, return-receipt requested, all addressed as follows (or at such other
addresses as shall be given in writing by either party to their other):
If to BA-__: Address: 1320 N. Court House Road, 9th Floor
Arlington, VA 22201
Attn.: Manager-Local Interconnection
Facsimile: 703 974 2188
Telephone: 704 974 4614
If to Carrier: Address:
Attn:
Facsimile:
Telephone:
16
<PAGE>
EXHIBIT D
(c) SUCCESSORS; ASSIGNMENT. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns, and nothing herein
shall be construed to create any rights enforceable by any other person or
third party. This Agreement may not be assigned by either party (except by
BA-__ to an affiliate or successor in interest) without the prior written
consent of the other party, which consent shall not be unreasonably withheld.
(d) WAIVER. No waiver of any right or term hereof shall be effective
unless in a writing executed by the waiving party. No waiver of any right or
privilege hereunder shall operate as a waiver of any subsequent or similar
right or privilege.
(e) MODIFICATIONS. This Agreement may be modified or amended only by a
written agreement executed by the parties hereto.
(f) COUNTERPARTS. This Agreement may be executed in counterparts, all
of which shall be considered one and the same agreement and each of which
shall be deemed an original.
(g) SEVERABILITY. If any term, provision, paragraph or clause of this
Agreement or any application thereof shall be held invalid or unenforceable
in any particular jurisdiction, the remainder of this Agreement and any other
application of such term, provision, paragraph or clause shall not be
affected thereby in such jurisdiction (where such remainder or application
shall be construed as if such invalid or unenforceable term, provision,
paragraph or clause has not been inserted), and this Agreement and such
application of such term, provision, paragraph or clause shall not be
affected in any other jurisdiction.
(h) CONTINGENCY. Neither party will be held liable for any delay or
failure in performance of this Agreement from any cause beyond its control
and without its fault or negligence including but not limited to acts of God,
acts of civil or military authority, government regulations, embargoes,
epidemics, wars, terrorist acts, riots, insurrections, fires, explosions,
earthquakes, nuclear accidents, floods, strikes, power blackouts, other major
environmental disturbances, unusually sever weather conditions, inability to
secure products or services of other persons or transportation facilities, or
acts or omissions of transportation common carriers.
(i) GOVERNING LAW. Except as otherwise expressly provided herein, this
Agreement shall be interpreted, construed and governed by the laws of the
State of ____________, without regard to conflict of law provisions.
(j) CONFIDENTIALITY. Unless by mutual agreement, or except to the
extent directed by a court of competent jurisdiction, neither party shall
disclose this Agreement or the terms hereof to any person other than such
party's affiliates or such party's officers, employees and consultants, who
are similarly bound hereby. This paragraph shall not prevent the filing of
this Agreement with a state or federal commission having jurisdiction over
the parties hereto if such filing is required by rule or order of that
commission; PROVIDED, HOWEVER, that the parties hereto shall jointly request
that the Agreement be treated as confidential by that commission to the
extent
17
<PAGE>
EXHIBIT D
permitted under the commission's regulations and procedures. Each
party hereto must maintain the confidentiality of all message, billing,
traffic, and call records, traffic volumes and all other material information
and data pertaining to the traffic covered by this Agreement and the carriers
and end users associated with such traffic.
(k) REMEDIES UNDER LAW. All remedies available to the parties hereto
under the terms of this Agreement shall be in addition to, and not by way of
limitation of, any other rights that said parties may have at law or equity,
none of which are hereby waived.
(l) ENTIRE AGREEMENT. This Agreement, including all Attachments and
Schedules attached hereto, contains the entire agreement, and supersedes and
voids any prior understanding, between BA-__ and Carrier regarding the
subject matter hereof.
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<PAGE>
EXHIBIT D
In witness whereof, the undersigned parties have caused this Agreement to
be executed on their behalf this ____________ day of ______________ , 19 .
Witness: [Carrier]
___________________________ By: _________________________
Witness: Bell Atlantic - _______________, Inc.
___________________________ By: _________________________
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EXHIBIT D
ATTACHMENT A
BASIS OF COMPENSATION
CHARGES FOR ADMINISTRATION OF ITORP AND ITORP PROCESSING
A. Bell Atlantic - _____________, Inc. charges the following rates for
providing ITORP services:
Rate Per Message/ Month
1. Administrative Charge $
2. Processing Charge Elements:
a. Terminating Traffic $
b. Minute/Message $
c. 800/888 Message $
d. Net Compensation $
e. Collected Revenue Processing Charge $
3. Minimum Monthly Fee $
4. Alternately Billed Calls $
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<PAGE>
EXHIBIT D
ATTACHMENT B
I.
Message Telecommunications Service - Terminating to Carrier
RATE ELEMENT BILLING COMPANY
- ------------------------------------------------------------------------------
Carrier Common Line Carrier
End Office Carrier
Transport based on negotiated billing percentages (BIPs)
II.
800/888 - Terminating to or originating from Carrier Customers
RATE ELEMENT BILLING COMPANY
- ------------------------------------------------------------------------------
Carrier Common Line Originating Company
End Office Originating Company
Transport based on negotiated billing percentages (BIPs)
Query Originating Company
III.
Local Exchange - Terminating to Carrier
RATE ELEMENT BILLING COMPANY
- ------------------------------------------------------------------------------
Local E.O. Termination Charge Carrier
Transport based on negotiated billing percentages (BIPs)
21
<PAGE>
INTERCONNECTION
AGREEMENT
BETWEEN
U S WEST COMMUNICATIONS, INC.
AND
ACI, CORP.
FOR
WASHINGTON
PAGE i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
1. RECITALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
2. SCOPE OF AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
4. RATES AND CHARGES GENERALLY. . . . . . . . . . . . . . . . . . . . . . . . . 13
5. RECIPROCAL TRAFFIC EXCHANGE . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.1 SCOPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.2 TRAFFIC TYPES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.3 TYPES OF EXCHANGED TRAFFIC. . . . . . . . . . . . . . . . . . . . . . . . 14
5.4 RATE STRUCTURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.5 LIS INTERFACE CODE AVAILABILITY AND OPTIONAL FEATURES . . . . . . . . . . 18
5.6 MEASURING LOCAL INTERCONNECTION MINUTES . . . . . . . . . . . . . . . . . 19
5.7 TESTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.8 ORDERING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.9 BILLING ARRANGEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.10 MILEAGE MEASUREMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.11 CONSTRUCTION CHARGES . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6. INTERCONNECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.1 DEFINITION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.2 MID-SPAN MEET POI . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.3 COLLOCATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.4 ENTRANCE FACILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.5 QUALITY OF INTERCONNECTION. . . . . . . . . . . . . . . . . . . . . . . . 23
6.6 POINTS OF INTERFACE (POI) . . . . . . . . . . . . . . . . . . . . . . . . 23
PAGE ii
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TABLE OF CONTENTS
6.7 TRUNKING REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.8 INTERCONNECTION FORECASTING . . . . . . . . . . . . . . . . . . . . . . . 25
6.9 SERVICE INTERRUPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 26
7. COLLOCATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.1.1 DESCRIPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.2. TERMS AND CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.3. RATE ELEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.4. ORDERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
7.5. BILLING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
7.6. MAINTENANCE AND REPAIR . . . . . . . . . . . . . . . . . . . . . . . . . 41
8. UNBUNDLED ACCESS/ELEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.1 GENERAL TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.2 DESCRIPTION OF UNBUNDLED ELEMENTS . . . . . . . . . . . . . . . . . . . . 43
9. ANCILLARY SERVICES AND ARRANGEMENTS . . . . . . . . . . . . . . . . . . . . . 50
9.1 SIGNALING ACCESS TO CALL-RELATED DATABASES. . . . . . . . . . . . . . . . 50
9.2 INTERIM NUMBER PORTABILITY. . . . . . . . . . . . . . . . . . . . . . . . 51
9.3 911/E-911 SERVICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
9.4 DIRECTORY ASSISTANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . 60
9.5 WHITE PAGES DIRECTORY LISTINGS. . . . . . . . . . . . . . . . . . . . . . 60
9.6 BUSY LINE VERIFY AND BUSY LINE INTERRUPT SERVICES . . . . . . . . . . . . 63
9.7 TOLL AND ASSISTANCE OPERATOR SERVICES . . . . . . . . . . . . . . . . . . 64
9.8 INTERCONNECTION TO LINE INFORMATION DATA BASE (LIDB). . . . . . . . . . . 65
9.9 ACCESS TO POLES, DUCTS, CONDUITS, AND RIGHTS OF WAY . . . . . . . . . . . 66
9.10 MISCELLANEOUS ANCILLARY SERVICES.. . . . . . . . . . . . . . . . . . . . 66
PAGE iii
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TABLE OF CONTENTS
10. ACCESS TO OPERATIONAL SUPPORT SYSTEMS (OSS) . . . . . . . . . . . . . . . . . 66
10.1 OPERATIONAL SYSTEMS INTERFACES - INTERFACE IMPLEMENTATION TIMETABLE 66
10.2 OSS INTERFACE DESIGN . . . . . . . . . . . . . . . . . . . . . . . . . . 67
10.3 ACCESSIBLE OSS FUNCTIONS . . . . . . . . . . . . . . . . . . . . . . . . 67
10.4 BILLING INTERFACES . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
10.5 COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
11. RESALE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
11.1 DESCRIPTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
11.2 SCOPE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
11.3 ORDERING AND MAINTENANCE . . . . . . . . . . . . . . . . . . . . . . . . 74
11.4 ACI RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 77
11.5 RATES AND CHARGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
11.6 COLLATERAL AND TRAINING. . . . . . . . . . . . . . . . . . . . . . . . . 80
11.7 DIRECTORY LISTINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
11.8 BILLING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
11.9 DEPOSIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
11.10 PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
12. ACCESS TO TELEPHONE NUMBERS . . . . . . . . . . . . . . . . . . . . . . . . . 83
12.1 NUMBER RESOURCES ARRANGEMENTS. . . . . . . . . . . . . . . . . . . . . . 83
13. DIALING PARITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
14. U S WEST DEX ISSUES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
15. ACCESS TO DATABASES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
16. NOTICE OF CHANGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
PAGE iv
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TABLE OF CONTENTS
17. REFERRAL ANNOUNCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
18. COORDINATED REPAIR CALLS. . . . . . . . . . . . . . . . . . . . . . . . . . . 85
19. BONA FIDE REQUEST PROCESS . . . . . . . . . . . . . . . . . . . . . . . . . . 85
20. AUDIT PROCESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
21. AUDIOTEXT AND MASS ANNOUNCEMENT SERVICES. . . . . . . . . . . . . . . . . . . 89
22. LOCAL INTERCONNECTION DATA EXCHANGE FOR BILLING . . . . . . . . . . . . . . . 89
23. CONSTRUCTION CHARGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
24. SERVICE PERFORMANCE RESULTS . . . . . . . . . . . . . . . . . . . . . . . . . 91
25. IMPLEMENTATION SCHEDULE . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
26. MISCELLANEOUS TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
26.1 GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
26.2 TERM OF AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
26.3 PAYMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
26.4 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
26.5 FORCE MAJEURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
26.6 LIMITATION OF LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . . 97
26.7 INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
26.8 INTELLECTUAL PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . 99
26.9 WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101
26.10 ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101
26.11 DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102
26.12 DISCLAIMER OF AGENCY. . . . . . . . . . . . . . . . . . . . . . . . . .102
PAGE v
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TABLE OF CONTENTS
26.13 SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102
26.14 NONDISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102
26.15 SURVIVAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .104
26.16 DISPUTE RESOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . .104
26.17 CONTROLLING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . .105
26.18 JOINT WORK PRODUCT. . . . . . . . . . . . . . . . . . . . . . . . . . .105
26.19 RESPONSIBILITY FOR ENVIRONMENTAL CONTAMINATION. . . . . . . . . . . . .105
26.20 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105
26.21 RESPONSIBILITY OF EACH PARTY. . . . . . . . . . . . . . . . . . . . . .106
26.22 NO THIRD PARTY BENEFICIARIES. . . . . . . . . . . . . . . . . . . . . .106
26.23 REFERENCED DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . .106
26.24 PUBLICITY AND ADVERTISING . . . . . . . . . . . . . . . . . . . . . . .107
26.25 AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107
26.26 EXECUTED IN COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . .107
26.27 HEADINGS OF NO FORCE OR EFFECT. . . . . . . . . . . . . . . . . . . . .107
26.28 CANCELLATION CHARGES. . . . . . . . . . . . . . . . . . . . . . . . . .107
26.29 REGULATORY APPROVAL . . . . . . . . . . . . . . . . . . . . . . . . . .107
26.30 COMPLIANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108
26.31 COMPLIANCE WITH THE COMMUNICATIONS LAW ENFORCEMENT ACT OF 1994
("CALEA") . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108
26.32 COOPERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108
26.33 ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . .108
</TABLE>
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INTERCONNECTION AGREEMENT
This Interconnection Agreement, made as of the 3rd day of June, 1998, is
between ACI, CORP. ("ACI"), a Delaware corporation and U S WEST COMMUNICATIONS,
INC. ("USWC"), a Colorado corporation.
1. RECITALS
1.1 Pursuant to this Interconnection Agreement ("Agreement"), ACI,
Corp. ("ACI"), a Competitive Local Exchange Carrier and USWC
(collectively, "the Parties") will extend certain arrangements
to one another within each LATA in which they both operate
within the state of Washington. This Agreement includes
terms, conditions, and prices for network interconnection,
access to unbundled network elements, ancillary network
services, and retail services available for resale. It will be
submitted to the Washington Utilities and Transportation
Commission. Notwithstanding this mutual commitment, however,
the Parties enter into this Agreement without prejudice to any
positions they have taken previously, or may take in the future
in any legislative, regulatory, or other public forum
addressing any matters, including matters related to the types
of arrangements prescribed by this Agreement.
2. SCOPE OF AGREEMENT
2.1 This Agreement sets forth the terms, conditions and prices
under which USWC agrees to provide (a) services for resale
(hereinafter referred to as "Local Services") (b) certain
unbundled network elements, ancillary functions and additional
features to ACI (hereinafter collectively referred to as
"Network Elements"). The Agreement also sets forth the terms,
conditions and prices under which the Parties agree to provide
interconnection and reciprocal compensation for the exchange of
local traffic between USWC and ACI for purposes of offering
telecommunications services. Unless otherwise provided in this
Agreement, the Parties will perform all of their obligations
hereunder throughout, to the extent provided in the Appendices
attached hereto. The Agreement includes all accompanying
Appendices.
2.2 In the performance of their obligations under this Agreement,
the Parties shall act in good faith and consistently with the
intent of the Act. Where notice, approval or similar action by
a Party is permitted or required by any provision of this
Agreement, (including, without limitation, the obligation of
the Parties to further negotiate the resolution of new or open
issues under this Agreement) such action shall not be
unreasonably delayed, withheld or conditioned.
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3. DEFINITIONS
3.1 "Access Service Request" or "ASR" means the industry standard
forms and supporting documentation used for ordering Access
Services. The ASR will be used to order trunking and
facilities between ACI and USWC for Local Interconnection
Service.
3.2 "Access Services" refers to the tariffed interstate and
intrastate switched access and private line transport services
offered for the origination and/or termination of interexchange
traffic (see each Party's appropriate state and interstate
access tariffs).
3.3 "Act" means the Communications Act of 1934 (47 U.S.C. 151 et.
seq.), as amended by the Telecommunications Act of 1996, and as
from time to time interpreted in the duly authorized rules and
regulations of the FCC or a Commission within its state of
jurisdiction.
3.4 "Automatic Number Identification" or "ANI" means a Feature
Group D signaling parameter which refers to the number
transmitted through a network identifying the billing number of
the calling party.
3.5 "Basic Exchange Switched Features" are optional end user
switched services that include, but are not necessarily limited
to: Automatic Call Back; Call Trace; Caller ID and Related
Blocking Features; Distinctive Ringing/Call Waiting; Selective
Call Forward; Selective Call Rejection.
3.6 "Basic Exchange Telecommunications Service" means a service
offered to end users which provides the end user with a
telephonic connection to, and a unique local telephone number
address on, the public switched telecommunications network, and
which enables such end user to generally place calls to, or
receive calls from, other stations on the public switched
telecommunications network. Basic residence and business line
services are Basic Exchange Telecommunications Services. As
used solely in the context of this statement and unless
otherwise agreed, Basic Exchange Telecommunications Service
includes access to ancillary services such as 911, directory
assistance and operator services.
3.7 "BLV/BLVI Traffic" means an operator service call in which the
caller inquires as to the busy status of or requests an
interruption of a call on another end user's Basic Exchange
Telecommunications Service line.
3.8 "Calling Party Number" or "CPN" is a Common Channel Signaling
("CCS") parameter which refers to the number transmitted
through a network identifying the calling party. Reference
Technical Pub. 77342.
3.9 "Central Office Switch" means a switch used to provide
telecommunications services, including, but not limited to:
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3.9.1 "End Office Switches" which are used to terminate end
user station loops for the purpose of interconnecting
to each other and to trunks; and
3.9.2 "Tandem Office Switches" which are used to connect and
switch trunk circuits between and among other Central
Office Switches. Access tandems provide connections
for exchange access and toll traffic while local
tandems provide connections for local/EAS traffic.
3.10 "Collocation" means an arrangement whereby one Party's (the
"Collocating Party") facilities are terminated in its equipment
necessary for Interconnection or for access to Network Elements
on an unbundled basis which has been installed and maintained
at the premises of a second Party (the "Housing Party").
Collocation may be "physical" or "virtual". In "Physical
Collocation," the Collocating Party installs and maintains its
own equipment in the Housing Party's premises. In "Virtual
Collocation," the Housing Party installs and maintains the
Collocating Party's equipment in the Housing Party's premises.
3.11 "Commission" means the Public Utilities Commission of _________
3.12 "Common Channel Signaling" or "CCS" means a method of digitally
transmitting call set-up and network control data over a
special signaling network fully separate from the public voice
switched network elements that carry the actual call. The CCS
used by the Parties shall be Signaling System 7.
3.13 "Co-Provider" means an entity authorized to provide Local
Exchange Service that does not otherwise qualify as an
incumbent Local Exchange Carrier ("LEC").
3.14 "Digital Signal Level" means one of several transmission rates
in the time division multiplexing hierarchy.
3.15 "Digital Signal Level 0" or "DS0" means the 64 Kbps zero-level
signal in the time-division multiplex hierarchy.
3.16 "Digital Signal Level 1" or "DS1" means the 1.544 Mbps
first-level signal in the time-division multiplex hierarchy.
In the time-division multiplexing hierarchy of the telephone
network, DS1 is the initial level of multiplexing.
3.17 "Digital Signal Level 3" or "DS3" means the 44.736 Mbps
third-level in the time-division multiplex hierarchy. In the
time-division multiplexing hierarchy of the telephone network,
DS3 is defined as the third level of multiplexing.
3.18 "Exchange Message Record" or "EMR" is the standard used for
exchange of telecommunications message information between
telecommunications providers for billable, non-billable,
sample, settlement and study data. EMR format is contained in
BR-010-200-010 CRIS Exchange Message Record, a
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Bellcore document that defines industry standards for exchange
message records.
3.19 "Extended Area Service (EAS)/Local Traffic" means traffic that
is originated by an end user of one Party and terminates to an
end user of the other Party as defined in accordance with
USWC's then current EAS/local serving areas, as determined by
the Commission.
3.20 "Integrated Digital Loop Carrier" means a subscriber loop
carrier system, which integrates within the switch at a DS1
level (twenty-four (24) local Loop transmission paths combined
into a 1.544 Mbps digital signal).
3.21 "Interconnection" is the linking of the USWC and Co-Provider
networks for the mutual exchange of traffic and for Co-Provider
access to unbundled Network Elements. Interconnection does not
include the transport and termination of traffic.
Interconnection is provided by Virtual or Physical Collocation,
entrance facilities or Mid-Span Meet arrangements.
3.22 "Interexchange Carrier" or "IXC" means a carrier that provides,
directly or indirectly, interLATA or IntraLATA Toll services.
3.23 "IntraLATA Toll" is defined in accordance with USWC's current
intraLATA toll serving areas, as determined by the Commission.
3.24 "Local Loop Transmission" or "Loop" means the entire
transmission path which extends from the network interface or
demarcation point at an end user's premises to the Main
Distribution Frame or other designated frame or panel in a
Party's Wire Center which serves the end user.
3.25 "Main Distribution Frame" or "MDF" means the distribution frame
of the Party providing the Loop used to interconnect cable
pairs and line and trunk equipment terminals on a switching
system.
3.26 "MECAB" refers to the Multiple Exchange Carrier Access Billing
(MECAB) document prepared by the Billing Committee of the
Ordering and Billing Forum (OBF), that functions under the
auspices of the Carrier Liaison Committee of the Alliance for
Telecommunications Industry Solutions. The MECAB document,
published by Bellcore as Special Report SR-BDS-000983, contains
the recommended guidelines for the billing of an Access Service
provided by two or more LECs (including a LEC and a
Co-Provider) or by one LEC in two or more states within a
single LATA.
3.27 "MECOD" refers to the Multiple Exchange Carriers Ordering and
Design (MECOD) Guidelines for Access Services - Industry
Support Interface, a document developed by the
Ordering/Provisioning Committee under the auspices of the
Ordering and Billing Forum (OBF), that functions under the
auspices of the Carrier Liaison Committee of the Alliance for
Telecommunications Industry Solutions. The MECOD document,
published by
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Bellcore as Special Report SR STS-002643, establishes
recommended guidelines for processing orders for Access Service
that is to be provided by two or more LECs (including a LEC and
a Co-Provider). It is published by Bellcore as SRBDS 00983.
3.28 "Meet-Point Billing" or "MPB" refers to an arrangement whereby
two LECs (including a LEC and Co-Provider) jointly provide
Switched Access Service to an Interexchange Carrier, with each
LEC (or Co-Provider) receiving an appropriate share of the
transport element revenues as defined by their effective access
tariffs.
3.29 "Mid-Span Meet" is a Point of Interconnection between two
networks, designated by two Telecommunications Carriers, at
which one carrier's responsibility for service begins and the
other carrier's responsibility ends.
3.30 "North American Numbering Plan" or "NANP" means the numbering
plan used in the United States that also serves Canada,
Bermuda, Puerto Rico and certain Caribbean Islands. The NANP
format is a 10-digit number that consists of a 3-digit NPA code
(commonly referred to as the area code), followed by a 3-digit
NXX code and 4-digit line number.
3.31 "NXX" means the fourth, fifth and sixth digits of a ten-digit
telephone number.
3.32 "Party" means either USWC or ACI and "Parties" means USWC and
ACI.
3.33 "Point of Interface", "Point of Interconnection", or "POI" is a
mutually agreed upon point of demarcation where the exchange of
traffic between two LECs (including a LEC and a Co-Provider)
takes place.
3.34 "Port" means a termination on a Central Office Switch that
permits end users to send or receive telecommunications
services over the public switched network, but does not include
switch features or switching functionality.
3.35 "Rate Center" means the specific geographic point and
corresponding geographic area which are associated with one or
more particular NPA-NXX codes which have been assigned to a LEC
(or Co-Provider) for its provision of basic exchange
telecommunications services. The "rate center point" is the
finite geographic point identified by a specific V & H
coordinate, which is used to measure distance-sensitive end
user traffic to/from, the particular NPA-NXX designations
associated with the specific Rate Center. The "rate center
area" is the exclusive geographic area identified as the area
within which the LEC (or Co-Provider) will provide Basic
Exchange Telecommunications Service bearing the particular
NPA-NXX designations associated with the specific Rate Center.
The Rate Center point must be located within the Rate Center
area.
3.36 "Reseller" is a category of local exchange service provider
that obtains dial tone and associated telecommunications
services from another provider through the purchase of bundled
finished services for resale to its end users.
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3.37 "Routing Point" means a location that a LEC or Co-Provider has
designated on its own network as the homing (routing) point for
traffic, bearing a certain NPA-NXX designation, that is inbound
to Basic Exchange Telecommunications Services provided by the
LEC or Co-Provider. The Routing Point is employed to calculate
mileage measurements for the distance-sensitive transport
element charges of Switched Access Services. Pursuant to
Bellcore Practice BR 795-100-100, the Routing Point may be an
"End Office" location, or a "LEC Consortium Point of
Interconnection". Pursuant to that same Bellcore Practice,
examples of the latter shall be designated by a common language
location identifier (CLLI) code with (x)KD in positions 9, 10,
11, where (x) may be any alphanumeric A-Z or 0-9. The above
referenced Bellcore document refers to the Routing Point as the
Rating Point. The Rating Point/Routing Point must be located
within the rate center area.
3.38 "Service Control Point" or "SCP" means a signaling end point
that acts as a database to provide information to another
signaling end point (i.e., Service Switching Point or another
SCP) for processing or routing certain types of network calls.
A query/response mechanism is typically used in communicating
with an SCP.
3.39 "Signaling Transfer Point" or "STP" means a signaling point
that performs message routing functions and provides
information for the routing of messages between signaling end
points. An STP transmits, receives and processes Common
Channel Signaling ("CCS") messages.
3.40 "Switched Access Service" means the offering of transmission or
switching services to Telecommunications Carriers for the
purpose of the origination or termination of telephone toll
service. Switched Access Services include: Feature Group A,
Feature Group B, Feature Group D, 800/888 access, and 900
access and their successors or similar Switched Access
services.
3.41 "Tariff" as used throughout this Agreement refers to USWC
interstate tariffs and state tariffs, price lists, price
schedules and catalogs.
3.42 "Telecommunications Carrier" means any provider of
telecommunications services, except that such term does not
include aggregators of telecommunications services (as defined
in Section 226 of the Act). A Telecommunications Carrier shall
be treated as a common carrier under the Act only to the extent
that it is engaged in providing telecommunications services,
except that the Commission shall determine whether the
provision of fixed and mobile satellite service shall be
treated as common carriage.
3.43 "Traffic Type" is the characterization of intraLATA traffic as
"local" (local includes EAS), or "toll" which shall be the same
as the characterization established by the appropriate state
commission for the incumbent LEC.
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3.44 "Wire Center" denotes a building or space within a building,
that serves as an aggregation point on a given carrier's
network, where transmission facilities are connected or
switched. Wire Center can also denote a building where one or
more Central Offices, used for the provision of Basic Exchange
Telecommunications Services and Access Services, are located.
However, for purposes of Collocation Service, Wire Center shall
mean those points eligible for such connections as specified in
the FCC Docket No. 91-141, and rules adopted pursuant thereto.
3.45 Terms not otherwise defined here, but defined in the Act or in
regulations implementing the Act, shall have the meaning
defined there.
4. RATES AND CHARGES GENERALLY
4.1 Prices for termination and transport of traffic,
Interconnection, access to unbundled Network Elements, and
ancillary services are set forth in Appendix A.
4.2 USWC's wholesale discounts for resale services are set forth in
Appendix A.
4.3 The underlying provider of a resold service shall be entitled
to receive, from the purchaser of Switched Access, the
appropriate access charges pursuant to its then effective
Switched Access Tariff.
5. RECIPROCAL TRAFFIC EXCHANGE
5.1 SCOPE
Reciprocal traffic exchange addresses the exchange of traffic
between ACI end users and USWC end users. If such traffic is
local, the provisions of this Agreement shall apply. Where
either Party acts as an IntraLATA Toll provider or interLATA
Interexchange Carrier (IXC) or where either Party interconnects
and delivers traffic to the other from third parties, each
Party shall bill such third parties the appropriate charges
pursuant to its respective tariffs or contractual offerings for
such third party terminations. Absent a separately negotiated
agreement to the contrary, the Parties will directly exchange
traffic between their respective networks, without the use of
third party transit providers.
5.2 TRAFFIC TYPES
The Traffic Types to be exchanged under this Agreement include:
5.2.1 EAS/Local Traffic as defined above.
5.2.2 IntraLATA Toll traffic as defined above.
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5.2.3 Switched Access traffic, or interLATA toll traffic, as
specifically defined in USWC's state and interstate
Switched Access Tariffs, and generally identified as
that traffic that originates at one of the Party's end
users and terminates at an IXC point of presence, or
originates at an IXC point of presence and terminates
at one of the Party's end users, whether or not the
traffic transits the other Party's network.
5.2.4 Transit traffic is any traffic other than Switched
Access, that originates from one Telecommunications
Carrier's network, transits another Telecommunications
Carrier's network, and terminates to yet another
Telecommunications Carrier's network.
Transit service provides the ability for a
Telecommunications Carrier to use its connection to a
local or access tandem for delivery of calls that
originate with a Telecommunications Carrier and
terminate to a company other than the tandem company,
such as another Co-Provider, an existing LEC, or a
wireless carrier. In these cases, neither the
originating nor terminating end user is a customer of
the tandem Telecommunications Carrier. The tandem
Telecommunications Carrier will accept traffic
originated by a Party and will terminate it at a Point
of Interconnection with another local, intraLATA or
interLATA network Telecommunications Carrier. This
service is provided through local and access tandem
switches.
5.2.5 Ancillary traffic includes all traffic destined for
ancillary services, or that may have special billing
requirements, including, but not limited to the
following:
5.2.5.1 Directory Assistance
5.2.5.2 911/E911
5.2.5.3 Operator call termination (busy line
interrupt and verify)
5.2.5.4 800/888 database dip
5.2.5.5 LIDB
5.2.5.6 Information services requiring special
billing.
5.2.6 Unless otherwise stated in this Agreement, ancillary
traffic will be exchanged in accordance with whether
the traffic is EAS/Local, IntraLATA Toll, or Switched
Access.
5.3 TYPES OF EXCHANGED TRAFFIC
5.3.1 Termination of Local Traffic.
Local traffic will be terminated as Local
Interconnection Service (LIS).
5.3.2 Transport of Local Traffic
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As negotiated between the Parties, the exchange of
local traffic between the Parties may occur in several
ways:
5.3.2.1 While the Parties anticipate the use of two
way trunks for the delivery of local traffic,
either Party may elect to provision its own
one-way trunks for delivery of local traffic
to be terminated on the other Party's
network.
5.3.2.2 The Parties may elect to purchase transport
services from each other or from a third
party. Such transport delivers the
originating Party's local traffic to the
terminating Party's end office or tandem for
call termination. Transport may be purchased
as either tandem switched transport or direct
trunk transport.
5.3.2.3 Based on forecasted traffic at ACI's busy
hour in CCS, where there is a DS1's worth of
traffic (512 CCS) between the ACI switch and
a USWC end office, the traffic will be moved
to a dedicated (i.e., direct) trunk group
from the ACI switch directly to the USWC end
office. To the extent that ACI has
established a collocation arrangement at a
USWC end office location, and has available
capacity, the Parties agree that ACI shall
provide two-way direct trunk facilities, when
required, from that end office to the ACI
switch. In all other cases, the direct
facility may be provisioned by USWC or ACI or
a third party. If both ACI and USWC desire
to provision the facility and cannot
otherwise agree, the Parties may agree to
resolve the dispute through the submission of
competitive bids.
5.3.3 Transit Traffic.
5.3.3.1 USWC will accept traffic originated by ACI
and will terminate it at a Point of
Interconnection with another Co-Provider,
LEC, IXC, or wireless carrier. USWC will
provide this transit service through local
and access tandem switches. ACI may also
provide USWC with transit service.
5.3.3.2 To the extent technically feasible, the
Parties involved in transporting transit
traffic will deliver calls to each involved
network with CCS/SS7 protocol and the
appropriate ISUP/TCAP message to facilitate
full interoperability and billing functions.
In all cases, the originating company is
responsible to follow the EMR standard and to
exchange records with both the transiting
company and the terminating company, to
facilitate the billing process to the
originating network.
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5.3.3.3 The Parties will use industry standards
developed to handle the provision and billing
of Switched Access by multiple providers
(MECAB, MECOD and the Parties' FCC tariffs),
including the one-time provision of
notification to ACI of the billing name,
billing address and carrier identification
codes of all Interexchange Carriers
originating or terminating at each USWC
access tandem.
5.3.4 Toll Traffic.
Toll traffic routed to an access tandem, or directly
routed to an end office, will be terminated as Switched
Access Service. Traffic terminated at the access
tandem will be routed to the end offices within the
LATA that subtend the USWC access tandem switch.
Switched Access Service also allows for termination at
an end office or tandem via direct trunked circuits
provisioned either by USWC or ACI.
5.4 RATE STRUCTURE
5.4.1 Local Traffic
5.4.1.1 Call Termination
5.4.1.1.1 The Parties agree that call
termination rates as
described in Appendix A
will apply reciprocally for
the termination of
EAS/Local traffic per
minute of use. If the
exchange of EAS/Local
traffic between the Parties
is within +/- 5% of balance
(as measured monthly), the
Parties agree that their
respective call termination
charges will offset one
another, and no
compensation will be paid.
The Parties agree to
perform monthly joint
traffic audits, based upon
mutually agreeable
measurement criteria and
auditing standards. In the
event that the exchange of
traffic is not in balance
as described above, the
call termination charges in
Appendix A will apply.
5.4.1.1.2 For traffic terminated at a
USWC or ACI end office, the
end office call termination
rate in Appendix A shall
apply.
5.4.1.1.3 For traffic terminated at a
USWC or ACI tandem switch,
the tandem switched rate
and the tandem transmission
rate in Appendix A shall
apply in addition to the
end office call termination
rate described above.
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<PAGE>
5.4.1.1.4 The Parties acknowledge
that ACI will initially
serve all of its end users
within a given LATA through
a single ACI switch. The
Parties also acknowledge
that ACI may, in the
future, deploy additional
switches in each LATA. For
purposes of call
termination, the initial
ACI switch shall be treated
as an end office switch.
5.4.1.1.5 For purposes of call
termination, this Agreement
recognizes the unique
status of traffic
originated by and
terminated to internet
service providers. Parties
agree to abide by any
federal or state regulatory
or judicial proceedings
governing reciprocal
compensation and enhanced
service provider traffic.
5.4.1.1.6 Neither Party shall be
responsible to the other
for call termination
charges associated with
third party traffic that
transits such Party's
network.
5.4.2 Transport
5.4.2.1 If the Parties elect to each provision their
own one-way trunks to the other Party's end
office for the termination of local traffic,
each Party will be responsible for its own
expenses associated with the trunks and no
transport charges will apply. Call
termination charges shall apply as described
above.
5.4.2.2 If one Party desires to purchase direct trunk
transport from the other Party, the following
rate elements will apply. Transport rate
elements include the direct trunk transport
facilities between the POI and the
terminating Party's tandem or end office
switches. The applicable rates are described
in Appendix A.
5.4.2.3 Direct trunk transport facilities are
provided as dedicated DS3 or DS1 facilities
without the tandem switching functions, for
the use of either Party between the Point of
Interconnection and the terminating end
office or tandem switch.
5.4.2.4 If the Parties elect to establish two-way
direct trunks, the compensation for such
jointly used 'shared' facilities shall be
adjusted as follows. The nominal
compensation shall be pursuant to the rates
for direct trunk transport in Appendix A.
The actual rate paid to the provider of the
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direct trunk facility shall be reduced to
reflect the provider's use of that
facility. The adjustment in the direct
trunk transport rate shall be a percentage
that reflects the provider's relative use
(i.e., originating minutes of use) of the
facility in the busy hour.
5.4.2.5 Multiplexing options are available at rates
described in Appendix A.
5.4.3 Toll Traffic.
Applicable Switched Access Tariff rates, terms, and
conditions apply to toll traffic routed to an access
tandem, or directly to an end office. Relevant rate
elements include Direct Trunk Transport or Tandem
Switched Transport, Interconnection Charge, Local
Switching, and Carrier Common Line, as appropriate.
5.4.4 Transit Traffic.
Applicable Switched Access, Type 2 or LIS transport
rates apply for the use of USWC's network to transport
transit traffic. For transiting local traffic, the
applicable local transit rate applies to the
originating Party per Appendix A. For transiting toll
traffic, the Parties will charge the applicable
Switched Access rates to the responsible carrier. For
terminating transiting wireless traffic, the Parties
will charge their applicable rates to the wireless
provider. For transiting wireless traffic, the Parties
will charge each other the applicable local transit
rate.
5.5 LIS INTERFACE CODE AVAILABILITY AND OPTIONAL FEATURES
5.5.1 Interface Code Availability.
Supervisory signaling specifications, and the
applicable network channel interface codes for LIS
trunks, are the same as those used for Feature Group D
Switched Access Service, as described in the Parties'
applicable Switched Access Tariffs.
5.5.2 Switching Options.
5.5.2.1 Inband MF or SS7 Out of Band Signaling.
Inband MF signaling and SS7 Out of Band
Signaling are available for LIS trunks.
MF signaling or SS7 Out-of-Band Signaling
must be requested on the order for the new
LIS trunks. Provisioning of the LIS
trunks equipped with MF signaling or SS7
Out of Band Signaling is the same as that
used for Feature Group D Switched Access.
Common Channel Signaling Access Capability
Service, as set forth
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in this Agreement, must be ordered by ACI
when SS7 Out-of-Band Signaling is requested
on LIS trunks.
5.5.2.2 Clear Channel Capability.
Clear Channel Capability permits 24 DS0-64
kbit/s services or 1.536 Mbit/s of
information on the 1.544 Mbit/s line rate.
Clear Channel Capability is available for
LIS trunks equipped with SS7 Out-of-Band
Signaling. Clear Channel Capability is
only available on trunks to USWC's access
tandem switch or USWC's end office
switches (where available); (Clear Channel
Capability is not available on trunks to
USWC's local tandem switches or end
offices where it is currently not
deployed. ACI agrees to use the Bona Fide
Request process to request clear channel
capability for such additional switches.
Prices for such additional Clear Channel
Capability, if any, will be established
through the BFR Process). Clear Channel
Capability must be requested on the order
for the new LIS trunks. The provisioning
of the LIS trunks equipped with Clear
Channel Capability is the same as that
used for Feature Group D Switched Access
Service. USWC will provide ACI with a
listing of USWC end offices, local tandems
and access tandems equipped with Clear
Channel Capability.
5.6 MEASURING LOCAL INTERCONNECTION MINUTES
5.6.1 Measurement of terminating local interconnection
minutes begins when the terminating LIS entry switch
receives answer supervision from the called end user's
end office indicating the called end user has answered.
The measurement of terminating call usage over LIS
trunks ends when the terminating LIS entry switch
receives disconnect supervision from either the called
end user's end office, indicating the called end user
has disconnected, or ACI's Point of Interconnection,
whichever is recognized first by the entry switch.
5.6.2 USWC and ACI are required to provide each other the
proper call information (e.g., originating call party
number and destination call party number, etc.) to
enable each Party to issue bills in a complete and
timely fashion.
5.7 TESTING
5.7.1 Acceptance Testing
At the time of installation of an LIS trunk group, and
at no additional charge, the Parties will cooperatively
test the same parameters tested for
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terminating Feature Group D Switched Access Service.
See USWC's applicable Switched Access Tariff for the
specifications.
5.7.2 Testing Capabilities
5.7.2.1 Terminating LIS testing is provided where
equipment is available, with the following
test lines: seven-digit access to balance
(100 type), milliwatt (102 type),
nonsynchronous or synchronous, automatic
transmission measuring (105 type), data
transmission (107 type), loop-around, short
circuit, open circuit, and non-inverting
digital loopback (108 type).
5.7.2.2 In addition to LIS acceptance testing, other
tests are available (e.g., additional
cooperative acceptance testing, automatic
scheduled testing, cooperative scheduled
testing, manual scheduled testing, and
non-scheduled testing) at the applicable
tariff rates.
5.8 ORDERING
5.8.1 When ordering LIS, the ordering Party shall specify on
the service order: 1) the type and number of
Interconnection facilities to terminate at the Point of
Interconnection in the serving wire center; 2) the type
of interoffice transport, (i.e., Direct Trunk Transport
or Tandem Switched Transport); 3) the peak busy hour
CCS from the ACI end office; 4) the number of trunks to
be provisioned at a local exchange office or tandem; 5)
and any optional features. When the ordering Party
requests facilities, routing, or optional features
different than those determined to be available, the
Parties will work cooperatively in determining an
acceptable configuration, based on available
facilities, equipment and routing plans.
5.8.2 When the ordering Party initially orders a DS3
Interconnection facility, in conjunction with Tandem
Switched Transport to a tandem, or DS3 Direct Trunk
Transport facilities to a tandem or local exchange
office, the provider will forward the appropriate DS1
facility record information necessary to identify the
circuit facility assignment. On subsequent orders
utilizing existing DS3 Interconnection facilities, or
DS3 Direct Trunk Transport facilities, the provider
will assign the DS1 facility to the DS3 Interconnection
facility or DS3 Direct Trunk Transport facility, as
directed by the ordering Party.
5.8.3 A joint planning meeting will precede ACI and USWC
trunking orders. These meetings will result in the
transmittal of Access Service Requests (ASRs) to
initiate order activity. A Party requesting tandem
Interconnection will provide its best estimate of the
traffic distribution to each end office subtending the
tandem.
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5.8.4 Service intervals and due dates for the initial
establishment of trunking arrangements at each location
of Interconnection between the Parties will be
determined on an individual case basis.
5.8.5 Service intervals and due dates for the establishment
of subsequent trunking arrangements for Interconnection
between the Parties, will be in accordance with the
guidelines for LIS.
5.9 BILLING ARRANGEMENTS
5.9.1 USWC and ACI desire to submit separate bills, pursuant
to their separate tariffs, to Interexchange Carriers
for their respective portions of jointly provided
Switched Access Service.
Based on the negotiated POI, the Parties will agree on
a meet point percentage to enable the joint
provisioning and billing of Switched Access Services to
third parties in conformance with the Meet-Point
Billing guidelines adopted by and contained in the
Ordering and Billing Forum's MECAB and MECOD documents
and referenced in USWC's Switched Access Tariffs. The
Parties understand and agree that MPB arrangements are
available and functional only to/from Interexchange
Carriers who directly connect with the tandem(s) that
ACI sub-tends in each LATA.
5.9.2 The Parties will use reasonable efforts, individually
and collectively, to maintain provisions in their
respective federal and state access tariffs, and/or
provisions within the National Exchange Carrier
Association ("NECA") Tariff No. 4, or any successor
tariff, sufficient to reflect this MPB arrangement,
including MPB percentages.
5.9.3 As detailed in the MECAB document, ACI and USWC will
exchange all information necessary to bill third
parties for Switched Access Services traffic jointly
handled by ACI and USWC via the meet point arrangement
in a timely fashion. Information shall be exchanged in
Exchange Message Record ("EMR") format (Bellcore
Standard BR 010-200-010, as amended) on magnetic tape
or via a mutually acceptable electronic file transfer
protocol. The Parties will exchange records pursuant
to this paragraph without additional compensation.
5.9.4 The Parties will agree upon reasonable audit standards
and other procedures as required to ensure billing
accuracy.
5.9.5 Each Party will bill the IXCs the appropriate rate
elements in accordance with their respective interstate
and intrastate tariffs, as follows:
<TABLE>
<CAPTION>
Rate Element Billing Company
------------ ---------------
<S> <C>
Carrier Common Line Dial Tone Provider
Local Switching Dial Tone Provider
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Interconnection Charge Dial Tone Provider
Local Transport Termination Based on negotiated BIP
Local Transport Facility Based on negotiated BIP
(also called Tandem Transmission per mile)
Tandem Switching Access Tandem Provider
Entrance Facility Access Tandem Provider
</TABLE>
5.9.6 For originating 800/888 traffic routed to an access
tandem, the tandem provider will perform 800/888
database inquiry and translation functions and bill the
inquiry charge and translation charge (if any) to the
Interexchange Carrier pursuant to tariff. For all
originating 800/888 database inquiry and translation
functions, the charges will be billed to the
Interexchange Carrier transporting the call.
5.10 MILEAGE MEASUREMENT
Where required, the mileage measurement for LIS facilities and
trunks is determined in the same manner as the mileage
measurement for Feature Group D Switched Access Service.
5.11 CONSTRUCTION CHARGES
If applicable, construction charges will apply as detailed in
the Construction Charges section of this Agreement.
6. INTERCONNECTION
6.1 DEFINITION
6.1.1 "Interconnection" is the linking of the USWC and ACI
networks for the mutual exchange of traffic and for ACI
access to unbundled Network Elements. Interconnection
does not include the transport and termination of
traffic. Interconnection is provided by Virtual or
Physical Collocation, entrance facilities or Mid-Span
Meet arrangements.
6.1.2 USWC will provide Interconnection at the line side of
the local switch, the trunk side of the local switch,
trunk interconnection points of the tandem switch,
central office cross-connect points, and the location
of the signaling transfer points necessary to exchange
traffic and access call related databases.
6.2 MID-SPAN MEET POI
6.2.1 A Mid-Span Meet POI is a negotiated point of interface,
limited to the interconnection of facilities between
one Party's switch and the other Party's switch. The
actual physical Point of Interface and facilities used
will be subject to negotiations between the Parties.
Each Party will be
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responsible for its portion of the build to the
Mid-Span Meet POI, if the meet point arrangement is
used exclusively for the exchange of local traffic.
6.2.2 If the Mid-Span Meet arrangement is to be used for
access to unbundled Network Elements, ACI must pay the
portion of the economic costs of the Mid-Span Meet
arrangement used by ACI for access to unbundled Network
Elements.
6.3 COLLOCATION
Interconnection may be accomplished through either Virtual or
Physical Collocation. The terms and conditions under which
Collocation will be available are described in the Collocation
section of this Agreement.
6.4 ENTRANCE FACILITY
Interconnection may be accomplished through the provision of an
entrance facility. An entrance facility extends from the
serving Wire Center of the provider to the other Party's Wire
Center location. Entrance facilities may not extend beyond the
area described by the provider's serving Wire Center. The
rates for entrance facilities are provided in Appendix A.
6.5 QUALITY OF INTERCONNECTION
USWC will not, for the purpose of Interconnection, provide to
ACI less favorable terms and conditions than USWC provides
itself or in a manner less efficient than it would impose on
itself. The quality of Interconnection will be at least equal
to that of USWC.
Both Parties agree to manage their network switches in
accordance with the Bellcore LSSGR.
6.6 POINTS OF INTERFACE (POI)
UPON THE REQUEST FOR SPECIFIC POINT TO POINT ROUTING, USWC WILL
MAKE AVAILABLE TO ACI INFORMATION INDICATING THE LOCATION AND
TECHNICAL CHARACTERISTICS OF USWC'S NETWORK FACILITIES. THE
FOLLOWING ALTERNATIVES ARE NEGOTIABLE: (1) A DS1 OR DS3
ENTRANCE FACILITY; (2) VIRTUAL COLLOCATION; (3) PHYSICAL
COLLOCATION; AND (4) NEGOTIATED MID-SPAN MEET FACILITIES. EACH
PARTY IS RESPONSIBLE FOR PROVIDING ITS OWN FACILITIES UP TO THE
MID-SPAN MEET POI. THE PARTIES WILL NEGOTIATE THE FACILITIES
ARRANGEMENT BETWEEN THEIR NETWORKS.
6.7 TRUNKING REQUIREMENTS
6.7.1 The Parties agree to provide designed Interconnection
facilities that meet the same technical criteria and
service standards, such as probability of
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blocking in peak hours and transmission standards, in
accordance with industry standards.
6.7.2 Two-way trunk groups will be established wherever
possible. Exceptions to this provision will be based
on billing, signaling, and network requirements. For
example, (1) billing requirements - switched access vs.
local traffic, (2) signaling requirements - MF vs. SS7,
and (3) network requirements - directory assistance
traffic to TOPS tandems. The following is the current
list of traffic types that require separate trunk
groups, unless specifically otherwise stated in this
Agreement.
6.7.2.1 IntraLATA Toll and Switched Access trunks
6.7.2.2 EAS/Local trunks
6.7.2.3 Directory Assistance trunks
6.7.2.4 911/E911 trunks
6.7.2.5 Operator services trunks
6.7.2.6 Commercial Mobile Radio Service/Wireless
traffic for which ACI serves as the transit
provider between the CMRS provider and USWC.
6.7.2.7 Transit IntraLATA Toll
6.7.2.8 Transit local
6.7.2.9 Meet-Point Billing Trunks (for the joint
provision of Switched Access)
6.7.2.10 Mass calling trunks, if applicable
6.7.3 Trunk group connections will be made at a DS1 or
multiple DS1 level for exchange of EAS/Local, IntraLATA
Toll, wireless/Commercial Mobile Radio Service, and
Switched Access traffic. Ancillary service trunk
groups will be made below a DS1 level, as negotiated.
6.7.4 The Parties will provide Common Channel Signaling (CCS)
to one another, where available, in conjunction with
all EAS/Local trunk circuits. All CCS signaling
parameters will be provided including Calling Party
Number (CPN), originating line information (OLI),
calling party category, charge number, etc. All
privacy indicators will be honored.
6.7.5 Where CCS is not available, in-band multi-frequency
(MF) wink start signaling will be provided. When the
Parties interconnect via CCS for jointly provided
Switched Access Service, the tandem provider will
provide MF/CCS interworking as required for
Interconnection with Interexchange Carriers who use MF
signaling.
6.7.6 The Parties will follow all Ordering and Billing Forum
adopted standards pertaining to CIC/OZZ codes.
6.7.7 USWC will cooperate in the provision of TNS (Transit
Network Selection) for the joint provision of Switched
Access Service.
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6.7.8 The Parties shall terminate EAS/Local traffic
exclusively on EAS/Local trunk groups. No EAS/Local
trunk groups shall be terminated on USWC's access
tandems.
6.7.9 The Parties agree to terminate local traffic in the
same EAS/Local area as such traffic originated.
6.8 INTERCONNECTION FORECASTING
6.8.1 The Parties agree that during the first year of
Interconnection, joint forecasting and planning
meetings will take place no less frequently than once
per quarter.
6.8.2 The Parties shall establish joint forecasting
responsibilities for traffic utilization over trunk
groups. Intercompany forecast information must be
provided by the Parties to each other four times a
year. The quarterly forecasts shall include forecasted
requirements for each trunk group identified in
Paragraph 6.7.2 of this Section. In addition, the
forecast shall include, for tandem-switched traffic,
the quantity of tandem-switched traffic forecasted for
each subtending end office. The Parties recognize
that, to the extent historical traffic data can be
shared between the Parties, the accuracy of the
forecasts will improve. Forecasts shall be for a
minimum of three (current and plus-1 and plus-2) years
and shall include:
6.8.2.1 The use of Common Language Location
Identifier (CLLI-MSG), which are described in
Bellcore documents BR 795-100-100 and BR
795-400-100;
6.8.2.2 A description of major network projects
anticipated for the following six months that
could affect the other Party. Major network
projects include trunking or network
rearrangements, shifts in anticipated traffic
patterns, or other activities that are
reflected by a significant increase or
decrease in trunking demand for the following
forecasting period. This planning will
include the issues of network capacity,
forecasting and compensation calculation,
where appropriate.
6.8.3 If differences in quarterly forecasts of the Parties
vary by more than 24 additional DS0 two-way trunks for
each local interconnection trunk group, the Parties
shall meet to reconcile the forecast to within 24 DS0
trunks.
6.8.4 If a trunk group is under 75 percent of centum call
seconds (ccs) capacity on a monthly average basis for
each month of any three month period, either Party may
request to resize the trunk group, which resizing will
not be unreasonably withheld. If a resizing occurs,
the trunk group shall not be left with less than 25
percent excess capacity.
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6.8.5 Each Party shall provide a specified point of contact
for planning, forecasting and trunk servicing purposes.
6.9 SERVICE INTERRUPTIONS
6.9.1 Standards and procedures for notification of trunk
disconnects will be jointly developed by the Parties.
Neither Party shall be expected to maintain active
status for a trunk disconnected by the other Party for
an extended or indefinite period of time.
Collectively, the Parties will use their best good
faith efforts to complete and agree on such plan.
6.9.2 The characteristics and methods of operation of any
circuits, facilities or equipment of either Party
connected with the services, facilities or equipment of
the other Party pursuant to this Agreement shall not:
1) interfere with or impair service over any facilities
of the other Party; its affiliated companies, or its
connecting and concurring carriers involved in its
services; 2) cause damage to their plant; 3) violate
any applicable law or regulation regarding the invasion
of privacy of any communications carried over the
Party's facilities; or 4) create hazards to the
employees of either Party or to the public. Each of
these requirements is hereinafter referred to as an
"Impairment of Service".
6.9.3 If, either Party discovers an impairment or
interference that threatens to cause, is causing, or
has caused service-affecting harm to the physical
integrity of the network, physical harm to either
Parties' employees or third parties or interference
which prevents either Party, or third parties, from
offering service to their end-users, such impairment or
inference may be considered an emergency situation and
that Party shall, where practical, promptly notify the
other Party of the nature and location of the
impairment or interference. The Parties agree to work
together to attempt to promptly resolve the emergency
situation and if Parties are unable to resolve it, or
if exigent circumstances exist, either Party may take
any action permitted by applicable law, including the
temporary disconnection of the affected circuit,
facility or equipment. The Parties contemplate that
the provision of services within industry standards,
norms, or generally accepted practices will not
constitute an emergency situation.
6.9.4 Where new facilities, services and arrangements are
installed, the TRCO shall ensure that continuity exists
and take appropriate transmission measurements before
advising the other Party that the new circuit is ready
for service.
6.9.5 Each Party shall furnish a trouble reporting telephone
number for the designated TRCO. This number shall give
access to the location where facility records are
normally located and where current status reports on
any trouble reports are readily available. Alternative
out-of-hours
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procedures shall be established to ensure access to a
location that is staffed and has the authority to
initiate corrective action.
6.9.6 Before either Party reports a trouble condition, each
shall use its best efforts to isolate the trouble to
the other's facilities.
6.9.6.1 In cases where a trouble condition affects a
significant portion of the other's service,
the Parties shall assign the same priority
provided to other interconnecting carriers.
6.9.6.2 The Parties shall cooperate in isolating
trouble conditions.
7. COLLOCATION
7.1.1 DESCRIPTION
7.1.1 Collocation allows for the placing of transmission
equipment owned by ACI within USWC's Central Office for
the purpose of interconnecting with USWC, accessing
UNEs, and/or terminating EAS/Local traffic.
7.1.1.1 Virtual Collocation
With a Virtual Collocation arrangement,
ACI is responsible for the procurement of
its own transmission equipment which USWC
installs and maintains. ACI does not have
physical access to its equipment in the
USWC Central Office but will be granted
access to the SPOT Frame for placing any
connections it may require for access to
USWC UNEs.
7.1.1.2 Physical Collocation
Physical Collocation allows ACI to lease
caged floor space in 100 square foot
increments, up to a maximum of 400 square
feet, for placement of its transmission
equipment within USWC's Central Office for
the purpose of interconnecting with USWC
UNEs. ACI is responsible for the
procurement, installation and on-going
maintenance of its equipment as well as
the cross connections required at the SPOT
Frame for combining its equipment to USWC
UNEs.
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7.1.1.3 Common Collocation
Common Collocation is provided in a
non-caged area of a USWC Central Office.
Space will be made available in single
frame bay increments. Space will be
provided utilizing USWC standard equipment
bay configurations in which ACI can place
and maintain its own equipment. As with
both Virtual and Physical Collocation,
Common Collocation will also include
access to the SPOT Frame in which ACI can
make connections to USWC UNEs.
7.2. TERMS AND CONDITIONS
7.2.1 Terms and Conditions - General
7.2.1.1 With respect to any technical requirements or
performance standards specified in this
Section, USWC shall provide Collocation in a
nondiscriminatory manner on rates, terms and
conditions that are just, reasonable and
nondiscriminatory.
7.2.1.2 ACI will only collocate basic transmission
equipment, including equipment necessary to
provide DSL services, to interconnect with
USWC's UNEs and/or terminate EAS/local
traffic to USWC. ACI must identify what
transmission equipment will be installed and
the vendor technical specifications of such
equipment so that USWC may engineer the
power, floor loading, heat release,
environmental particulate level, and HVAC.
7.2.1.3 Collocation requests require that space be
provided for the placement of [Co-Provider's]
transmission equipment within USWC's Central
Office. USWC must also provide the structure
that is necessary in support of this
equipment including physical space, a cage
(for Physical Collocation), required cabling
between equipment and other associated
hardware.
7.2.1.4 All equipment placed will meet NEBS standards
and will be installed in accordance with USWC
Technical Publications 77350, 77351, 77355,
77367, 77386 and 77390. USWC shall provide
standard central office alarming pursuant to
Technical Publication 77390.
7.2.1.5 Collocation is offered on a first-come,
first-served basis. Requests for Collocation
may be denied due to the lack of sufficient
space in a USWC Central Office for placement
of ACI's equipment. When ENTRANCE
FACILITIES space is not available, ACI may
opt to utilize USWC Private Line Finished
Services in lieu of entrance facilities.
USWC is not required to build new entrance
facilities or construct new office space
solely for the purposes of Collocation. In
the event that USWC requires additional
Central Office space in order
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to satisfy its own business needs,
additional space will be taken into
consideration for Collocation as well.
7.2.1.6 If a request for Collocation is denied due to
a lack of space in a USWC Central Office, ACI
may request USWC to provide a cost quote for
the reclamation of space and/or equipment.
Quotes will be developed within 60 business
days including the estimated time frames for
the work that is required in order to satisfy
the Collocation request. ACI has 30 days to
accept the quote. If ACI accepts the quote,
upon receipt of 50% down of the quoted
charges, work will begin with the balance due
on completion.
7.2.1.7 If space is limited in USWC's Central
Offices, Collocation space will always be
provided for placement of a SPOT frame for
all Collocation requests. This may include
having to reclaim either space or equipment.
All costs associated with allocating space
directly related to the SPOT Frame will be
borne by USWC.
7.2.1.8 Reclamation may include the following:
USWC is responsible for Equipment
Reclamation - Space that contains
non-working equipment that can be
removed.
ACI is responsible for Grooming -
The moving of circuits from working
equipment to other equipment with
similar functionality for the
purpose of providing space for
Interconnection.
ACI is responsible for Space
Reclamation - Administrative space
that can be re- conditioned for the
placement of transmission equipment.
If ACI's request for reclamation
produces additional capacity in
excess of ACI's requested amount of
collocation space, ACI will be
responsible, on a pro-rated basis,
pursuant to Section 7.2.1.8. only
for that portion of the reclamation
necessary to satisfy its collocation
request.
7.2.1.9 If USWC determines that the amount of space
requested by ACI for Physical Collocation is
not available, ACI will be offered
Collocation in the closest 100 square foot
increment that is determined to be available
in relation to the original request or ACI
will be offered Common Collocation (bay at a
time) as an alternative to Physical
Collocation.
7.2.1.10 USWC will designate the POI for network
Interconnection for Virtual, Physical or
Common Collocation arrangements. ACI will be
allowed access to the POI on
non-discriminatory terms.
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7.2.1.11 ACI is responsible for providing its own
fiber facilities to the (POI) outside USWC's
Central Office. USWC will extend the fiber
facility on a USWC fiber cable from the POI
to a Fiber Distribution Panel (FDP). From
the FDP additional fiber, conduit and
associated riser structure will then be
provided by USWC to continue the run to ACI's
transmission equipment or collocation area.
7.2.1.12 The entrance facility must be fiber optic
cable and meet industry standards (GR. 20
Core). Metallic sheath cable is not
permitted for use as an entrance facility for
the purpose of Interconnection. USWC
reserves the right to refuse cable that does
not meet requirements for entrance
facilities.
7.2.1.13 Dual entry into a USWC Central Office will be
provided only when two entry points
previously exist and duct space is available.
USWC will not initiate construction of an
entrance facility solely for Collocation. If
USWC requires an entrance facility for its
own use, then the needs of ACI will also be
taken into consideration.
7.2.1.14 Where no entrance facilities are available,
USWC will offer ACI USWC Private Line
Finished Services in lieu of entrance
facilities to be terminated at ACI's
collocated equipment.
7.2.1.15 USWC will establish a SPOT Frame to be the
single point where all USWC UNEs and ACI
equipment are terminated. The SPOT Frame
becomes the standard demarcation point
between ACI and USWC owned network facilities
and equipment as well as the demarcation
between UNEs. ACI will run jumpers on this
SPOT Frame to connect the network elements.
There are three basic types of connections
that will be made at the SPOT Frame:
Unbundled Element to Unbundled
Element
Unbundled Element to ACI equipment
termination
ACI equipment termination to
Co-Provider equipment termination
7.2.1.16 All terminations on the SPOT Frame will have
a cable CFA address. USWC will assign and
maintain cable CFA records for the
terminations at the SPOT frame. USWC will
provide the cable CFA to ACI for subsequent
unbundled network element ACI orders. ACI
will maintain assignment records for the
terminations of its own equipment. ACI will
also maintain the assignment records for
which SPOT frame addresses are connected to
combine network elements and deliver service.
ACI will be required to make the jumper wire,
cross connection between frame addresses on
the SPOT frame to complete the standard
circuit.
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7.2.1.17 ACI will be required to forecast for all DS0,
DS1 and DS3 terminations that it requires for
each Wire Center for which it is requesting
Collocation. The forecast is, including a
separate forecast for UNEs ACI wishes to
combine, included as part of the Collocation
order form and will be used to pre-provision
the necessary tie cables from the Collocation
space to the SPOT Frame and from the SPOT
Frame to USWC UNEs. Terminations will be
provisioned in following increments:
DS0- 100 pair increments
DS1- 28 channel increments
DS3- per termination
7.2.1.18 USWC will review the security requirements
and hours of access (seven (7) days a week,
twenty-four (24) hours a day) with ACI. This
will include issuing keys, ID cards, and
explaining the access control processes,
including but not limited to the requirement
that all ACI approved personnel are subject
to trespass violations if outside of
designated and approved areas or if found to
be providing access to unauthorized
individuals.
7.2.1.19 USWC shall provide access to existing eyewash
stations, bathrooms, and drinking water
within the collocated facility on a
twenty-four (24) hours per day, seven (7)
days per week basis for ACI personnel and its
designated agents.
7.2.1.20 ACI shall be restricted to corridors,
stairways, and elevators that provide direct
access to ACI's space, or to the nearest
restroom facility from ACI's designated
space, and such direct access will be
outlined during ACI's orientation meeting.
Access shall not be permitted to any other
portion of the building.
7.2.1.21 Nothing herein shall be construed to limit
ACI's ability to obtain Virtual, Physical
and/or Common Collocation at their preference
in a single location, provided space is
available.
7.2.1.22 Conversions of the various Collocation
arrangements (i.e. virtual to physical) are
available upon request by ACI and payment by
ACI of associated conversion charges.
Conversions shall be in accordance with
USWC's standard Collocation provisioning
processes.
7.2.2 Terms and Conditions - Virtual Collocation
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7.2.2.1 USWC is responsible for installing and
maintaining Virtually Collocated equipment
for the purpose of Interconnection or to
access UNEs.
7.2.2.2 ACI will not have physical access to the
Virtually Collocated equipment in the USWC
Wire Center. If ACI orders UNEs, ACI will
have access to the Wire Center and the SPOT
frame where the virtually collocated
equipment is terminated for the purposes of
combining UNEs.
7.2.2.3 ACI will be responsible for obtaining and
providing to USWC administrative codes,
(e.g., common language codes, for all
equipment specified by ACI and installed in
Wire Center buildings).
7.2.2.4 ACI shall ensure that upon receipt of ACI's
virtually collocated equipment by USWC, all
warranties and access to ongoing technical
support are passed through to USWC, all at
ACI's expense. ACI shall advise the
manufacturer and seller of the virtually
collocated equipment that ACI's equipment
will be possessed, installed and maintained
by USWC.
7.2.2.5 ACI's virtually collocated equipment must
comply with the Bellcore Network Equipment
Building System (NEBS) Generic Equipment
Requirements TR-NWT-000063, USWC Wire Center
environmental and transmission standards and
any statutory (local, state or federal)
and/or regulatory requirements in effect at
the time of equipment installation or that
subsequently become effective. ACI shall
provide USWC interface specifications (e.g.,
electrical, functional, physical and
software) of ACI's virtually collocated
equipment.
7.2.2.6 ACI must specify all software options and
associated plug-ins for its virtually
collocated equipment.
7.2.2.7 USWC does not guarantee the reliability of
ACI's virtually collocated equipment.
7.2.2.8 ACI will be responsible for payment for
training of USWC employees for the
maintenance, operation and installation of
ACI's Virtually Collocated equipment when
that equipment is different than the
equipment locally used by USWC in the
affected offices.
7.2.2.9 Co-Provider] will be responsible for payment
of charges incurred in the maintenance and/or
repair of ACI's virtually collocated
equipment.
7.2.3 Terms and Conditions - Physical Collocation
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7.2.3.1 USWC shall provide to ACI Physical
Collocation for Interconnection and for
access to UNEs, except that USWC may provide
for Common or Virtual Collocation if USWC
demonstrates to the Commission that Physical
Collocation is not practical for technical
reasons or because of space limitations, as
provided in Section 251(c)(6) of the Act.
USWC shall provide basic telephone service
with a connection jack as requested by ACI
for the Physical or Common Collocated space.
Upon ACI's request, this service shall be
available per standard USWC business service
provisioning processes.
7.2.3.2 Physical Collocation is offered in Wire
Centers on a space-available, first come,
first-served basis.
7.2.3.3 The minimum standard leasable amount of floor
space is 100 square feet. ACI must
efficiently use the leased space; no more
than 50% of the floor space may be used for
storage cabinets and work surfaces. The
Commission will be the final arbitrator in
points of dispute between the Parties.
7.2.3.4 ACI's leased floor space will be separated
from other Co-Providers and USWC space
through a cage enclosure. USWC or a USWC
approved contractor will construct the cage
enclosure. These two Technical Publications
must be in the possession of ACI and its
agents at the site during all work
activities.
7.2.3.5 The following standard features will be
provided by USWC:
Heating, ventilation and air
conditioning.
Smoke/fire detection and any
other building code
requirements.
7.2.3.6 USWC will design the floor space within each
Wire Center which will constitute ACI's
leased space.
7.2.3.7 USWC will ensure that the necessary
construction work (racking, ducting, caging,
etc.) is performed to build ACI's leased
physical space and the riser from the vault
to the leased physical space.
7.2.3.8 ACI owns and is responsible for the
installation, maintenance and repair of its
transmission equipment located within the
physically collocated space rented from USWC.
7.2.3.9 ACI must use leased space promptly and may
not warehouse space for later use or sublease
to another Co-Provider.
7.2.3.10 USWC will extend USWC-provided and owned
fiber optic cable from the POI through the
cable vault and extend the cable to the
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Fiber Distribution Panel and then to
ACI's leased physical space or place
the cable in fire retardant tubing
prior to extension to ACI's leased
physical space. ACI will, procure,
install and maintain all fiber optic
facilities up to the USWC designated
POI.
7.2.3.11 USWC will install and maintain all related
SPOT frame activity necessary to provide
cross connections between USWC's and ACI's
equipment.
7.2.3.12 ACI may not extend USWC dark fiber to ACI's
leased physical space or connect DS1/DS3
Channel Terminations to USWC dark fiber.
7.2.3.13 USWC will work cooperatively with ACI in
matters of joint testing and maintenance.
7.2.3.14 Once construction is complete for Physical
Collocation and ACI has accepted its leased
physical space, ACI may order its DS0, DS1,
DS3.
7.2.3.15 If, during installation, USWC determines ACI
activities or equipment does not comply with
the NEBS standards listed in section 7.2.1.4
or are otherwise unsafe, non-standard, or in
violation of any applicable laws or
regulations, USWC has the right to stop all
collocation work until the situation is
remedied. If such conditions pose an
immediate threat to the safety of USWC
employees, interfere with the performance of
USWC's service obligations, or pose an
immediate threat to the physical integrity of
the conduit system, cable facilities, or
other equipment in the central office USWC
may perform such work and/or take action as
is necessary to correct the condition at
ACI's expense.
7.2.3.16 If, at any time, USWC determines that the
equipment or the installation does not meet
USWC standards as listed in Section 7.2.1.4,
ACI will be responsible for the costs
associated with the removal, modification to,
or installation of the equipment to bring it
into compliance. If ACI fails to correct any
non-compliance within fifteen (15) days of
written notice of non-compliance, USWC may
have the equipment removed or the condition
corrected at ACI's expense.
7.2.4 Terms and Conditions - Common Collocation
7.2.4.1 ACI owns and is responsible for the
installation, maintenance and repair of its
transmission equipment located within the
space rented from USWC. USWC will not
interfere with such ACI equipment and will
make best efforts to ensure that third
parties will not have access to, will not
physically touch, and/or functionally impact
the operation of any ACI equipment, spares,
or test equipment. USWC will not
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access ACI's equipment under normal
operating circumstances; however, USWC
cannot agree under any circumstances,
never access, physically touch, and/or
functionally impact ACI's equipment.
Additionally, with respect to the
requirement set forth to not functionally
impact ACI's equipment, please refer to
Section 6.9.2 and 6.9.3 which USWC and ACI
have had extensive discussions. ACI does
not have access to, will not physically
touch, and/or functionally impact the
operation of any adjacent USWC equipment,
spares, or test equipment.
7.2.4.2 Requests for multiple bay space will be
provided in adjacent bays where possible.
When contiguous space is not available, bays
may be co-mingled with other USWC equipment
bays. ACI may request through the USWC
Space Reclamation Policy, a price quote to
rearrange USWC equipment to provide ACI with
adjacent space.
7.2.4.3 All equipment placed will meet minimum NEBs
standards and will be engineered and
installed in accordance with USWC Technical
Publications 77350, 77351, 77355, 77367,
77386 and 77390. Technical Publications
77350 and 77367 must be in the possession of
ACI and its agents at the site during all
work activities.
7.2.4.4 All equipment placed will be subject to
random audits conducted by USWC. These
audits will determine whether the equipment
meets the standards required by this
Agreement. ACI will be notified of the
results of this audit and shall rectify all
non-conformities within 30 days of
notification. All non-conforming items
remaining after this 30 day period may be
rectified by USWC and the cost assessed to
ACI.
7.3. RATE ELEMENTS
7.3.1 Rate Elements - General Collocation
7.3.1.1 USWC will recover collocation costs through
both recurring and nonrecurring charges. The
charges are determined by the scope of work
to be performed based on the information
provided by ACI on the Collocation Order
Form. A quote is then developed by USWC for
the work to be performed.
7.3.1.2 The following elements as specified in Part H
of this Agreement, are used to develop a
price quotation in support of Collocation.
7.3.1.3 Quote Preparation Fee. This covers the work
involved in verifying space and developing a
quotation for ACI for the total costs
involved in its Collocation request.
7.3.1.4 Entrance Facility Charge. Provides for fiber
optic cable on a two-fiber basis from the POI
utilizing USWC owned, conventional single
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mode type of fiber optic cable to the
collocated equipment (for Virtual
Collocation) or to the leased space (for
Physical/Common Collocation). The
entrance facility includes riser, fiber
placement, entrance closure,
conduit/innerduct, and core drilling.
7.3.1.5 Cable Splicing Charge. Represents the labor
and equipment to perform a subsequent splice
to ACI provided fiber optic cable after the
initial installation splice. Includes
per-setup and per-fiber-spliced rate
elements.
7.3.1.6 -48 Volt DC Power Charge. Provides -48 volt
DC power to ACI collocated equipment.
Charged in 20 ampere unit increments.
7.3.1.7 48 Volt DC Power Cable Charge. Provides for
the transmission of -48 volt DC power to the
collocated equipment. It includes
engineering, furnishing and installing the
main distribution bay power breaker,
associated power cable, cable rack and local
power bay to the closest power distribution
bay. It also includes the power cable
(feeders) A and B from the local power
distribution bay to the leased physical space
(for Physical or Common Collocation) or to
the collocated equipment (for Virtual
Collocation). Charged per foot. per A and B
feeder.
7.3.1.8 Inspector Labor Charge. Provides for USWC
qualified personnel, acting as an inspector,
when ACI requires access to the POI after the
initial installation. A call-out of an
inspector after business hours is subject to
a minimum charge of four hours. The minimum
call-out charge shall apply when no other
employee is present in the location, and an
'off-shift' USWC employee (or contract
employee) is required to go 'on-shift' on
behalf of ACI.
7.3.1.9 Channel Regeneration Charge. Required when
the distance from the leased physical space
(for Physical or Common Collocation) or from
the collocated equipment (for Virtual
Collocation) to USWC network is of sufficient
length to require regeneration.
7.3.1.10 SPOT Frame Distribution Charge- This element
includes the tie cables and associated
racking that are required to be placed
between ACI collocated equipment and the
vertical side of the SPOT Frame.
7.3.1.11 Vertical Terminations Charge - This element
provides for the terminations required for
the tie cables on the vertical side of the
SPOT frame.
7.3.1.12 Horizontal Terminations Charge - This element
provides for the terminations which are
required for the tie cables at both the
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horizontal side of the SPOT frame and those
required for access to USWC UNEs.
7.3.1.13 Unbundled Distribution Charge- This element
includes the tie cables and associated
racking that are required to be placed
between the horizontal side of the SPOT frame
and USWC UNEs.
7.3.1.14 Collocation Grounding Charge. A charge
associated with providing grounding for ACI's
cage enclosure and equipment. Recurring and
nonrecurring charges are assessed per foot to
ACI's cage enclosure or common space where
required.
7.3.1.15 Overhead Lighting Charge- Standard
illumination of Central Office Space.
7.3.1.16 Heating and Air Conditioning Charge-
Environmental temperature control required
for proper operation of electronic
telecommunications equipment.
7.3.1.17 Security Charge- The keys/card readers and
cameras required for ACI access to the USWC
Central Office for the purpose of
collocation.
7.3.2 Rate Elements - Virtual Collocation
The following rate elements, as specified in Part H,
apply uniquely to Virtual Collocation.
7.3.2.1 Maintenance Labor -- Provides for the labor
necessary for repair of out of service and/or
service-affecting conditions and preventative
maintenance of ACI virtually collocated
equipment. ACI is responsible for ordering
maintenance spares. USWC will perform
maintenance and/or repair work upon receipt
of the replacement maintenance spare and/or
equipment from ACI. A call-out of a
maintenance technician after business hours
is subject to a minimum charge as specified
above.
7.3.2.2 Training Labor -- Provides for the billing of
vendor-provided training for USWC personnel
on a metropolitan service area basis,
necessary for ACI virtually collocated
equipment which is different from USWC
provided equipment. USWC will require three
USWC employees to be trained per metropolitan
service area in which ACI virtually
collocated equipment is located. If, by an
act of USWC, trained employees are relocated,
retired, or are no longer available, USWC
will not require ACI to provide training for
additional USWC employees for the same
virtually collocated equipment in the same
metropolitan area. The amount of training
billed to ACI will be reduced by half, should
a second Co-Provider in the same
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metropolitan area select the same
virtually collocated equipment as ACI.
7.3.2.3 Equipment Bay -- Provides mounting space for
ACI virtually collocated equipment. Each bay
includes the 7 foot bay, its installation,
all necessary environmental supports.
Mounting space on the bay, including space
for the fuse panel and air gaps necessary for
heat dissipation is limited to 78 inches.
The monthly rate is applied per shelf.
7.3.2.4 Engineering Labor -- Provides the planning
and engineering of ACI virtually collocated
equipment at the time of installation, change
or removal.
7.3.2.5 Installation Labor -- Provides for the
installation, change or removal of ACI
virtually collocated equipment.
7.3.2.6 All equipment and installation shall meet
earthquake rating requirements.
7.3.3 Rate Elements - Physical Collocation
7.3.3.1 Enclosure Buildout. The Cage Enclosure
Buildout element includes the material and
labor to construct the enclosure. ACI may
choose from USWC approved contractors to
construct the cage, in accordance with USWC's
installation Technical Publication 77350. It
includes a nine foot cage enclosure available
in increments of 100, 200, 300 or 400 square
feet, air conditioning (to support ACI loads
specified), lighting (not to exceed 2 watts
per square foot), and convenience outlets (3
per cage or number required by building
code). Pricing for the Enclosure Buildout
will be provided on an individual basis due
to the uniqueness of ACI's requirements,
central office structure and arrangements.
7.3.3.2 Floor Space Lease. Provides the monthly rent
for the leased physical space, property taxes
and base operating cost without -48 volt DC
power. Includes convenience 110 AC, 15 amp
electrical outlets provided in accordance
with local codes and may not be used to power
transmission equipment or -48 volt DC power
generating equipment. Also includes
maintenance for the leased space; provides
for the preventative maintenance (climate
controls, filters, fire and life systems and
alarms, mechanical systems, standard HVAC);
biweekly housekeeping services (sweeping,
spot cleaning, trash removal) of USWC Wire
Center areas surrounding the leased physical
space and general repair and maintenance.
7.3.3.3 AC Power Charge- Standard AC outlet used by
ACI for the purpose of powering test
equipment, tools etc.
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7.3.3.4 Grounding Charge- Used to connect the
Central Office common ground to ACI's
equipment.
7.3.4 Rate Elements - Common Collocation
The supporting structure and rate elements for Common
Collocation are the same as Physical Collocation,
excluding the caged enclosure.
7.4. ORDERING
7.4.1 Ordering - Collocation
7.4.1.1 ACI must have a state approved
Interconnection agreement before submitting a
Collocation Order Form and Quote Preparation
Fee (QPF) to USWC.
7.4.2 Ordering - Virtual Collocation
7.4.2.1 Upon receipt of a Collocation Order Form and
QPF, USWC will perform a feasibility study to
determine if adequate space can be found for
the placement of [Co-Provider]'s equipment
within the Central Office. The feasibility
study will be completed within five (5)
business days of receipt of the QPF. If
space is available, USWC will develop a price
quotation within 25 business days of
completion of the feasibility study.
7.4.2.2 Virtual Collocation price quotes will be
honored for 30 calendar days from the date
the quote is provided. During this period
the entrance facility and space is reserved
pending ACI's approval of the quoted charges.
If ACI agrees to terms as stated in the
Collocation Price Quote, ACI must respond
within 30 days with a signed quote, a check
for 50% down of the quoted charges and proof
of insurance. Under normal conditions, USWC
will complete the installation within 90 days
from receipt of ACI's equipment. Any
portions that cannot be completed within 90
days will be negotiated with ACI on an
individual case basis. The installation of
line cards and other minor modifications
shall be performed by USWC on intervals
equivalent to those that USWC applies to
itself, but in no instance shall any such
interval exceed 90 days. Final Payment is
due upon completion.
7.4.3 Ordering - Physical Collocation
7.4.3.1 Upon receipt of a Collocation Order Form and
QPF, USWC will perform a feasibility study to
determine if adequate space can be found for
the placement of ACI's equipment within the
Central Office. The feasibility study will
be provided within 15 business
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days from date of receipt of the QPF. If
entrance facilities and office space are
found to be available, USWC will develop a
quote for the supporting structure within
25 business days of providing the
feasibility study. Physical Collocation
price quotes will be honored for 30
calendar days from the date the quote is
provided. Upon receipt of the signed
quote, 50% down and proof of insurance,
construction by USWC will begin. The cage
will be available to ACI for placement of
its equipment within 90 days of receipt of
the 50% down payment. Depending on
specific Wire Center conditions, shorter
intervals may be available. Final payment
is due upon completion of work.
7.4.3.2 If Physical Collocation is ordered from a
state Tariff then the available terminations
will be defined in each of those Tariffs.
7.4.3.3 Due to variables in equipment availability
and scope of the work to be performed,
additional time may be required for
implementation of the structure required to
support the Collocation request. Examples of
structure that may not be completed within 90
days may include additional time for
placement of a POI and DC power upgrades
required to meet ACI's Collocation request.
7.4.4 Ordering - Common Collocation
7.4.4.1 Upon receipt of a Collocation Order Form and
QPF, USWC will perform a feasibility study to
determine if adequate space can be found for
the placement of ACI's equipment within the
Central Office. The feasibility study will
be provided within 15 business days from date
of receipt of the Collocation Order Form and
QPF. If entrance facilities and office space
are found to be available, USWC will develop
a quote for supporting structure within 25
business days of providing the feasibility
study. Common Collocation price quotes will
be honored for 30 calendar days from the date
the quote is provided. During this period
the entrance facility and space is reserved
pending ACI's approval of the quoted charges.
If ACI agrees to the terms as stated in the
Collocation Price Quote, ACI must respond
within 30 days with a signed quote, a check
for 50% of the quoted charges and proof of
insurance. Upon receipt of the signed quote,
50% payment and proof of insurance,
construction by USWC will begin. The common
space including equipment bays and associated
apparatus provided by USWC, will be available
to ACI for placement of its equipment within
90 days of receipt of the 50% down payment.
Depending on specific Wire Center conditions,
shorter intervals may be available. Final
payment is due upon completion of work.
7.4.4.2 Due to variables in equipment availability
and scope of the work to be performed,
additional time may be required for
implementation of
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the structure required to support the
Collocation request. Examples of
structure that may not be completed within
90 days may include additional time for
placement of a POI and DC power upgrades
required to meet ACI's Collocation request.
7.5. BILLING
7.5.1 Billing - Collocation
Upon completion of the Collocation construction
activities and payment of the remaining nonrecurring
balance, USWC will provide ACI a completion package
that will initiate the recurring Collocation charges.
Once this completion package has been signed by ACI and
USWC, ACI may begin submitting service order requests
for USWC transport services and/or UNEs.
7.5.2 Billing - Virtual Collocation
Virtual Collocation will be considered complete when
the POI has been constructed, the shared fiber entrance
facility has been provisioned, and the collocated
equipment has been installed. Cooperative testing
between ACI and USWC may be negotiated and performed to
ensure continuity and acceptable transmission
parameters in the facility and equipment.
7.5.3 Billing - Physical and Common Collocation
Upon completion of the construction activities and
payment of the remaining nonrecurring charge, USWC will
turn over access to the space and provide security
access to the Wire Center. ACI will sign off on the
completion of the physical space via the Physical or
Common Collocation completion package. This will
activate the monthly billing for leased space. ACI may
then proceed with the installation of its equipment in
the Collocation space. Once ACI's equipment has been
installed and cable provided to the SPOT Frame, USWC
will complete all remaining work activities. A second
completion package will be provided for ACI's approval
of the project. This completion package will initiate
the recurring collocation charges associated with the
remaining monthly charges (e.g., Entrance Facility, DC
Power, SPOT Frame terminations, etc.)
7.6. MAINTENANCE AND REPAIR
7.6.1 Virtual Collocation
7.6.1.1 Maintenance Labor, Inspector Labor,
Engineering Labor and Equipment Labor
business hours are considered to be Monday
through Friday, 8:00am to 5:00pm (local time)
and after business hours are after 5:00pm and
before 8:00am (local time), Monday through
Friday, all day Saturday, Sunday and
holidays.
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7.6.1.2 Installation and maintenance of ACI's
virtually collocated equipment will be
performed by USWC or a USWC authorized
vendor.
7.6.1.3 Upon failure of ACI's virtually collocated
equipment, ACI is responsible for
transportation and delivery of maintenance
spares to USWC at the Wire Center housing the
failed equipment. ACI is responsible for
purchasing and maintaining a supply of
spares.
7.6.2 Physical Collocation
ACI is responsible for the maintenance and repair of
its equipment located within the ACI's caged space.
7.6.3 Common Collocation
ACI is responsible for the maintenance and repair of
its equipment located within the ACI's common space.
8. UNBUNDLED ACCESS/ELEMENTS
8.1 GENERAL TERMS
8.1.1 USWC agrees to provide the following unbundled Network
Elements which are addressed in more detail in later
sections of this Agreement: 1) local Loop, 2) local and
tandem switches (including all vertical switching
features provided by such switches), 3) interoffice
transmission facilities, 4) network interface devices,
5) signaling and call-related database facilities, 6)
operations support systems functions, and 7) operator
and directory assistance functions.
8.1.2 This Agreement provides for the provision of unbundled
Network Elements to ACI which ACI may connect or
combine for the purpose of offering finished retail
services. USWC will not combine USWC's unbundled
Network Elements to provide a finished service to ACI.
USWC agrees, however, to offer finished retail services
to ACI for resale pursuant to the Resale section of
this Agreement.
8.1.3 USWC will not restrict the types of telecommunications
services ACI may offer through unbundled elements, nor
will it restrict ACI from combining elements with any
technically compatible equipment ACI owns. USWC will
provide ACI with the same features, functions and
capabilities of a particular element that USWC provides
to itself, so that ACI can provide any
telecommunications services that can be offered by
means of the element.
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8.2 DESCRIPTION OF UNBUNDLED ELEMENTS
8.2.1 Tandem Switching
USWC will provide a tandem switching element on an
unbundled basis. The tandem switch element includes
the facilities connecting the trunk distribution frames
to the switch, and certain switching functions,
including those facilities that establish a temporary
transmission path between two other switches, but not
including the transport needed to complete the call.
The definition of the tandem switching element also
includes the functions that are centralized in tandems
rather than in separate end office switches, such as
call recording, the routing of calls to operator
services, and signaling conversion functions.
8.2.2 Interoffice Transport
USWC will provide access to dedicated transmission
facilities between its Central Offices or between such
offices and those of other carriers.
8.2.3 Digital Cross Connect System.
USWC will provide ACI with access to mutually agreed
upon digital cross-connect system (DCS) points.
8.2.4 Unbundled Loops
8.2.4.1 Service Description
8.2.4.1.1 An Unbundled Loop
establishes a transmission
path between a central
office distribution frame
(or equivalent) up to, and
including, USWC's network
interface device (NID)
and/or demarcation point.
For existing Loops, the
inside wire connection to
the NID, and/or demarcation
point, will remain intact.
8.2.4.1.2 Basic Unbundled Loops are
available as a two-wire or
four-wire, point-to-point
configuration suitable for
local exchange type
services within the analog
voice frequency range of
300 to 3000 Hz. For the
two-wire configuration, ACI
is requested to specify
loop start or ground start
option. The actual loop
facilities that provide
this service may utilize
various technologies or
combinations of
technologies. Basic
Unbundled Loops provide an
analog facility to ACI.
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8.2.4.1.2.1 When ACI requests a
nonloaded Unbundled
Loop and there are
none available, USWC
will dispatch a
technician to remove
load coils and
excess bridge taps
(i.e., "deload" and
condition the Loop)
in order to make a
Loop available. ACI
will be charged the
conditioning
nonrecurring charge
(cable unloading and
bridge tap removal)
in addition to the
Unbundled Loop
installation
nonrecurring charge.
8.2.4.1.2.2 If ACI orders
multiplexing, ACI
will be responsible
for notifying USWC
of the multiplexing
channel plug
requirements and
settings ACI desires
to be established.
If ACI wishes to
establish a standard
setting for all such
multiplexing, the
BFR process shall be
used to document
that request. The
multiplexing channel
plug requirements
and settings may
also be established
on a case by case
basis.
8.2.4.1.2.3 The actual Loop
facilities may
utilize various
technologies or
combinations of
technologies. If
USWC uses Integrated
Digital Loop Carrier
(IDLC) systems to
provide the local
Loop, to the extent
possible, USWC will
make alternate
arrangements to
permit ACI to order
a contiguous
unbundled local
Loop. This could
include finding
either a metallic or
universal digital
Loop carrier
facility
alternative. If
neither of these
alternatives are
available, the
request will become
a held order. ACI
has the alternative
to request USWC to
construct facilities
under the provisions
of the construction
charges section
contained herein.
8.2.4.2 Unbundled Loops are provided in accordance
with the specifications, interfaces and
parameters described in the appropriate
Technical Reference Publications. USWC's
sole obligation is to provide and maintain
Unbundled Loops in accordance with such
specifications, interfaces and parameters.
USWC does not warrant that Unbundled Loops
are compatible with any specific facilities
or equipment or can be used for any
particular purpose or service. Transmission
characteristics may vary depending
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on the distance between ACI's end user and
USWC's end office and may vary due to
characteristics inherent in the physical
network. USWC, in order to properly
maintain and modernize the network, may
make necessary modifications and changes
to the Network Elements in its network on
an as needed basis. Such changes may
result in minor changes to transmission
parameters. Changes that affect network
interoperability require advance notice
pursuant to the Notice of Changes section
of this Agreement.
8.2.4.3 Facilities and lines furnished by USWC on the
premises of ACI's end user and up to, and
including, the NID or equivalent are the
property of USWC. USWC must have access to
all such facilities for network management
purposes. USWC's employees and agents may
enter said premises at any reasonable hour to
test and inspect such facilities and lines in
connection with such purposes or upon
termination or cancellation of the Unbundled
Loop Service to remove such facilities and
lines.
8.2.4.4 Unbundled Loops include the facilities
between the USWC distribution frame up to and
including USWC's NID located at ACI's end
user premises. The connection between the
distribution frame and ACI facilities is
accomplished by ordering the applicable EICT
in conjunction with Expanded
Interconnection-Collocation as set forth in
USWC's Private Line Tariff. Regeneration for
the EICT may be required.
8.2.4.5 Ordering and Maintenance.
8.2.4.5.1 Prior to placing orders on
behalf of the end user, ACI
shall be responsible for
obtaining and have in its
possession Proof of
Authorization ("POA"). POA
shall consist of documentation
acceptable to USWC of the end
user's selection of ACI. Such
selection may be obtained in
the following ways:
8.2.4.5.1.1 The end user's
written Letter of
Authorization or
LOA.
8.2.4.5.1.2 The end user's
electronic
authorization by use
of an 800 number,
8.2.4.5.1.3 The end user's oral
authorization
verified by an
independent third
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party (with third
party verification
as POA).
8.2.4.5.1.4 A prepaid returnable
postcard supplied by
ACI which has been
signed and returned
by end user. ACI
will wait fourteen
(14) business days
after mailing the
postcard before
placing an order to
change.
8.2.4.5.2 If there is a conflict between
an end user (and/or its
respective agent) and ACI
regarding the disconnection or
provision of Unbundled Loops,
USWC will honor the latest
dated Letter of Authorization
designating an agent by the
end user or its respective
agent. If the end user's
service has not been
disconnected and Unbundled
Loop Service is not yet
established, ACI will be
responsible to pay the
nonrecurring charge as set
forth herein. If the end
user's service has been
disconnected and the end
user's service is to be
restored with USWC, ACI will
be responsible to pay the
applicable nonrecurring
charges as set forth in USWC's
applicable tariff, to restore
the end user's prior service
with USWC.
8.2.4.5.3 ACI is responsible for its own
end user base and will have
the responsibility for
resolution of any service
trouble report(s) from its end
users. USWC will work
cooperatively with ACI to
resolve trouble reports when
the trouble condition has been
isolated and found to be
within a portion of USWC's
network. ACI must provide to
USWC switch-based test results
when testing its end user's
trouble prior to USWC
performing any repair
functions. The Parties will
cooperate in developing
mutually acceptable test
report standards. When the
trouble is not in USWC's
network, USWC shall apply to
ACI the maintenance of service
charges in accordance with the
applicable time and materials
charges in USWC's tariff.
8.2.4.5.4 ACI will be responsible to
submit to USWC a disconnect
order for an Unbundled Loop
that is relinquished by the
end user due to cessation of
service. Unbundled Loop
facilities will be returned to
USWC when the disconnect order
is complete. In the event of
transfer of the end user's
service
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from one provider to another,
the new provider will issue a
request for transfer of
service, resulting in the
appropriate disconnection and
reconnection of service.
8.2.4.5.5 USWC will employ the following
ordering interval process when
receiving [Co-Provider's]
request for Unbundled Loops.
For one order at a specific
end user's premises:
1 order- within 5 business
day interval for order
completion by USWC.
For multiple orders at a
specific end user's
premises:
2-8 orders- within 5
business day interval for
order completion by USWC.
9-16 orders- within 6
business day interval for
order completion by USWC.
17-24 orders- within 7
business day interval for
order completion by USWC.
For related orders, new
connects will be physically
worked within the same
calendar day.
8.2.4.5.6 When ordering Unbundled
Loops, ACI is responsible for
obtaining or providing
facilities and equipment that
are compatible with the
service.
8.2.4.5.7 ACI will have responsibility
for testing the equipment,
network facilities and the
Unbundled Loop facility. If
USWC performs tests of the
Unbundled Loop facility at
ACI's request, and the fault
is not in the USWC facilities,
a charge shall apply.
8.2.4.5.8 ACI will be responsible for
providing battery and dial
tone to its connection point
two business days prior to
the due date on the service
order.
8.2.4.5.9 Provisions regarding Basic
Testing at Coordinated
Cutover Time shall be
negotiated between the
Parties on an individual case
basis.
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8.2.4.5.10 ACI and USWC will work
cooperatively to develop
forecasts for Unbundled Loop
service. USWC requests an
eighteen month forecast of
Unbundled Loop service. The
forecast will include the
specific serving Wire Center
that will be requested, plus
the specific quantity of each
service desired. The
forecast will be updated
quarterly, and will be
treated as ACI confidential
information.
8.2.4.6 Appendix A contains the rate information for
Unbundled Loops.
8.2.4.7 If applicable, the Bona Fide Request Process
will apply as detailed in the Bona Fide
Request Process section of this Agreement.
8.2.4.8 If applicable, Construction Charges, pursuant
to the Construction Charges section of this
Agreement, may apply to the construction of
new Unbundled Loops on behalf of ACI.
8.2.5 Local Switching Element
The unbundled switching element includes facilities
that are associated with the switch (e.g., Port),
facilities that are involved with switching the call,
access to vertical features (e.g., custom calling), and
all originating minutes of use from the unbundled
switching element, but not including transport from or
to the switch.
8.2.5.1 End Office Switching
8.2.5.1.1 Line-side and trunk-side
Ports are available. The
line-side Port is flat
rated and it includes:
8.2.5.1.1.1 Telephone Number
8.2.5.1.1.2 Directory Listing
8.2.5.1.1.3 Dial Tone
8.2.5.1.1.4 Signaling (loop or
ground start)
8.2.5.1.1.5 On/Off Hook
Detection
8.2.5.1.1.6 Audible and Power
Ringing
8.2.5.1.1.7 Automatic Message
Accounting (AMA)
Recording
8.2.5.1.1.8 Access to 911,
Operator Services,
and Directory
Assistance
8.2.5.1.1.9 Blocking Options
(900 services)
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8.2.5.1.2 Vertical features will be
offered as elements. These
elements are offered at the
retail rate with the
appropriate discounted rate
offered under resale.
8.2.5.1.3 Local originating usage
will be measured and billed
on minutes of use.
8.2.5.1.4 The access point for
line-side Port
interconnection is the
Single Point of Termination
(SPOT) bay of the USWC
designated serving Wire
Center.
8.2.5.1.5 The price for local
switching is described in
Appendix A.
8.2.5.2 Customized Routing
8.2.5.2.1 Description
Customized routing will
enable ACI to direct
particular classes of calls
to prearranged outgoing
trunks. ACI can use
customized routing to
direct its end users' calls
to 411, 555-1212, or O- to
its own directory
assistance, operator
services platform or
dedicated trunks.
8.2.5.2.2 Limitations
Because there is a
limitation in the capacity
of the 1A ESS switch,
custom routing will be
offered to Co-Providers on
a first-come, first-served
basis.
8.2.5.2.3 The price for custom
routing will be provided on
a case-by-case basis. The
price for custom routing is
comprised of a development
charge for a customized
Line Class Code and an
installation charge for
every switch the Line Class
Code is implemented.
8.2.5.3 Coin signaling is only available as part of
"smart PAL" service.
8.2.6 Network Interface Device (NID)
8.2.6.1 Service Description.
A device wired between a telephone
protector and the inside wiring to
isolate the end user's equipment from the
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network at the subscriber's premises. It
is a device for the termination of inside
wire that is available in single and
multiple pair configurations.
8.2.6.2 ACI may connect its loops, via its own NID,
to the USWC NID.
8.2.6.3 Any costs associated with USWC's connection
of ACI's NID to USWC's NID, will be the
responsibility of ACI.
8.2.6.4 The price for access to the NID will be
provided on a case-by-case basis.
8.2.7 Additional Unbundled Elements
ACI may request nondiscriminatory access to, and where
appropriate, development of additional unbundled
Network Elements not covered in this Agreement in
response to specific requests therefor, pursuant to the
Bona Fide Request Process detailed in the Bona Fide
Request Process section of this Agreement.
9. ANCILLARY SERVICES AND ARRANGEMENTS
9.1 SIGNALING ACCESS TO CALL-RELATED DATABASES
9.1.1 When ACI is purchasing local switching from USWC, USWC
will provide access via the STP to call related
databases used in AIN services. The Parties agree to
work in the industry to define the mediated access
mechanisms for SCP access. Access to the USWC Service
Management Systems (SMS) will be provided to ACI, via
the BFR process, to activate, modify, or update
information in the call related databases, equivalent
to the USWC access.
9.1.2 USWC will offer unbundled signaling via LIS-Common
Channel Signaling Capability (CCSAC). CCSAC service
utilizes the SS7 network and provides access to
call-related databases that reside at USWC's SCPs, such
as the Line Information Database (LIDB) and the 800
Database. The access to USWC's SCPs will be mediated
via the STP Port in order to assure network
reliability.
9.1.3 CCSAC includes:
9.1.3.1 Entrance Facility - This element connects
ACI's signaling point of interface with the
USWC serving wire center (SWC). ACI may
purchase this element or it may
self-provision the entrance facility. If the
entrance facility is
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self-provisioned, ACI would need to
purchase Collocation and an Expanded
Interconnection Channel Termination.
9.1.3.2 Direct Link Transport (DLT) - This element
connects the SWC to the USWC STP. ACI may
purchase this element or self-provision
transport directly to the STP. If ACI
provides the link to the STP, it must
purchase Collocation, an Expanded
Interconnection Channel Termination at the
STP location, and a direct link from the EICT
to the STP Port.
9.1.3.3 STP Port - This element provides the
switching function at the STP. One STP Port
is required for each DLT Link. The Port
provides interaction with the Service Control
Point (SCP). Port availability is limited.
9.1.3.4 Multiplexing - Multiplexing may be required
at either/both the SWC and/or Port. The
multiplexing options are the standard DS3 to
DS1 and DS1 to DS0 requirements.
9.1.4 Access to Advanced Intelligent Network (AIN) functions
is available only through the STP.
9.1.5 USWC will provide mediated access to SMS via the BFR
process, for the purpose of activating, modifying or
updating AIN service specification through its Service
Creation Environment (SCE) on an equivalent basis as
USWC provides to itself. SMS allows ACI to provision,
modify, or update information in call related
databases. Currently, the SCE process is predominantly
manual via a service center.
9.1.6 The pricing for CCSAC service is provided in Appendix
A.
9.2 Interim Number Portability
9.2.1 General Terms
9.2.1.1 The Parties shall provide Number Portability
on a reciprocal basis to each other to the
extent technically feasible, and in
accordance with rules and regulations as from
time to time prescribed by the FCC and/or the
Commission.
9.2.1.2 Until Permanent Number Portability is
implemented by the industry pursuant to
regulations issued by the FCC or the
Commission, the Parties agree to provide
Interim Number Portability ("INP") to each
other through remote call forwarding, direct
inward dialing and NXX migration.
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9.2.1.3 Once Permanent Number Portability is
implemented pursuant to FCC or Commission
regulation, either Party may withdraw, at any
time and at its sole discretion, its INP
offerings, subject to advance notice to the
other Party and coordination to allow the
seamless and transparent conversion of INP
end user numbers to Permanent Number
Portability. Upon implementation of
Permanent Number Portability pursuant to FCC
regulations, both Parties agree to conform
and provide such Permanent Number
Portability.
9.2.1.4 USWC will update its Line Information
Database ("LIDB") listings for retained
numbers as directed by ACI. USWC will
restrict or cancel calling cards associated
with these forwarded numbers. LIDB updates
shall be completed by the Parties on the same
business day each INP arrangement is
activated.
9.2.1.5 Upon request, USWC shall provide to ACI INP
via Direct Inward Dial Trunks pursuant to
applicable tariffs.
9.2.1.6 Where either Party has activated an entire
NXX for a single end user, or activated a
substantial portion of an NXX for a single
end user with the remaining numbers in that
NXX either reserved for future use or
otherwise unused, if such end user chooses to
receive service from the other Party, the
first Party shall cooperate with the second
Party to have the entire NXX reassigned in
the LERG (and associated industry databases,
routing tables, etc.) to an end office
operated by the second Party. Such transfer
will be accomplished with appropriate
coordination between the Parties and subject
to appropriate industry lead-times for
movement of NXXs from one switch to another.
Other applications of NXX migration will be
discussed by the Parties as circumstances
arise.
9.2.2 Description Of Service
9.2.2.1 Interim Number Portability ("INP") Service is
a service arrangement that can be provided by
USWC to ACI or by ACI to USWC. For the
purposes of this section, the Party porting
traffic to the other Party shall be referred
to as the "INP Provider" and the Party
receiving INP traffic for termination shall
be referred to as the "INP Requestor".
9.2.2.2 INP applies to those situations where an end
user elects to transfer service from the INP
Provider to the INP Requestor and such end
user also wishes to retain its
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existing telephone number. INP
consists of INP Provider's provision
to the INP Requestor the capability
to route calls placed to telephone
numbers assigned to the INP
Provider's switches to the INP
Requestor's switches. INP is
available only for working telephone
numbers assigned to the INP
Provider's end users who request to
transfer to the INP Requestor's
service.
9.2.2.3 INP is available as INP-Remote Call
Forwarding ("INP-RCF") permitting a call to
an INP Provider's assigned telephone number
to be translated to the INP Requestor's
dialable local number. INP Requestor may
terminate the call as desired. Additional
capacity for simultaneous call forwarding is
available where technically feasible. The
INP Requestor will need to specify the number
of simultaneous calls to be forwarded for
each number ported.
9.2.2.4 INP is subject to the following restrictions:
9.2.2.4.1 An INP telephone number may
be assigned by INP
Requestor only to the
Requestor's end users
located within the INP
Provider's local calling
area and toll rating area
that is associated with the
NXX of the portable number.
9.2.2.4.2 INP is applicable only if
the INP Requestor is
engaged in a reciprocal
traffic exchange
arrangement with the INP
Provider.
9.2.2.4.3 Only the existing, INP
Provider assigned end user
telephone number may be
used as a ported number for
INP.
9.2.2.4.4 INP will not be provided by
the INP Provider for end
users whose accounts are in
arrears and who elect to
make a change of service
provider unless and until
the following conditions
are met:
9.2.2.4.4.1 Full payment for the
account (including
directory
advertising charges
associated with the
end user's telephone
number) is made by
end user or INP
Requestor agrees to
make full payment on
behalf of end user.
9.2.2.4.4.2 INP Provider is
notified in advance
of the change in
service provider and
a Change of
Responsibility form
is issued.
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9.2.2.4.4.3 INP Provider accepts
the transfer of
responsibility.
9.2.2.4.5 INP services shall not be
re-sold, shared or assigned
by either Party to another
LEC or Co-Provider.
9.2.2.4.6 INP is not offered for NXX
Codes 555, 976, 960 and
coin telephones, and
Service Access Codes (i.e.
500, 700, 800/888, 900).
INP is not available for
FGA seven-digit numbers,
including foreign exchange
(FEX), FX and FX/ONAL and
foreign Central Office
Service. Furthermore, INP
numbers may not be used for
mass calling events.
9.2.2.4.7 The ported telephone number
will be returned to the
originating Party (or to
the common pool of
telephone numbers upon
implementation of Permanent
Number Portability) when
the ported service is
disconnected. The Party
purchasing a ported number
may not retain it and
reassign it to another end
user. The normal intercept
announcement will be
provided by the INP
Provider for the period of
time until the telephone
number is reassigned by the
INP Provider.
9.2.2.5 Ordering and Maintenance
9.2.2.5.1 The INP Requestor is
responsible for all
dealings with and on behalf
of its end users, including
all end user account
activity, e.g. end user
queries and complaints.
9.2.2.5.2 Each Party is responsible
for obtaining a Letter of
Authorization (LOA) from
its end users who request a
transfer of the end user's
telephone number from the
other Party.
9.2.2.5.3 The INP Provider will work
cooperatively with the INP
Requestor to ensure a
smooth end user transition
and to avoid unnecessary
duplication of other
facilities (e.g., Unbundled
Loops). The Parties will
cooperate to develop
intercompany procedures to
implement the requirements
of this paragraph.
9.2.2.5.4 If an end user requests
transfer of service from
the INP Requestor back to
the INP Provider, the INP
Provider may rely on that
end user request to
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institute cancellation of
the INP service. The INP
Provider will provide at
least 48 hours notice to
the INP Requestor of the
cancellation of INP
service, and will work
cooperatively with the INP
Requestor to ensure a
smooth end user transition
and to avoid unnecessary
duplication of other
facilities (e.g., Unbundled
Loops). The Parties will
cooperate to develop
intercompany procedures to
implement the requirements
of this paragraph.
9.2.2.5.5 Certain features are not
available on calls passed
through INP service.
9.2.2.5.6 The INP Requestor's
designated INP switch must
return answer and
disconnect supervision to
the INP Provider's switch.
9.2.2.5.7 The INP Requestor will
provide to the E911
database provider the
network telephone number
that the INP Requestor
assigned to the INP
Provider-assigned, ported
telephone number. Updates
to and maintenance of the
INP information to the E911
database are the
responsibility of the INP
Requestor.
9.2.2.5.8 The INP Requestor will
submit to the INP Provider
a disconnect order for each
ported number that is
relinquished by the INP
Requestor's end users.
9.2.2.6 Cost Recovery
The Parties agree that, for the purposes
of this Agreement that the following cost
structure is an acceptable measure of the
costs incurred by the INP Provider.
9.2.2.6.1 Number Ported -- This cost
is incurred per number
ported, per month. Should
the INP Requestor provide
the transport from the INP
Provider's end office to
the INP Requestor's end
office switch, a lower cost
is incurred. This cost
represents a single call
path from the INP
Provider's end office
switch to the INP Requestor
for the portable number.
9.2.2.6.2 Additional Call Path --
This cost is incurred per
additional call path per
month added to a particular
ported telephone number.
Should the INP Requestor
provide the transport from
the INP
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Provider's end office to
the INP Requestor's end
office switch, a lower cost
is incurred.
9.2.2.6.3 Service Establishment - Per
Route, Per Switch. This
non-recurring cost is
incurred for each INP
Provider's end office
switch that is equipped to
provide INP to the INP
Requestor.
9.2.2.6.4 Service Establishment -
Additional number ported or
changes to existing
numbers, per number ported
-- This non-recurring cost
is for each telephone
number equipped with INP.
9.2.2.6.5 The Parties agree that
Appendix A reasonably
identifies the above costs.
9.2.2.6.6 Each of the above costs
shall be borne by the INP
Requestor.
9.2.2.6.7 The INP Provider will, when
using RCF, send the
original ("ported") number
over the Interconnection
arrangements as the Calling
Party Number using the
signaling protocol
applicable to the
arrangements. The INP
Requestor will capture and
measure the number of
minutes of INP incoming
traffic. USWC will provide
(and update quarterly)
percentage distributions of
all terminating traffic in
the LATA by jurisdictional
nature of the traffic: a)
local; b) intrastate,
intraLATA switched access;
c) intrastate, interLATA
switched access; d)
interstate, intraLATA
switched access; e)
interstate, interLATA
switched access. Separate
residence and business
percentage distributions
will be provided, to the
extent possible. The
Parties agree to work
cooperatively to develop
and exchange the data
required to implement this
paragraph. The appropriate
percentage will be applied
to the number of minutes of
INP traffic in each
category to determine the
number of minutes eligible
for additional "pass
through" switched access
compensation. Pass through
switched access
compensation will be paid
at the following rates:
For all Intra-LATA
For all Intra-LATA
Toll and inter-LATA
minutes delivered
over INP, USWC will
pay, in addition to
reciprocal
compensation, the
applicable CCLC for
each minute.
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9.2.2.6.8 Rates are contained in
Appendix A.
9.3 911/E-911 SERVICE
9.3.1 Scope.
9.3.1.1 ACI exchanges to be included in USWC's E-911
Data Base will be indicated via written
notice and will not require an amendment to
this Agreement.
9.3.1.2 In counties where USWC has obligations under
existing agreements as the primary provider
of the 911 System to the county, ACI will
participate in the provision of the 911
System as described in this Agreement.
9.3.1.2.1 Each Party will be
responsible for those
portions of the 911 System
for which it has total
control, including any
necessary maintenance to
each Party's portion of the
911 System.
9.3.1.2.2 USWC, or its agent, will be
responsible for maintaining
the E-911 Data Base. USWC,
or its agent, will provide
to ACI an initial copy of
the most recent Master
Street Address Guide
("MSAG"), and subsequent
versions on a quarterly
basis, at no charge. MSAGs
provided outside the
quarterly schedule will be
provided and charged on an
individual case basis. The
data will be provided in
computer readable format.
9.3.1.2.3 For selective routing table
updates, ACI will negotiate
directly with USWC's data
base provider for the input
of end user data into the
USWC Automatic Location
Identification ("ALI") data
base. ACI will negotiate
directly with the Public
Safety Answering Point
("PSAP")'s (or PSAP
agency's) DMS/ALI provider
for input of end user data
into the ALI data base. In
most cases the selective
routing table updates and
the ALI data base will be
managed by the same
provider. ACI assumes all
responsibility for the
accuracy of the data that
ACI provides for MSAG
preparation and E-911 Data
Base operation.
9.3.1.2.4 ACI will provide end user
data to USWC's agent for
the USWC ALI data base
utilizing NENA-02-001
Recommended Formats For
Data Exchange, NENA-02-002
Recommended Standard For
Street
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Thoroughfare Abbreviations
and NENA-02-003 Recommended
Protocols For Data
Exchange. USWC will
furnish ACI any variations
to NENA recommendations
required for ALI data base
input.
9.3.1.2.5 ACI will provide end user
data to USWC's agent for
the USWC ALI data base that
are MSAG valid and meet all
components of the
NENA-02-004 Recommended
Measurements For Data
Quality.
9.3.1.2.6 ACI will update its end
user records provided to
USWC's agent for the USWC
ALI data base to agree with
the 911 MSAG standards for
its service areas.
9.3.1.2.7 USWC will provide ACI with
the identification of the
USWC 911 controlling office
that serves each geographic
area served by ACI.
9.3.1.2.8 The Parties will cooperate
in the routing of 911
traffic in those instances
where the ALI/ANI
information is not
available on a particular
911 call.
9.3.1.2.9 USWC will provide ACI with
the ten-digit telephone
numbers of each PSAP
agency, for which USWC
provides the 911 function,
to be used by ACI to
acquire emergency telephone
numbers for operators to
handle emergency calls in
those instances where the
ACI end user dials "O"
instead of "911".
9.3.1.2.10 ACI will provide USWC with
the ten-digit telephone
numbers of each PSAP
agency, for which ACI
provides the 911 function,
to be used by USWC to
acquire emergency telephone
numbers for operators to
handle emergency calls in
those instances where the
USWC end user dials "O"
instead of "911".
9.3.1.3 If a third party; i.e., LEC, is the primary
service provider to a county, ACI will
negotiate separately with such third party
with regard to the provision of 911 service
to the county. All relations between such
third party and ACI are totally separate from
this Agreement and USWC makes no
representations on behalf of the third party.
9.3.1.4 If ACI is the primary service provider to the
county, ACI and USWC will negotiate the
specific provisions necessary
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for providing 911 service to the county
and will include such provisions in an
amendment to this Agreement.
9.3.1.5 ACI will separately negotiate with each
county regarding the collection and
reimbursement to the county of applicable end
user taxes for 911 service.
9.3.1.6 ACI is responsible for network management of
its network components in compliance with the
Network Reliability Council Recommendations
and meeting the network standard of USWC for
the 911 call delivery.
9.3.1.7 The Parties shall provide a single point of
contact to coordinate all activities under
this Agreement.
9.3.1.8 Neither Party will reimburse the other for
any expenses incurred in the provision of
E-911 services up to P.01 grade of service.
9.3.2 Performance Criteria. E-911 Data Base accuracy shall
be as set forth below:
9.3.2.1 Accuracy of ALI data will be measured jointly
by the PSAPs and USWC in a format supplied by
USWC. The reports shall be forwarded to ACI
by USWC when relevant and will indicate
incidents when incorrect or no ALI data is
displayed.
9.3.2.2 Each discrepancy report will be jointly
researched by USWC and ACI. Corrective
action will be taken immediately by the
responsible Party.
9.3.2.3 Each Party will be responsible for the
accuracy of its end user records. Each Party
specifically agrees to indemnify and hold
harmless the other Party from any claims,
damages, or suits related to the accuracy of
end user data provided for inclusion in the
E-911 Data Base.
9.3.2.4 For PSAP default routing purposes, ACI will
establish separate trunks for the USWC
selective router for each PSAP jurisdictional
area it serves from a given switch.
9.3.2.5 The additional parameters by which the
Parties will utilize the 911 or E-911
database will be the subject of further
discussion between the Parties.
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9.4 DIRECTORY ASSISTANCE
9.4.1 USWC agrees to (1) provide to ACI's operators on-line
access to USWC's directory assistance database; (2)
provide to ACI unbranded directory assistance service
(3) provide to ACI directory assistance service under
the ACI brand (where technically feasible); (4) allow
ACI or ACI's designated operator bureau to license
USWC's directory assistance database for use in
providing competitive directory assistance services.
Prices for all of these services will be determined on
an individual case basis.
9.4.2 The price for directory assistance, provided pursuant
to this Agreement, is specified in Appendix A. As an
alternative, the Parties may obtain directory
assistance service pursuant to retail directory
assistance tariffs.
9.4.3 The price for directory call completion services is
specified in Appendix A, pending the completion of an
approved cost study. Additional charges, for USWC
IntraLATA Toll services, also apply for completed
IntraLATA Toll calls. IntraLATA Toll service shall be
available pursuant to the wholesale discount provided
in the Resale section of this Agreement. Call
completion service is an optional service. ACI may, at
its option, request USWC to not provide call completion
services to ACI end users.
9.5 WHITE PAGES DIRECTORY LISTINGS
9.5.1 Scope.
9.5.1.1 White Pages Listings Service ("Listings")
consists of USWC placing the names, addresses
and telephone numbers of ACI's end users in
USWC's listing database, based on end user
information provided to USWC by ACI. USWC is
authorized to use Listings in Directory
Assistance (DA) and as noted in paragraph
9.5.1.4, below.
9.5.1.2 ACI will provide in standard, mechanized
format, and USWC will accept at no charge,
one primary listing for each main telephone
number belonging to ACI's end users. Primary
listings are as defined for USWC end users in
USWC's general exchange tariffs. ACI will be
charged for premium and privacy listings,
e.g., additional, foreign, cross reference,
informational, etc., at USWC's general
exchange listing tariff rates, less the
wholesale discount. If ACI utilizes Remote
Call Forwarding for local number portability,
ACI can list only one number without charge -
either the end user's original telephone
number or the ACI-assigned number. The
standard discounted rate for an additional
listing applies to the other number.
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9.5.1.3 USWC will furnish ACI the Listings format
specifications. ACI may supply a maximum of
one batch file daily, containing only
Listings that completed on or prior to the
transmission date. USWC cannot accept
Listings with advance completion dates.
Large volume activity (e.g., 100 or more
listings) on a caption set is considered a
project that requires coordination between
ACI and USWC to determine time frames.
9.5.1.4 ACI grants USWC a non-exclusive license to
incorporate Listings information into its
directory assistance database. ACI hereby
selects one of two options for USWC's use of
Listings and dissemination of Listings to
third parties.
EITHER:
9.5.1.4.1 Treat the same as USWC's
end user listings - No
prior authorization is
needed for USWC to release
Listings to directory
publishers or other third
parties. USWC will
incorporate Listings
information in all existing
and future directory
assistance applications
developed by USWC. ACI
authorizes USWC to sell and
otherwise make Listings
available to directory
publishers. USWC shall be
entitled to retain all
revenue associated with any
such sales. Listings shall
not be provided or sold in
such a manner as to
segregate end users by
carrier.
OR:
9.5.1.4.2 Restrict to USWC's
directory assistance --
Prior authorization
required by ACI for all
other uses. ACI makes its
own, separate agreements
with USWC, third parties
and directory publishers
for all uses of its
Listings beyond directory
assistance. USWC will sell
Listings to directory
publishers (including
USWC's publisher
affiliate), other third
parties and USWC products
only after the third party
presents proof of ACI's
authorization. USWC shall
be entitled to retain all
revenue associated with any
such sales. Listings shall
not be provided or sold in
such a manner as to
segregate end users by
carrier.
ACI hereby selects Option ______.
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9.5.1.5 To the extent that state tariffs limit USWC's
liability with regard to Listings, the
applicable state tariff(s) is incorporated
herein and supersedes the Limitation of
Liability section of this Agreement with
respect to Listings only.
9.5.2 USWC Responsibilities
9.5.2.1 USWC is responsible for maintaining Listings,
including entering, changing, correcting,
rearranging and removing Listings in
accordance with ACI orders. USWC will take
reasonable steps in accordance with industry
practices to accommodate non-published and
non-listed Listings provided that ACI has
supplied USWC the necessary privacy
indicators on such Listings.
9.5.2.2 USWC will include ACI Listings in USWC's
Directory Assistance service to ensure that
callers to USWC's Directory Assistance
service have non-discriminatory access to
ACI's Listings.
9.5.2.3 USWC will ensure the ACI Listings provided to
USWC are included in the white pages
directory published on USWC's behalf, in
accordance with ACI's selection under Section
9.5.1.4, above.
9.5.3 ACI Responsibilities
9.5.3.1 ACI agrees to provide to USWC its end user
names, addresses and telephone numbers in a
standard mechanized format, as specified by
USWC.
9.5.3.2 ACI will supply its ACNA/CIC or CLCC/OCN, as
appropriate, with each order to provide USWC
the means of identifying Listings ownership.
9.5.3.3 ACI represents and warrants the end user
information provided to USWC is accurate and
correct. ACI further represents and warrants
that it has reviewed all Listings provided to
USWC, including end user requested
restrictions on use such as non-published and
non-listed. ACI shall be solely responsible
for knowing and adhering to state laws or
rulings regarding Listings (e.g., no
solicitation requirements in the states of
Arizona and Oregon, privacy requirements in
Colorado), and for supplying USWC with the
applicable Listing information.
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9.5.3.4 ACI is responsible for all dealings with, and
on behalf of, ACI's end users, including:
9.5.3.4.1 All end user account
activity, e.g. end user
queries and complaints.
9.5.3.4.2 All account maintenance
activity, e.g., additions,
changes, issuance of orders
for Listings to USWC.
9.5.3.4.3 Determining privacy
requirements and accurately
coding the privacy
indicators for ACI's end
user information. If end
user information provided
by ACI to USWC does not
contain a privacy
indicator, no privacy
restrictions will apply.
9.5.3.4.4 Any additional services
requested by ACI's end
users.
9.6 BUSY LINE VERIFY AND BUSY LINE INTERRUPT SERVICES
9.6.1 Busy Line Verification ("BLV") is performed when one
Party's end user requests assistance from the operator
bureau to determine if the called line is in use,
however, the operator bureau will not complete the call
for the end user initiating the BLV inquiry. Only one
BLV attempt will be made per end user operator bureau
call, and a charge shall apply whether or not the
called party releases the line.
9.6.2 Busy Line Verification Interrupt ("BLVI") is performed
when one Party's operator bureau interrupts a telephone
call in progress after BLV has occurred. The operator
bureau will interrupt the busy line and inform the
called party that there is a call waiting. The
operator bureau will only interrupt the call and will
not complete the telephone call of the end user
initiating the BLVI request. The operator bureau will
make only one BLVI attempt per end user operator
telephone call and the applicable charge applies
whether or not the called party releases the line.
9.6.3 The rates for Busy Line Verify and Busy Line Verify and
Interrupt are specified in Appendix A.
9.6.4 Each Party's operator bureau shall accept BLV and BLVI
inquiries from the operator bureau of the other Party
in order to allow transparent provision of BLV/BLVI
traffic between the Parties' networks.
9.6.5 Each Party shall route BLV/BLVI traffic inquiries over
separate direct trunks (and not the local/intraLATA
trunks) established between the Parties' respective
operator bureaus.
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9.7 TOLL AND ASSISTANCE OPERATOR SERVICES
9.7.1 Description of Serice.
Toll and Assistance refers to functions end users associate
with the "O" operator. Subject to availability and capacity,
access may be provided via operator services trunks purchased
from USWC or provided by ACI via Collocation arrangements to
route calls to ACI's platform.
9.7.2 Functions include:
9.7.2.1 O-Coin, Automatic Coin Telephone Service
(ACTS) - these functions complete coin calls,
collect coins and provide coin rates.
9.7.2.2 Alternate Billing Services (ABS or O+
dialing): Bill to third party, Collect and
Mechanized Credit Card System (MCCS).
9.7.2.3 O- or operator assistance which provides
general assistance such as dialing
instruction and assistance, rate quotes,
emergency call completion and providing
credit.
9.7.2.4 Automated Branding - ability to announce the
carrier's name to the end user during the
introduction of the call.
9.7.2.5 Rating Services - operators have access to
tables that are populated with all toll rates
used by the operator switch.
9.7.3 Pricing for Toll and Assistance Operator Services shall
be determined on a case-by-case basis, upon request.
9.7.4 Interconnection to the USWC Toll and Assistance
Operator Services from an end office to USWC T/A is
technically feasible at three distinct points on the
trunk side of the switch. The first connection point
is an operator services trunk connected directly to the
T/A host switch. The second connection point is an
operator services trunk connected directly to a remote
T/A switch. The third connection point is an operator
services trunk connected to a remote access tandem with
operator concentration capabilities.
9.7.5 Trunk provisioning and facility ownership will follow
the guidelines recommended by the Trunking and Routing,
IOF and Switch sub-teams. All trunk interconnections
will be digital.
9.7.6 Toll and Assistance interconnection will require an
operator services type trunk between the end office and
the interconnection point on the USWC switch.
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9.7.7 Connecting a position to the host system requires two
circuits (one voice and one data) per position on a T1
facility.
9.7.8 The technical requirements of operator services type
trunks and the circuits to connect the positions to the
host are covered in the OSSGR under Section 6
(Signaling) and Section 10 (System Interfaces) in
general requirements form.
9.7.9 Specific provisions regarding Operator Services will be
addressed in a separate agreement between the Parties.
9.8 INTERCONNECTION TO LINE INFORMATION DATA BASE (LIDB)
9.8.1 Description of Line Information Data Base (LIDB).
Line information Data Base (LIDB) stores various line
numbers and Special Billing Number (SBN) data used by
operator services systems to process and bill calls.
The operator services system accesses LIDB data to
provide origination line (calling number), billing
number and termination line (called number) management
functions. LIDB is used for calling card validation,
fraud verification, preferred IC association with the
calling card, billing or service restrictions and the
sub-account information to be included on the call's
billing record.
9.8.2 Interfaces.
Bellcore's GR-446-CORE defines the interface between
the administration system and LIDB including specific
message formats. (Bellcore's TR-NWP-000029, Section 10)
9.8.3 LIDB Access.
9.8.3.1 All LIDB queries and responses from operator
services systems and end offices are
transmitted over a CCS network using a
Signaling System 7 (SS7) protocol
(TR-NWT-000246, Bell Communications Research
Specification of Signaling System 7).
9.8.3.2 The application data needed for processing
LIDB data are formatted as TCAP messages.
TCAP messages may be carried as an
application level protocol using SS7
protocols for basic message transport.
9.8.3.3 The SCP node provides all protocol and
interface support. ACI SS7 connections will
be required to meet Bellcore's GR905. TR954
and USWC's Technical Publication 77342
specifications.
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9.8.3.4 Non-USWC companies will submit LIDB updates
via a manual fax process being developed. An
electronic capability is being designed to
allow ACI to add, update, and delete their
line records.
9.8.3.5 It is currently USWC's policy to allow LIDB
access to non-USWC companies through regional
STPs.
9.8.4 Pricing for LIDB access shall be determined
on a case-by-case basis and will be included
in a separate LIDB agreement between the
parties.
9.9 ACCESS TO POLES, DUCTS, CONDUITS, AND RIGHTS OF WAY
Each Party shall provide the other Party access to its poles,
ducts, rights-of-way and conduits it controls on terms,
conditions and prices comparable to those offered to any other
entity pursuant to each Party's applicable tariffs and/or
standard agreements.
9.10 MISCELLANEOUS ANCILLARY SERVICES.
Miscellaneous ancillary services will be addressed in separate
agreements between the Parties. These include, but are not
limited to 800 and CMDS.
10. ACCESS TO OPERATIONAL SUPPORT SYSTEMS (OSS)
USWC is developing a proposal for access to its Operational Support
Systems (OSS) to meet the requirements of the FCC's 1st and 2nd Orders
and to provide ACI with electronic interfaces for pre-ordering,
ordering, demand repairs and billing functions for Plain Old Telephone
Services (POTS). These interfaces will also have the necessary
mediation to protect the integrity of the network as well as allay any
privacy concerns for end user information. The components described in
this section are conceptual in nature and will be subject to change as
the implementation process proceeds. There will be charges associated
with the introduction of the interface and ongoing access to OSS
operations which will include an initial access fee and an ongoing
charge as described more fully below.
10.1 OPERATIONAL SYSTEMS INTERFACES - INTERFACE IMPLEMENTATION
TIMETABLE
USWC's initial operational systems interfaces have been
deployed and will support Pre-ordering, Ordering, Provisioning
and Repair capabilities for POTS (non-design) services and
Billing capabilities for most USWC product offerings.
Subsequent phases of the plan incorporate the capabilities to
support designed services for Pre-ordering, Ordering,
Provisioning, and Maintenance and Repair. The specific features
and functions are not discussed in this Agreement.
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10.2 OSS INTERFACE DESIGN
10.2.1 USWC will develop OSS interfaces using an electronic
gateway solution consistent with the design prescribed
by the FCC, Docket 96-98, FCC 96-325, paragraph 527.
These gateways will act as a mediation or control point
between ACI's and USWC's Operations Systems.
Additionally, these gateways will provide security for
the interface, protecting the integrity of the USWC
network and its databases.
10.2.2 USWC proposes the use of the existing Electronic Data
Interchange ("EDI") standard for the transmission of
monthly local billing information. EDI is an
established standard under the auspices of the American
National Standards Institute/Accredited Standards
Committee (ANSI/ASC) X12 Committee. A proper subset of
this specification has been adopted by the
Telecommunications Industry Forum (TCIF) as the "811
Guidelines" specifically for the purposes of
telecommunications billing.
10.2.3 For the exchange of daily usage data, including third
party billed, collect, and card calls, USWC will use
the Bellcore EMR format for the records, using the
Network Data Mover ("NDM"), otherwise also known as the
Connect:Direct method to transmit the information to
carriers.
10.3 ACCESSIBLE OSS FUNCTIONS
10.3.1 Pre-ordering
"Pre-Ordering" refers to the set of activities whereby
a service representative dialogs with ACI in order to
obtain service availability. In today's environment,
the pre-order process is performed in conjunction with
placing an order. Packaged as a separate activity,
pre-order consists of the following functions: verify
an address, check service availability, and return end
user service information. USWC will provide on-line
capabilities to perform these functions. These
functions are described as follows.
10.3.1.1 Address Verification
This transaction will verify the end user's
address.
If the address does not match USWC records,
the AVR transaction will return "partial
match" addresses and/or help as appropriate
to assist ACI to properly identify the end
user's address for verification.
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Once the address is verified, the AVR
transaction will return the valid address and
the current status (working, non-working, or
pending out) and the date the status was
posted for each line at the address.
If USWC does not have a record of the
address, ACI will have to contact USWC to
input the record before the order can be
submitted.
Note:
10.3.1.1.1 No detailed facility
information (i.e., cable
pair) will be returned as
part of this transaction.
10.3.1.1.2 Rural addresses will not be
supported.
10.3.1.1.3 The AVQ/AVR transaction
attributes currently don't
reflect the attributes
required to support the
error scenarios.
10.3.1.2 Service Availability
This transaction will return the list of
products and services available for
resale in the central office serving a
particular end user address. The
USWC rates for the products and
services will also be returned, but
the ACI discount will not be applied.
10.3.1.3 End User Service Information Request
Gives ACI the ability to request a listing of
services and features USWC is currently
providing to an end user and the rates USWC
is charging for such services.
10.3.1.4 View/Update Service Query/Service Request
Response
Gives ACI the ability to view or update an
existing Service Request (SR).
10.3.1.5 Store Service Request
This transaction allows ACI to store a new or
existing SR.
This SR can be stored for the number of
business days specified in USWC's methods and
procedures before the SR must be submitted to
USWC as a Work Order.
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USWC will store the SR on-line until the
associated Work Order is canceled by ACI or
completed by USWC.
10.3.2 Ordering
With the pre-ordering steps completed, the requisite
information will have been obtained from ACI and the
initiation of a service order can begin. Submitting a
service order will result in the provisioning and
installation, if necessary, of an end user's service.
The functional set required to order service is: open
a service order, check facility availability, reserve
an appointment if technician work is required in the
field or at the end user's premises, reserve a
telephone number if appropriate, cancel a service
order, change a service order, send a firm order
confirmation, support for work order status queries,
and send notification of order completion.
10.3.2.1 Facility Availability
For each new line requested, this transaction
will indicate if existing facilities are
available or if new facilities are required,
and if a technician must be dispatched to
provide the facilities requested at the end
user's address.
This transaction must be executed for any new
line(s) requested.
Note:
10.3.2.1.1 This transaction does not
reserve facilities and does
not guarantee that
facilities will be
available when the work
order is submitted.
10.3.2.1.2 USWC will automatically
execute this transaction as
part of order processing,
any time a new line or
transfer line is requested.
10.3.2.2 Telephone Number Availability
Enables a telephone number (TN) to be
assigned to a line. ACI will be able to
accept the TN or exchange the TN for two
other TNs. If the end user requests a
specific number or a vanity number, ACI must
call the USWC Number Assignment Center (NAC)
and the request will be handled manually.
ACI will not have direct access to the
telephone number assignment system.
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10.3.2.3 Exchange Telephone Numbers/Response
Enables ACI to exchange the TN returned by
the Telephone Number Availability Transaction
for two more TNs. ACI must select one of the
three TNs to proceed with the Work Order.
10.3.2.4 Return Telephone Numbers
Enables ACI to reject the TNs returned by the
Telephone Number Availability transaction and
the TNs will be returned to the pool.
10.3.2.5 Telephone Number Accept
Allows ACI to reserve one telephone number
returned by the Telephone Number Availability
transaction for a period of one (1) day so
that the end user can be informed of the
TN(s) prior to the actual submission of a
Work Order. The Work Order must be submitted
before the TN expires, otherwise the TN will
be returned to the available pool of TNs.
10.3.2.6 Appointment Availability
Allows ACI to select an appointment from a
calendar of available appointments. ACI will
not have direct access to the system but USWC
will automatically execute this transaction
after the Work Order has been submitted and a
technician must be dispatched.
10.3.2.7 Appointment Reservation
Enables ACI to reserve an available
appointment after the appointment
availability calendar has been returned to
ACI by USWC. USWC will return a confirmation
number.
10.3.2.8 Work Order/Firm Order Completion
The work order provides the information and
actions required for USWC to provision
products, services and features. This
transaction will also be used to cancel and
change existing work orders. The information
contained in a work order identifies ACI, the
end user desired due date, the service being
requested, the order type (only change and
migration to ACI), POA (Proof of
Authorization), class of service, telephone
number and additional information
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needed to successfully provision the
requested service to the end user.
Once a work order is accepted by USWC, the
assigned service order number will be
returned to ACI. This may not happen in real
time. ACI can then use the service order
number to status the work order. Firm Order
Confirmation means that USWC has received the
order and assigned an order number for
tracking. It does not mean that edits have
been applied, so errors may still exist on
the order.
10.3.2.9 Status Query/Response
This transaction will allow ACI to obtain the
status of a work order. USWC will return the
current status, remarks and due date for
specified work order.
Note: This status request is issued by ACI
on demand. Real Time Order Completion and
Jeopardy Notification is not proactively
issued by USWC.
10.3.2.10 Order Completion Report
Provides ACI with a daily (Monday - Saturday)
report, electronically, that identifies all
work orders that were completed by USWC on
that date. This report is called the
Co-Provider Completion Report.
10.3.3. Repair
Repair functions allow ACI to report trouble with
communications circuits and services provided by USWC.
The functions, processes and systems used in repair are
based on a Trouble Report (TR), which is an electronic
document maintained in one or more Operations Systems.
A TR contains information about the end user, the
trouble, the status of the work on the trouble and the
results of the investigation and resolution efforts.
These business processes have been summarized and will
be made available to ACI in the following functional
set: open a trouble report, cancel a trouble report,
send notification of status change and close a trouble
report.
10.3.3.1 Verify Request
This transaction will be used to verify
vertical features the end user currently
owns. Technical discussions (e.g.,
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Security) are currently ongoing within USWC
as to how to provide this capability.
10.3.3.2 Open Trouble Report
Gives ACI the capability to open a TR with
USWC.
10.3.3.3 Open Trouble Report Response
Gives ACI the capability to the Open TR
request and contains information about the TR
that ACI needs to track or to convey to ACI's
end user.
10.3.3.4 Completion Notification
Provides notification to ACI that a TR has
been closed because the trouble was resolved.
10.3.3.5 Cancel Trouble Report Instruction
Allows ACI to cancel a previously opened TR.
10.3.3.6 Status Change Notification
Provides notification to ACI that the status
of a previously opened TR has changed.
10.4 BILLING INTERFACES
USWC offers interfaces for the exchange of several types of
billing data:
- Monthly Billing Information,
- Daily Usage Data,
- Local Account Maintenance Report,
- Centralized Message Distribution System
(CMDS) messages,
- Routing of in-region intraLATA collect,
calling card, and third number billed
messages.
10.4.1 Monthly Billing Information
Includes all connectivity charges, credits, and
adjustments related to network elements and
USWC-provided local service.
10.4.2 Daily Usage Data
The accumulated set of call information for a given day
as captured, or "recorded," by the network switches.
USWC will
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provide this data to ACI with the same level of
precision and accuracy it provides itself. Such
precision cannot and will not exceed the current
capabilities of the software in the switches today.
10.4.3 Local Account Maintenance Report
The list of phone numbers to which the carrier is no
longer providing service since the last report.
10.4.4 Centralized Message Distribution System ("CMDS")
Distribution of CMDS messages for ACI end users.
10.4.5 Routing of In-region IntraLATA Collect, Calling Card,
and Third Number Billed Messages
USWC will distribute in-region intraLATA collect,
calling card, and third number billed messages to ACI
and exchange with other Co-Providers operating in
region in a manner consistent with existing
inter-company processing agreements. Whenever the
daily usage information is transmitted to a carrier, it
will contain the records for these types of calls as
well.
10.5 Compensation
10.5.1 Compensation for OSS access will consist of an initial
access fee which will be determined based on the
specific access engineered and implemented for ACI and
is a function of the numbers of ACI business office and
repair service representatives accessing the system.
The fee will include costs for hardware (if purchased
through USWC), software (which must be purchased
through USWC), telecommunications links and labor
incurred to establish the interfaces to USWC's OSS for
ACI. The costs will be substantiated by purchasing
invoices for the communications and computing hardware
and software, and by time reports for the labor
expended in their design and implementation. Labor
will be billed at the prevailing rates for contract
labor for similar services. USWC will bill ACI in a
nondiscriminatory manner for OSS based on approved
prices. USWC will work cooperatively with ACI to
establish a payment schedule for true-up of OSS prices
from the time OSS is established to the time OSS is
approved.
10.5.2 The ongoing charge will be billed at a rate to be
specified by the Commission at the completion of an
appropriate cost study hearing.
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11. RESALE
11.1 DESCRIPTION
11.1.1 USWC Basic Exchange Telecommunications Service and
Basic Exchange Switched Features (as defined in Section
3) and IntraLATA Toll originating from USWC exchanges
will be available for resale from USWC pursuant to the
Act and will reference terms and conditions (except
prices) in USWC tariffs, where applicable. Appendix A
lists services which are available for resale under
this Agreement and applicable discounts.
11.1.2 The Parties agree that, at this time, certain USWC
services are not available for resale under this
Agreement and certain other USWC services are available
for resale but at no discount, as identified in
Appendix A or in individual state tariffs. The
availability of services and applicable discounts
identified in Appendix A or in individual tariffs are
subject to change pursuant to the Rates and Charges
sub-section of this Resale section.
11.1.3 The scope of restrictions in 11.1.1 and 11.1.2 are
subject to the state rules and decisions.
11.2 SCOPE
11.2.1 Basic Exchange Telecommunications Service, Basic
Exchange Switched Features and IntraLATA Toll may be
resold only for their intended or disclosed use and
only to the same class of end user to which USWC sells
such services e.g., residence service may not be resold
to business end users.
11.2.2 USWC shall provide to ACI services for resale that are
equal in quality, subject to the same conditions
(including the conditions in USWC's effective tariffs),
within provisioning time intervals that are
substantially equal to the intervals USWC provides
these services to others, including its end users, and
in accordance with any applicable state Commission
service quality standards, including standards a state
Commission may impose pursuant to Section 252 (e)(3) of
the Act.
11.3 ORDERING AND MAINTENANCE
11.3.1 ACI, or ACI's agent, shall act as the single point of
contact for its end users' service needs, including
without limitation, sales, service design, order
taking, provisioning, change orders, training,
maintenance, trouble reports, repair, post-sale
servicing, billing, collection and inquiry. ACI shall
make it clear to its end users that
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they are end users of ACI for resold services. ACI's
end users contacting USWC will be instructed to contact
ACI; however, nothing in this Agreement, except as
provided below, shall be deemed to prohibit USWC from
discussing its products and services with ACI's end
users who call USWC for any reason.
11.3.2 ACI shall transmit to USWC all information necessary
for the installation (billing, listing and other
information), repair, maintenance and post-installation
servicing according to USWC's standard procedures, as
described in the USWC resale operations guide that will
be provided to ACI. When USWC's end user or the end
user's new service provider discontinues the end user's
service in anticipation of moving to another service
provider, USWC will render its closing bill to the end
user effective with the disconnection. If USWC is not
the local service provider, USWC will issue a bill to
ACI for that portion of the service provided to ACI
should ACI's end user, a new service provider, or ACI
request service be discontinued to the end user. USWC
will notify ACI by FAX, OSS, or other processes when an
end user moves to another service provider. USWC will
not provide ACI with the name of the other Reseller or
service provider selected by the end user. The Parties
agree that they will not transfer to each other their
respective end users whose accounts are in arrears.
The Parties further agree that they will work
cooperatively together to develop the standards and
processes applicable to the transfer of such accounts.
11.3.3 ACI shall provide USWC and USWC shall provide ACI with
points of contact for order entry, problem resolution
and repair of the resold services.
11.3.4 Prior to placing orders on behalf of the end user, ACI
shall be responsible for obtaining and have in its
possession Proof of Authorization ("POA"). POA shall
consist of documentation acceptable to USWC of the end
user's selection of ACI. Such selection may be
obtained in the following ways:
11.3.4.1 The end user's written Letter of
Authorization or LOA.
11.3.4.2 The end user's electronic authorization by
use of an 800 number,
11.3.4.3 The end user's oral authorization verified by
an independent third party (with third party
verification as POA).
11.3.4.4 A prepaid returnable postcard supplied by ACI
which has been signed and returned by end
user. ACI will wait
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fourteen (14) business days after mailing
the postcard before placing an order to
change.
11.3.5 ACI shall make POAs available to USWC upon request.
Prior to placing orders that will disconnect a line
from another Reseller's account ACI is responsible for
obtaining all information needed to process the
disconnect order and re-establish the service on behalf
of the end user. Should an end user dispute or a
discrepancy arise regarding the authority of ACI to act
on behalf of the end user, ACI is responsible for
providing written evidence of its authority to USWC
within three (3) business days. If there is a conflict
between the end user designation and ACI's written
evidence of its authority, USWC shall honor the
designation of the end user and change the end user
back to the previous service provider. If ACI does not
provide the POA within three (3) business days, or if
the end user disputes the authority of the POA, then
the ACI must, by the end of the third business day:
11.3.5.1 notify USWC to change the end user back to
the previous Reseller or service provider,
and
11.3.5.2 provide any end user information and billing
records ACI has obtained relating to the end
user to the previous Reseller, and
11.3.5.3 notify the end user and USWC that the change
has been made, and
11.3.5.4 remit to USWC a charge of $100.00 ("slamming
charge") as compensation for the change back
to the previous Reseller or service provider.
11.3.6 If an end user is switched from ACI back to USWC and
there is a dispute or discrepancy with respect to such
change in service provider, ACI may request to see a
copy of the POA which USWC has obtained from the end
user to effectuate a return to USWC as the end user's
service provider. If USWC is unable to produce a POA
within three (3) business days, USWC shall change the
end user back to ACI (or other previous Reseller)
without imposition of any Customer Transfer Charge.
11.3.7 ACI shall designate the Primary Interexchange Carrier
(PIC) assignments on behalf of its end users for
interLATA services and intraLATA services when
intraLATA presubscription is implemented.
11.3.8 When end users switch from USWC to ACI, or to ACI from
any other Reseller, such end users shall be permitted
to retain their
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current telephone numbers if they so desire and do not
change their service address to an address served by a
different central office. USWC shall take no action to
prevent ACI end users from retaining their current
telephone numbers.
11.3.9 ACI and USWC will employ the procedures for handling
misdirected repair calls as specified in the
Coordinated Repair Calls section of this Agreement.
11.4 ACI RESPONSIBILITIES
11.4.1 ACI must send USWC complete and accurate end-user
listing information for Directory Assistance, Directory
Listings, and 911 Emergency Services using USWC's
resale order form and process. ACI must provide to
USWC accurate end-user information to ensure
appropriate listings in any databases in which USWC is
required to retain and/or maintain end-user
information. USWC assumes no liability for the
accuracy of information provided by ACI.
11.4.2 ACI may not reserve blocks of USWC telephone numbers,
except as allowed by tariffs.
11.4.3 ACI is liable for all fraud associated with service to
its end-users and accounts. USWC takes no
responsibility, will not investigate, and will make no
adjustments to ACI's account in cases of fraud unless
such fraud is the result of any intentional act or
gross negligence of USWC. Notwithstanding the above,
if USWC becomes aware of potential fraud with respect
to ACI's accounts, USWC will promptly inform ACI and,
at the direction of ACI, take reasonable action to
mitigate the fraud where such action is possible.
11.4.4 In accordance with the Act, ACI will indicate the date
it will offer to residential and business subscribers
telephone exchange services. ACI will provide a three
year forecast within ninety (90) business days of
signing this Agreement. During the first year of the
term of this Agreement, the forecast shall be updated
and provided to USWC on a quarterly basis. Thereafter,
during the term of this Agreement ACI will provide
updated forecasts from time to time, as requested by
USWC. The initial forecast will provide:
- The date service will be offered (by city
and/or state)
- The type and quantity of service(s) which
will be offered
- ACI's anticipated order volume
- ACI's key contact personnel
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The information provided pursuant to this paragraph
shall be considered Proprietary Information under the
Nondisclosure section of this Agreement.
11.4.5 In the event USWC terminates the provisioning of any
resold services to ACI for any reason, including
disconnection of ACI for failure to make payment as
required herein, ACI shall be responsible for providing
any and all necessary notice to its end users of the
termination. In no case shall USWC be responsible for
providing such notice to ACI's end users. USWC will
provide notice to ACI of USWC's termination of a resold
service on a timely basis consistent with Commission
rules and notice requirements.
11.5 RATES AND CHARGES
11.5.1 Resold services as listed in Appendix A are available
for resale at the applicable discount percentage or
rate per minute set forth in Appendix A or at the
retail tariff rates for services available for resale
but excluded from the wholesale pricing arrangement in
this Agreement.
However, state Commissions may do any of the following
(collectively referred to hereinafter as "Order")
during the term of this Agreement:
- establish wholesale discount rates through
decisions in arbitration, interconnection
and/or resale cost proceedings;
- establish other recurring and nonrecurring
rates related to resale, including but not
limited to Customer Transfer Charges and
Slamming Charges ("Other Resale Charges");
and
- order that certain services be made available
for resale at specified wholesale discount
rates.
If a state Commission orders services to be available
for resale, the Parties agree that they will, on a
state-by-state basis, revise Appendix A to incorporate
the services determined by such Order into this
Agreement, effective on the date ordered by a
Commission. When a state Commission, through a
decision in arbitration, identifies services that must
be available for resale at wholesale discount rates,
such decision shall be deemed to have defined that such
services are generally available to Resellers in that
state. If a state Commission establishes wholesale
discount rates and Other Resale Charges to be made
generally available to Resellers or establishes a
resale tariff, the Parties agree that they will, on a
state-by-state basis, revise Appendix A to incorporate
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such wholesale discount rates and/or Other Resale
Charges into this Agreement effective on the date
ordered by a Commission; provided, however, that USWC
shall have a reasonable time to implement system or
other changes necessary to bill the Commission ordered
rates or charges.
The rates for those resold services initially included
in the wholesale pricing arrangement under this
Agreement shall be subject to true-up to the wholesale
discount rates established by a Commission Order making
such rates generally available to Resellers or
established by a resale tariff, retroactively to the
effective date of this Agreement. Any true-up shall be
on a service-by-service basis if wholesale discount
rates are established by a Commission on such a basis.
Services excluded from the wholesale pricing
arrangement under this Agreement as identified in
Appendix A, shall be made available on a going forward
basis from the date of a Commission Order that orders
such services be made generally available to any
Reseller in the state where such a Commission Order is
issued. Such services shall be available at the
discount rate applicable to basic exchange business
service identified in Appendix A; provided, however,
that when a Commission Order establishes wholesale
discount rates for such services as generally available
to Resellers, Appendix A shall be revised to
incorporate the wholesale discount rates generally
available to Resellers.
If a state Commission fails to issue such an Order or
make effective such a tariff by the end of the first
year of this Agreement, either USWC or ACI may elect to
renegotiate this Section of the Agreement.
11.5.2 If the resold services are purchased pursuant to
Tariffs and the Tariff rates change, charges billed to
ACI for such services will be based upon the new Tariff
rates less the applicable wholesale discount as agreed
to herein or established by resale Tariff. The new
rate will be effective upon the Tariff effective date.
11.5.3 A Customer Transfer Charge (CTC) as specified in
Appendix A applies when transferring any existing
account or lines to ACI. Tariffed, non-recurring
charges will apply to new installations.
11.5.4 A Subscriber Line Charge (SLC) will continue to be paid
by ACI without discount for each local exchange line
resold under this Agreement. All federal and state
rules and regulations associated with SLC as found in
the applicable tariffs also apply.
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11.5.5 ACI will pay to USWC the PIC change charge without
discount associated with ACI end user changes of
inter-exchange or intraLATA carriers.
11.5.6 ACI agrees to pay USWC when its end user activates any
services or features that are billed on a per use or
per activation basis subject to the applicable discount
in Appendix A as such may be amended pursuant to
Section 11.5.1 above (e.g., continuous redial, last
call return, call back calling, call trace, etc.).
11.5.7 Resold services are available only where facilities
currently exist and are capable of providing such
services without construction of additional facilities
or enhancement of existing facilities; provided
however, that any loop facilities serving Co-Provider's
end-user(s) at the time of the end-user(s) switch to
Co-Provider shall be considered "existing" and
"capable" to allow Co-Provider to offer resold services
to that end-user(s). However, if ACI requests that
facilities be constructed or enhanced to provide resold
services, USWC will review such requests on a
case-by-case basis and determine, in its sole
discretion, if it is economically feasible for USWC to
build or enhance facilities. If USWC decides to build
or enhance the requested facilities, USWC will develop
and provide to ACI a price quote for the construction.
If the quote is accepted, ACI will be billed the quoted
price and construction will commence after receipt of
payment.
11.5.8. Nonrecurring charges will not be discounted and will be
billed at the applicable Tariff rates.
11.5.9 As a part of the resold line, USWC provides and ACI
accepts, at this time, operator services, directory
assistance, and intraLATA long distance with standard
USWC branding. ACI is not permitted to alter the
branding of these services in any manner when the
services are a part of the resold line without the
prior written approval of USWC. However, at the
request of ACI and where technically feasible, USWC
will rebrand operator services and directory assistance
in ACI's name, provided the costs associated with such
rebranding are paid by ACI.
11.6 COLLATERAL AND TRAINING
The Parties will jointly develop procedures regarding ACI's use
of USWC's retail product training materials. Except for any
rights granted by USWC to ACI for the use or copying of product
training material, product training provided under this
Agreement shall be considered "Proprietary Information" as
described in this Agreement, and shall be subject to the terms
and conditions specified therein.
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11.7 DIRECTORY LISTINGS
USWC will accept at no charge one primary listing for each main
telephone number belonging to ACI's end user based on end user
information provided to USWC by ACI. USWC will place ACI's
listings in USWC's directory listing database for directory
assistance purposes and will make listings available to
directory publishers and to other third parties. Additional
terms and conditions with respect to directory listings are
described in the Ancillary Services and Arrangements section of
this Agreement.
11.8 BILLING
11.8.1. USWC shall bill ACI and ACI is responsible for all
applicable charges for the resold services as provided
herein. ACI shall also be responsible for all tariffed
charges and charges separately identified in this
Agreement associated with services that ACI resells to
an end user under this Agreement.
11.8.2 USWC shall provide ACI, on a monthly basis, within 7-10
business days of the last day of the most recent
billing period, in an agreed upon standard electronic
billing format, billing information including (1) a
summary bill, and (2) individual end user sub-account
information consistent with the samples provided to ACI
for ACI to render end user bills indicating all
recurring and nonrecurring charges associated with each
individual end user's account for the most recent
billing period.
11.9 DEPOSIT
11.9.1 USWC may require ACI to make a suitable deposit to be
held by USWC as a guarantee of the payment of charges.
Any deposit required of an existing Reseller is due and
payable within ten business days after the requirement
is imposed. The amount of the deposit shall be the
estimated charges for the resold service which will
accrue for a two-month period.
11.9.2 When the service is terminated, or when ACI has
established satisfactory credit, the amount of the
initial or additional deposit, with any interest due as
set forth in applicable Tariffs, will, at ACI's option,
either be credited to ACI's account or refunded.
Satisfactory credit for a Reseller is defined as twelve
consecutive months service as a Reseller without a
termination for nonpayment and with no more than one
notification of intent to terminate service for
nonpayment. Interest on the deposit shall be
accumulated by USWC at a rate equal to the federal
discount rate, as published in the Wall Street Journal
from time to time.
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11.10 PAYMENT
11.10.1 Amounts payable under this Resale Section are due and
payable within thirty (30) calendar days after the bill
date of USWC's invoice. During the initial three
billing cycles of this Agreement, ACI and USWC agree
that undisputed amounts shall be paid as provided
herein. ACI and USWC further agree that, during said
three billing cycle period, they will cooperate to
resolve amounts in dispute or billing process issues in
a timely manner but no later than sixty (60) business
days after the bill date of USWC's invoice or
identification and notice of the billing process issue.
Disputed amounts will be paid within thirty (30)
business days following resolution of the dispute.
11.10.2 After the three (3) month period outlined above, ACI
will pay the bill in full within 30 calendar days after
the bill date of the invoice. Billing disputes will be
processed and jointly resolved. Any disputed amounts
that USWC remits to ACI will be credited on the next
billing cycle including an interest credit of 1.5% per
month compounded.
11.10.3 A late payment charge of 1.5% applies to all billed
balances which are not paid by 30 calendar days after
the bill date shown on the invoice. USWC agrees,
however, that the application of this provision will be
suspended for the initial three billing cycles of this
Agreement and will not apply to amounts billed during
those three cycles.
11.10.4 USWC may discontinue processing orders for the failure
by ACI to make full payment for the resold services
provided under this Agreement within thirty (30)
calendar days of the due date on ACI's bill. USWC
agrees, however, that the application of this provision
will be suspended for the initial three billing cycles
of this Agreement and will not apply to amounts billed
during those three cycles.
11.10.5 USWC may disconnect for the failure by ACI to make full
payment for the resold services provided under this
Agreement within sixty (60) calendar days of the due
date on ACI's bill. ACI will pay the Tariff charge
required to reconnect each end user line disconnected
pursuant to this paragraph. USWC agrees, however, that
the application of this provision will be suspended for
the initial three billing cycles of this Agreement and
will not apply to amounts billed during those three
cycles.
11.10.6 Collection procedures and the requirements for deposit
are unaffected by the application of a late payment
charge.
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11.10.7 USWC shall credit ACI's account the amount due for any
trouble or out-of-service conditions in the same manner
that USWC credits the accounts of its own end users and
pursuant to any applicable provisions in USWC's
Tariffs. USWC shall reflect the amount of such credits
on an individual end user telephone number basis in the
billing information USWC provides ACI.
11.10.8 In the event billing disputes relate to service quality
issues, the dispute shall be referred to the USWC
account executive assigned to ACI who will evaluate the
facts and circumstances of the service quality issues
and will work with ACI to resolve the dispute.
12. ACCESS TO TELEPHONE NUMBERS
12.1 NUMBER RESOURCES ARRANGEMENTS.
12.1.1 Nothing in this Agreement shall be construed in any
manner to limit or otherwise adversely impact either
Party's right to the request and assignment of any NANP
number resources including, but not limited to, central
office (NXX) codes pursuant to the Central Office Code
Assignment Guidelines (last published by the Industry
Numbering Committee ("INC") as INC 95-0407-008,
Revision 4/19/96, formerly ICCF 93-0729-010).
12.1.2 To the extent USWC serves as Central Office Code
Administrator for a given region, USWC will support all
ACI requests related to central office (NXX) code
administration and assignments in the manner required
and consistent with the Central Office Code Assignment
Guidelines.
12.1.3 The Parties will comply with code administration
requirements as prescribed by the Federal
Communications Commission, the Commission, and accepted
industry guidelines.
12.1.4 It shall be the responsibility of each Party to program
and update its own switches and network systems
pursuant to the Local Exchange Routing Guide (LERG)
guidelines to recognize and route traffic to the other
Party's assigned NXX codes at all times. Neither Party
shall impose any fees or charges whatsoever on the
other Party for such activities. The Parties will
cooperate to establish procedures to ensure the timely
activation of NXX assignments in their respective
networks.
12.1.5 Each Party shall be responsible for notifying its end
users of any changes in numbering or dialing
arrangements to include changes such as the
introduction of new NPAs or new NXX codes.
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12.1.6 Until an impartial entity is appointed to administer
telecommunications numbering and to make such numbers
available on an equitable basis, USWC will assign NXX
codes to ACI in accordance with national guidelines at
no charge.
12.1.7 Each Party is responsible for administering NXX codes
assigned to it. Each Party is responsible for
obtaining LERG listings of CLLI codes assigned to its
switches. Each Party shall use the LERG published by
Bellcore or its successor for obtaining routing
information and shall provide all required information
to Bellcore for maintaining the LERG in a timely
manner.
13. DIALING PARITY
The Parties shall provide Dialing Parity to each other as required under
Section 251(b)(3) of the Act. This Agreement does not impact either
Party's ability to default IntraLATA Toll via a specific dialing pattern
until otherwise required by the Act.
14. U S WEST DEX ISSUES
USWC and ACI agree that certain issues, such as yellow page advertising,
directory distribution, access to call guide pages, yellow page
listings, will be the subject of negotiations between ACI and directory
publishers, including U S WEST Dex. USWC acknowledges that ACI may
request USWC to facilitate discussions between ACI and U S WEST Dex.
15. ACCESS TO DATABASES
In accordance with Section 271 of the Act, USWC shall provide ACI with
interfaces to access USWC's databases and associated signaling necessary
for the routing and completion of ACI traffic. Except where otherwise
specified, access to such databases, and the appropriate interfaces,
shall be requested by ACI via a Bona Fide Request.
16. NOTICE OF CHANGES
If a Party makes a change in its network which it believes will
materially affect the inter-operability of its network with the other
Party, the Party making the change shall provide advance notice of such
change to the other Party in accordance with the applicable FCC
regulations.
17. REFERRAL ANNOUNCEMENT
When an end user changes from USWC to ACI, or from ACI to USWC, and does
not retain its original main/listed telephone number, the Party formerly
providing service to the end user will provide a transfer of service
announcement on the abandoned telephone number. Each Party will provide
this referral service consistent with its Tariff.
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This announcement will provide details on the new number that must be
dialed to reach this end user.
18. COORDINATED REPAIR CALLS
18.1 ACI and USWC will employ the following procedures for handling
misdirected repair calls;
18.1.1 ACI and USWC will provide their respective end users
with the correct telephone numbers to call for access
to their respective repair bureaus.
18.1.2 End users of ACI shall be instructed to report all
cases of trouble to ACI. End users of USWC shall be
instructed to report all cases of trouble to USWC.
18.1.3 To the extent the correct provider can be determined,
misdirected repair calls will be referred to the proper
provider of Basic Exchange Telecommunications Service.
18.1.4 ACI and USWC will provide their respective repair
contact numbers to one another on a reciprocal basis.
18.1.5 In responding to repair calls, neither Party shall make
disparaging remarks about each other, nor shall they
use these repair calls as the basis for internal
referrals or to solicit end users to market services.
Either Party may respond with accurate information in
answering end user questions.
19. BONA FIDE REQUEST PROCESS
19.1 Any request for Interconnection or access to an unbundled
Network Element that is not already available as described
herein shall be treated as a Bona Fide Request (BFR). USWC
shall use the BFR Process to determine the terms and timetable
for providing the requested Interconnection or access to
unbundled Network Elements, if available, and the technical
feasibility of new/different points of Interconnection. USWC
will administer the BFR Process in a non-discriminatory manner.
19.2 A BFR shall be submitted in writing and on the appropriate USWC
form for BFRs. The Parties will work together to prepare the
BFR form. The form will request, and ACI will need to provide,
at a minimum: (a) a technical description of each requested
Network Element or new/different points of Interconnection; (b)
the desired interface specification; (c) each requested type of
Interconnection or access; (d) a statement that the
Interconnection or Network Element will be used to provide a
telecommunications service; (e) the quantity requested; (f) the
specific location requested; (g) if the requested unbundled
Network Element is a
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proprietary element as specified in Section 251(d)(2) of the
Act, ACI must submit documentation that demonstrates that
access to such Network Element is necessary, that the failure
to provide access to such Network Element would impair the
ability of ACI to provide the services that it seeks to offer,
and that ACI's ability to compete would be significantly
impaired or thwarted without access to such requested
proprietary element; and (h) if the requested unbundled Network
Element is a non-proprietary element as specified in Section
251(d)(2) of the Act, ACI must submit documentation that
demonstrates that denial of access to such unbundled
non-proprietary Network Element would decrease the quality or
increase the cost of the service sought to be offered by ACI.
19.3 Within two (2) business days of its receipt, USWC shall
acknowledge receipt of the BFR and in such acknowledgment
advise ACI of missing information, if any, necessary to process
the BFR. Thereafter, USWC shall promptly advise ACI of the
need for any additional information that will facilitate the
analysis of the BFR. The Parties may mutually agree to
conference calls or face-to-face meetings at mutually agreeable
times to discuss information necessary to process the BFR.
USWC will consider any previous BFRs in the evaluation of the
BFR in progress to make best efforts to shorten response times
and, to the extent possible, avoid duplicate work. USWC will
provide BFR status to ACI every ten (10) business days.
19.4 Within 30 calendar days of its receipt of the BFR and all
information necessary to process it, USWC shall provide to ACI
a preliminary analysis of the BFR. The preliminary analysis
shall specify USWC's conclusions as to whether or not the
requested Interconnection or access to an unbundled Network
Element complies with the unbundling requirements set forth
above.
19.4.1 If USWC determines during the 30 day period that a BFR
does not qualify as a Network Element or
Interconnection that is required to be provided under
the Act, USWC shall advise ACI as soon as reasonably
possible of that fact, and USWC shall promptly, but in
no case later than ten calendar days after making such
a determination, provide a written report setting forth
the basis for its conclusion.
19.4.2 If USWC determines during the thirty day period that
the BFR qualifies under the Act, it shall notify ACI in
writing of such determination within ten calendar days.
19.4.3 As soon as feasible, but in any case within 90 calendar
days after USWC notifies ACI that the BFR qualifies
under the Act, USWC shall provide to ACI a BFR quote.
The BFR quote will include, at a minimum, a description
of each Interconnection and Network Element, the
quantity to be provided, any interface specifications,
and the applicable rates (recurring and nonrecurring)
including the separately stated development costs and
construction charges of
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the Interconnection or the Network Elements and any
minimum volume and term commitments required.
Additionally, USWC shall notify ACI of any laboratory
testing, field testing, or joint field testing that may
be required for technical feasibility. As needed, the
Parties will mutually agree to test schedules. Testing
costs will be identified.
19.5 A BFR quote will remain valid for thirty (30) calendar days.
Minimum volume and term commitments may be applicable. Upon
thirty (30) calendar days, ACI must advise USWC, in writing, to
cancel, proceed, or invoke dispute resolution as described in
this Agreement.
19.6 ACI may cancel the BFR request any time. USWC reserves the
right to bill reasonable cancellation charges. ACI will pay
USWC reasonable development costs incurred in providing the
Interconnection or Network Element to the extent that those
development costs are not otherwise amortized. Volume and term
commitments will be considered.
19.7 If either Party believes that the other Party is not
requesting, negotiating or processing any BFR in good faith, or
disputes a determination, or quoted price or cost, it may seek
arbitration pursuant to the Dispute Resolution provision of
this Agreement.
20. AUDIT PROCESS
20.1 "Audit" shall mean the comprehensive review of:
20.1.1 Data used in the billing process for services performed
and facilities provided under this Agreement; and
20.1.2 Data relevant to provisioning and maintenance for
services performed or facilities provided by either of
the Parties for itself or others that are similar to
the services performed or facilities provided under
this Agreement for Interconnection or access to
unbundled elements.
20.2 The data referred to above shall be relevant to any performance
standards that are adopted in connection with this Agreement,
through negotiation, arbitration or otherwise.
This Audit shall take place under the following conditions:
20.2.1 Either Party may request to perform an Audit.
20.2.2 The Audit shall occur upon 30 business days written
notice by the requesting Party to the non-requesting
Party.
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20.2.3 The Audit shall occur during normal business hours.
20.2.4 There shall be no more than one Audit requested by each
Party under this Agreement in any 12-month period.
20.2.5 The requesting Party may review the non-requesting
Party's records, books and documents, as may reasonably
contain information relevant to the operation of this
Agreement.
20.2.6 The location of the Audit shall be the location where
the requested records, books and documents are retained
in the normal course of business.
20.2.7 All transactions under this Agreement which are over 24
months old will be considered accepted and no longer
subject to Audit.
20.2.8 Each Party shall bear its own expenses occasioned by
the Audit, provided that the expense of any special
data collection shall be born by the requesting Party.
20.2.9 The Party requesting the Audit may request that an
Audit be conducted by a mutually agreed-to independent
auditor. Under this circumstance, the costs of the
independent auditor shall be paid for by the Party
requesting the Audit.
20.2.10 In the event that the non-requesting Party requests
that the Audit be performed by an independent auditor,
the Parties shall mutually agree to the selection of
the independent auditor. Under this circumstance, the
costs of the independent auditor shall be shared
equally by the Parties.
20.2.11 The Parties agree that if an Audit discloses error(s),
the Party responsible for the error(s) shall, in a
timely manner, undertake corrective action for such
error(s).
20.3 All information received or reviewed by the requesting Party or
the independent auditor in connection with the Audit is to be
considered Proprietary Information as defined by this
Agreement. The non-requesting Party reserves the right to
require any non-employee who is involved directly or indirectly
in any Audit or the resolution of its findings as described
above to execute a nondisclosure agreement satisfactory to the
non-requesting Party. To the extent an Audit involves access
to information of other competitors, ACI and USWC will
aggregate such competitors' data before release to the other
Party, to insure the protection of the proprietary nature of
information of other competitors. To the extent a competitor
is an affiliate of the Party being audited (including itself
and its subsidiaries), the Parties shall be allowed to examine
such affiliates' disaggregated data, as required by reasonable
needs of the Audit.
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21. AUDIOTEXT AND MASS ANNOUNCEMENT SERVICES
21.1 The Parties agree that access to the audiotext, mass
announcement and information services of each Party should be
made available to the other Party upon execution of an
agreement defining terms for billing and compensation of such
calls. Services included in this category include 976 calls,
if available, whether flat rated or usage sensitive, intra-LATA
900 services and other intra-LATA 976-like services. Such
calls will be routed over the Local Interconnection Trunks.
21.2 ACI and USWC will work together in good faith to negotiate and
execute the agreement for billing and compensation for these
services. The Parties agree that their separate agreement on
audiotext and mass announcement services will include details
concerning the creation, exchange and rating of records, all of
which will occur without any explicit charge between the
Parties, as well as a process for the handling of
uncollectables so that the originating Party does not have any
responsibility for uncollectables.
21.3 Until such time that such an agreement is executed, ACI may
choose to block such calls, or ACI will agree to back-bill and
compensate retroactively for such calls once the subsequent
agreement is executed retroactive to the effective date of this
Agreement.
21.3.1 USAGE SENSITIVE COMPENSATION.
All audiotext and mass announcement calls shall be
considered toll calls for purposes of reciprocal
compensation between the Parties. Compensation will
be paid based on the compensation for toll calls
referenced in this Agreement with respect to reciprocal
compensation between the Parties, except that such
compensation shall be paid by the Party terminating the
call, rather than the Party originating the call.
21.3.2 BILLING AND COLLECTION COMPENSATION.
Billing and collection compensation will be dealt with
in the separate agreement referenced in this section.
22. LOCAL INTERCONNECTION DATA EXCHANGE FOR BILLING
22.1 There are certain types of calls or types of Interconnection
that require exchange of billing records between the Parties,
including, for example, alternate billed and Toll Free Service
calls. The Parties agree that all call types must be routed
between the networks, accounted for, and settled among the
parties. Certain calls will be handled via the Parties'
respective operator service platforms. The
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Parties agree to utilize, where possible and appropriate,
existing accounting and settlement systems to bill, exchange
records and settle revenue.
22.2 The exchange of billing records for alternate billed calls
(e.g., calling card, bill-to-third number, and collect) will be
distributed through the existing CMDS processes, unless
otherwise separately agreed to by the Parties.
22.3 Inter-Company Settlements ("ICS") revenues will be settled
through the Calling Card and Third Number Settlement System
("CATS"). Each Party will provide for its own arrangements for
participation in the CATS processes, through direct
participation or a hosting arrangement with a direct
participant.
22.4 Non-ICS revenue is defined as collect calls, calling card
calls, and billed to third number calls which originate on one
service provider's network and terminate on another service
provider's network in the same Local Access Transport Area
("LATA"). The Parties agree to negotiate and execute an
agreement for settlement of non-ICS revenue. This separate
arrangement is necessary since existing CATS processes do not
permit the use of CATS for non-ICS revenue. The Parties agree
that the CMDS system can be used to transport the call records
for this traffic.
22.5 Both Parties will provide the appropriate call records to the
intraLATA Toll Free Service provider, thus permitting the
service provider to bill its subscribers for the inbound Toll
Free Service. No adjustments to bills via tapes, disks or NDM
will be made without the mutual agreement of the Parties.
23. CONSTRUCTION CHARGES
23.1 All rates, charges and initial service periods specified in
this Agreement contemplate the provision of network
Interconnection services and access to Network Elements to the
extent existing facilities are available. Except for
modifications to existing facilities necessary to accommodate
Interconnection and access to Network Elements specifically
provided for in this Agreement, USWC will consider requests to
build additional or further facilities for network
Interconnection and access to Network Elements as described in
this Section.
23.2 Resale
Construction charges associated with the resale of services
will be applied in the same manner that construction charges
apply to USWC's retail end users. Contracts may be negotiated
on an individual case basis when construction is required for
large retail or resale customers.
23.3 LIS and Interoffice Transport
To the extent that USWC constructs facilities for LIS services
and/or interoffice transport, ACI will provide USWC with a
forecast of interoffice trunks and switch
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ports. USWC will perform a validated traffic engineering
estimate based on the forecasted demand and will then negotiate
an agreed upon quantity of interoffice trunks and switch ports
with ACI before constructing facilities. If ACI's forecasted
quantity exceeds USWC's validated traffic engineering estimate,
and if USWC finds it necessary to construct added facilities,
then construction charges will apply to the exceeded quantity.
USWC will track utilization of trunks, and when minimum trunk
utilization requirements are not met, a recurring charge will
apply for all unused trunks below the minimum utilization
level.
23.4 Unbundled Network Elements
USWC will conduct an individual financial assessment of any
request which requires construction of network capacity,
facilities, or space for access to or use of unbundled Network
Elements. If USWC constructs to fulfill ACI's request for
unbundled Network Elements, USWC will bid this construction on
a case-by-case basis. USWC will charge for the construction
through non-recurring charges and a term agreement for the
remaining recurring charge.
23.5 All necessary construction will be undertaken at the discretion
of USWC, consistent with budgetary responsibilities,
consideration for the impact on the general body of end users,
and without discrimination among the various carriers.
23.6 A quote for ACI's portion of a specific job will be provided to
ACI. The quote will be in writing and will be binding for
ninety (90) business days after the issue date. When accepted,
ACI will be billed the quoted price and construction will
commence after receipt of payment. If ACI chooses not to have
USWC construct the facilities, USWC reserves the right to bill
ACI for the expense incurred for producing the engineered job
design.
23.7 In the event a construction charge is applicable, ACI's service
application date will become the date upon which USWC receives
the required payment.
24. SERVICE PERFORMANCE RESULTS
24.1 USWC agrees to provide to ACI the same level of service that
USWC provides to itself and/or its affiliates as determined by
measuring and comparing a statistically significant number of
activities listed below.
24.1.1 For those services procured by ACI and unless otherwise
noted below, USWC shall measure its results and those
of its affiliates as a percentage. USWC shall also
measure the percentage results of ACI.
ACI agrees to measure its performance related to these
performance indicators in providing service to USWC.
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24.1.2 In some instances, USWC may not provide the listed
service to itself or its affiliates. If USWC does not
provide a statistically significant number of a listed
activity for itself or its affiliates, USWC will
provide data which will allow comparison between ACI's
performance results and the average performance results
of the same performance indicator for a statistically
significant number of total activities provided to all
other Co-Providers within the state in which the
service was provided.
24.1.3 In no event shall percentage results be provided if the
number of measured activities is less than a
statistically significant universe of fewer than sixty
(60) activities during the time period of measurement.
24.1.4 The list of performance indicators to be measured are
as follows:
RESALE INDICATORS
Residence Installation Intervals Offered (Facilities in
Place)
Business Installation Intervals Offered (Facilities in
Place)
Firm Order Confirmations within 48 hours (DS0)
(Facilities in Place)
Firm Order Confirmations within 48 hours (DS1)
(Facilities in Place)
Firm Order Confirmations within 48 hours (DS3)
(Facilities in Place)
Firm Order Confirmations within 48 hours (Switched)
(Facilities in Place)
Average Installation Intervals Delivered (Residence)
(Facilities in Place) (Days and Hours)
Average Installation Intervals Delivered (Business)
(Facilities in Place) (Days and Hours)
Average Installation Intervals Delivered (DS0)
(Facilities in Place) (Days and Hours)
Average Installation Intervals Delivered (DS1)
(Facilities in Place) (Days and Hours)
Average Installation Intervals Delivered (DS3)
(Facilities in Place) (Days and Hours)
Average Installation Intervals Delivered (Switched)
(Facilities in Place) (Days and Hours)
Residence Installation Commitments Met (Facilities in
Place)
Business Installation Commitments Met (Facilities in
Place)
Designed Installation Commitments Met (DS0) (Facilities
in Place)
Designed Installation Commitments Met (DS1) (Facilities
in Place)
Designed Installation Commitments Met (DS3) (Facilities
in Place)
Designed Installation Commitments Met (Switched)
(Facilities in Place)
Co-Provider-caused Installation Misses
Residence Disconnect Commitments Met
Business Disconnect Commitments Met
Residence Installation Reports (Repair Report After
Installation) Within 7 Business Days
Business Installation Reports (Repair Report After
Installation) Within 7 Business Days
Designed Installation Reports (Repair Report After
Installation) Within 30 Business Days (DS0)
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Designed Installation Reports (Repair Report After
Installation) Within 30 Business Days (DS1)
Designed Installation Reports (Repair Report After
Installation) Within 30 Business Days (DS3)
Designed Installation Reports (Repair Report After
Installation) Within 30 Business Days
(Switched Access)
Residence Percent Out of Service Cleared < 24 hours
Business Percent Out of Service Cleared in < 24 hours
Designed Percent Out of Service Cleared < 4 hours (DS0)
Designed Percent Out of Service Cleared in < 4hours
(DS1)
Designed Percent Out of Service Cleared < 4 hours (DS3)
Designed Percent Out of Service Cleared in < 4 hours
(Switched)
Residence Percent Out of Service and Service Affecting
Cleared < 48 hours
Business Percent Out of Service and Service Affecting
Cleared < 48 hours
Residence Repair Commitments Met
Business Repair Commitments Met
Residence Repair Repeated Reports Within 30 Business
Days
Business Repair Repeated Reports Within 30 Business
Days
Designed Repair Repeated Reports Within 30 Business
Days (DS0)
Designed Repair Repeated Reports Within 30 Business
Days (DS1)
Designed Repair Repeated Reports Within 30 Business
Days (DS3)
Designed Repair Repeated Reports Within 30 Business
Days (Switched)
Residence Report Rate per 100 Lines
Business Report Rate per 100 lines
Co-Provider-caused Trouble Reports
UNBUNDLED LOOP INDICATORS
Firm Order Confirmations Within 48 hours (Facilities in
Place) 2 Wire
Firm Order Confirmations Within 48 hours (Facilities in
Place) 4 Wire
Average Installation Intervals Delivered (Facilities in
Place) 2 Wire (Days and Hours)
Average Installation Intervals Delivered (Facilities in
Place) 4 Wire (Days and Hours)
Percent Installation Commitments Met (Facilities in
Place) 2 Wire
Percent Installation Commitments Met (Facilities in
Place) 4 Wire
Installation Reports Within 30 Business Days 2 Wire
Installation Reports Within 30 Business Days 4 Wire
Percent Out of Service Cleared in < 24 hours 2 Wire
Percent Out of Service Cleared in < 24 hours 4 Wire
Percent Out of Service and Service Affecting Cleared
in < 48 hours 2 Wire
Percent Out of Service and Service Affecting Cleared
in < 48 hours 4 Wire
Mean Time to Restore 2 Wire
Mean Time to Restore 4 Wire
Repair Repeated Reports Within 30 Business Days 2 Wire
Repair Repeated Reports Within 30 Business Days 4 Wire
LIS TRUNK INDICATORS
Firm Order Confirmations Within Six Business Days
(Facilities in Place)
Average Installation Intervals Delivered (Facilities in
Place) (Days and Hours)
Installation Commitments Met (Facilities in Place)
Installation Reports Within 30 Business Days
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Out of Service Cleared in < 4 hours
Repair Repeated Reports Within 30 Business Days
Co-Provider-caused Trouble Reports
24.2 Failure to Meet the Service Standard. If during a specified
review period, the performing Party fails to deliver the same
level of service that it provides to itself, such Party will
use its best efforts to meet the service standard for the next
specified review period. If the performing Party fails to meet
the service standard for two consecutive periods, the Parties
agree, in good faith, to attempt to resolve such issues through
negotiation or pursuant to the Dispute Resolution section of
this Agreement. This paragraph shall not be construed to waive
either Party's right to seek legal or regulatory intervention
as provided by state or federal law.
24.3 The performing Party's failure to meet the service standard
cannot be as a result, directly or indirectly, of a Delaying
Event. A "Delaying Event" means (a) a failure by the receiving
Party to perform any of its obligations set forth in this
Agreement, (b) any delay, act or failure to act by an end user,
agent or subcontractor of the receiving Party or (c) any Force
Majeure Event. If a Delaying Event prevents the performing
Party from performing a measured activity, then such measured
activity shall be excluded from the calculation of the
performing Party's compliance with the service standard.
24.4 Records. Each Party shall maintain complete and accurate
records, for the specified review period of its performance
under this Agreement for each measured activity and its
compliance with the service standard. Each Party shall provide
to the other such records in a self-reporting format. Such
records shall be in the format kept in the performing Party's
ordinary course of business. The Parties agree that such
records shall be deemed "Proprietary Information".
24.5 Cost Recovery. Each Party reserves the right to recover the
costs associated with the creation of the above reports and
standards through a future proceeding before a regulatory body.
Such a proceeding may address a wide range of implementation
costs not otherwise recovered through charges established
herein.
25. IMPLEMENTATION SCHEDULE
25.1 Within six months from the date of final approval of this
Agreement, the Parties agree to make a good faith effort to
complete each of the following interconnection arrangements:
25.1.1 Two-way trunk groups, as listed in Section 6.7.2
herein, necessary for the mutual exchange of traffic.
25.1.2 E-911 trunking and database access.
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25.1.3 SS7 Interconnection and Certification.
25.1.4 Directory Listings Arrangements and Directory
Assistance Interconnection.
25.1.5 Access to Unbundled Loops in at least one wire center.
25.1.6 Completion of Physical Collocation arrangements in at
least one USWC Wire Center.
25.1.7 Completion of inter-carrier billing arrangements
necessary for the joint provision of Switched Access
Services and for reciprocal traffic exchange.
26. MISCELLANEOUS TERMS
26.1 GENERAL PROVISIONS
26.1.1 Each Party shall use its best efforts to comply with
the Implementation Schedule.
26.1.2 The Parties are each solely responsible for
participation in and compliance with national network
plans, including the National Network Security Plan and
the Emergency Preparedness Plan.
26.1.3 Each Party is solely responsible for the services it
provides to its end users and to other
Telecommunications Carriers.
26.1.4 The Parties shall work cooperatively to minimize fraud
associated with third-number billed calls, calling card
calls, and any other services related to this
Agreement.
26.2 TERM OF AGREEMENT
This Agreement shall become effective upon Commission approval,
pursuant to Sections 251 and 252 of the Act, shall terminate on
________ __, 19__, and shall be binding upon the Parties during
that term, notwithstanding Section 252(i) of the Act. The
Parties agree to commence negotiations on a new agreement no
later than 135 calendar days prior to the termination date
specified above; provided that ACI, consistent with Section
252(i) of the Act, may opt into a then-existing, valid
interconnection agreement, in its entirety, at the conclusion
of the term of this Agreement. In the event that negotiations
are not concluded as of the termination date specified above,
the window of opportunity to file for arbitration to resolve
outstanding contractual issues in accordance with the Act, will
open upon the termination date specified above.
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26.3 PAYMENT
26.3.1 Amounts payable under this Agreement are due and
payable within thirty (30) business days after the date
of invoice.
26.3.2 Except as specified in the Resale section of this
Agreement or elsewhere in this Agreement, any amount
due and not paid by the due date stated above shall be
subject to a late charge equal to either i) 0.03
percent per day compounded daily for the number of
calendar days from the payment due date to and
including, the date of payment, that would result in an
annual percentage rate of 12% or ii) the highest lawful
rate, whichever is less. If late payment charges for
services are not permitted by local jurisdiction, this
provision shall not apply.
26.3.3 Should ACI dispute any portion of the monthly billing
under this Agreement, ACI will notify USWC in writing
within thirty (30) business days of the receipt of such
billing, identifying the amount and details of such
dispute. ACI shall pay all amounts due. Both ACI and
USWC agree to expedite the investigation of any
disputed amounts in an effort to resolve and settle the
dispute prior to initiating any other rights or
remedies. Should the dispute be found in ACI's favor,
USWC will reimburse ACI the resolved amount plus
interest from the date of payment at the late payment
factor of the Intrastate Access Service Tariffs,
General Regulations for the state in which the service
is rendered.
26.3.4 If ACI is repeatedly delinquent in making its payments,
USWC may, in its sole discretion, require a deposit to
be held as security for the payment of charges.
"Repeatedly delinquent" means being thirty (30)
business days or more delinquent for three (3)
consecutive months. The deposit may not exceed the
estimated total monthly charges for a two (2) month
period. The deposit may be a cash deposit, a letter of
credit with terms and conditions acceptable to USWC in
its sole discretion, or some other form of mutually
acceptable security.
26.3.5 Interest will be paid on cash deposits at the rate
applying to deposits under applicable Commission rules,
regulations, or Tariffs. Cash deposits and accrued
interest will be credited to ACI's account or refunded,
as appropriate, upon the earlier of the termination of
this Agreement or one full year of timely payments in
full by ACI. The fact that a deposit has been made
does not relieve ACI from any requirements of this
Agreement.
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26.4 TAXES
Each Party purchasing services hereunder shall pay or otherwise
be responsible for all federal, state, or local sales, use,
excise, gross receipts, transaction or similar taxes, fees or
surcharges levied against or upon such purchasing Party (or the
providing Party when such providing Party is permitted to pass
along to the purchasing Party such taxes, fees or surcharges),
except for any tax on either Party's corporate existence,
status or income. Whenever possible, these amounts shall be
billed as a separate item on the invoice. To the extent a sale
is claimed to be for resale tax exemption, the purchasing Party
shall furnish the providing Party a proper resale tax exemption
certificate as authorized or required by statute or regulation
by the jurisdiction providing said resale tax exemption.
Failure to timely provide said resale tax exemption certificate
will result in no exemption being available to the purchasing
Party.
26.5 FORCE MAJEURE
Neither Party shall be liable for any delay or failure in
performance of any part of this Agreement from any cause beyond
its control and without its fault or negligence including,
without limitation, acts of nature, acts of civil or military
authority, government regulations, embargoes, epidemics,
terrorist acts, riots, insurrections, fires, explosions,
earthquakes, nuclear accidents, floods, work stoppages,
equipment failure, power blackouts, volcanic action, other
major environmental disturbances, unusually severe weather
conditions, inability to secure products or services of other
persons or transportation facilities or acts or omissions of
transportation carriers (collectively, a "Force Majeure
Event"). In the event of a labor dispute or strike the Parties
agree to provide service to each other at a level equivalent to
the level they provide themselves.
26.6 LIMITATION OF LIABILITY
26.6.1 Each Party shall be liable to the other for direct
damages, as described in this section, for any loss,
defect or equipment failure resulting from the causing
Party's conduct or the conduct of its agents or
contractors in performing the obligations contained in
this Agreement.
26.6.2 Except for indemnity obligations, each Party's
liability to the other Party for any loss relating to
or arising out of any negligent act or omission in its
performance of this Agreement, whether in contract or
in tort, shall be limited to the total amount that is
or would have been charged to the other Party by such
negligent or breaching Party for the service(s) or
function(s) not performed or improperly performed.
26.6.3 Neither Party shall be liable to the other under this
Agreement for indirect, incidental, consequential, or
special damages, including
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(without limitation) damages for lost profits, lost
revenues, lost savings suffered by the other Party
regardless of the form of action, whether in contract,
warranty, strict liability, tort, including (without
limitation) negligence of any kind and regardless of
whether the Parties know the possibility that such
damages could result.
26.6.4 Nothing contained in this Section shall limit either
Party's liability to the other for intentional,
malicious misconduct.
26.6.5 Nothing contained in this Section shall limit either
Party's obligations of indemnification as specified in
the Indemnity Section of this Agreement.
26.7 INDEMNITY
26.7.1 With respect to third party claims, each of the Parties
agrees to release, indemnify, defend and hold harmless
the other Party and each of its officers, directors,
employees and agents (each an "Indemnitee") from and
against and in respect of any loss, debt, liability,
damage, obligation, claim, demand, judgment or
settlement of any nature or kind, known or unknown,
liquidated or unliquidated including, but not limited
to, costs and attorneys' fees, whether suffered, made,
instituted, or asserted by any other party or person,
for invasion of privacy, personal injury to or death of
any person or persons, or for loss, damage to, or
destruction of property, whether or not owned by
others, resulting from the indemnifying Party's
performance, breach of applicable law, or status of its
employees, agents and subcontractors; or for failure to
perform under this Agreement, regardless of the form of
action.
26.7.2 The indemnification provided herein shall be
conditioned upon:
26.7.2.1 The indemnified Party shall promptly notify
the indemnifying Party of any action taken
against the indemnified Party relating to the
indemnification. Failure to so notify the
indemnifying Party shall not relieve the
indemnifying Party of any liability that the
indemnifying Party might have, except to the
extent that such failure prejudices the
indemnifying Party's ability to defend such
claim.
26.7.2.2 The indemnifying Party shall have sole
authority to defend any such action,
including the selection of legal counsel, and
the indemnified Party may engage separate
legal counsel only at its sole cost and
expense.
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26.7.2.3 In no event shall the indemnifying Party
settle or consent to any judgment pertaining
to any such action without the prior written
consent of the indemnified Party.
26.8 INTELLECTUAL PROPERTY
26.8.1 Each Party hereby grants to the other Party the
limited, personal and nonexclusive right and license to
use its patents, copyrights and trade secrets but only
to the extent necessary to implement this Agreement or
specifically required by the then applicable federal
and state rules and regulations relating to
Interconnection and access to telecommunications
facilities and services, and for no other purposes.
Nothing in this Agreement shall be construed as the
grant to the other Party of any rights or licenses to
trademarks.
26.8.2 The rights and licenses above are granted "AS IS" and
the other Party's exercise of any such right and
license shall be at the sole and exclusive risk of the
other Party. Neither Party shall have any obligation
to defend, indemnify or hold harmless, or acquire any
license or right for the benefit of, or owe any other
obligation or have any liability to, the other based on
or arising from any claim, demand, or proceeding
(hereinafter "claim") by any third party alleging or
asserting that the use of any circuit, apparatus, or
system, or the use of any software, or the performance
of any service or method, or the provision of any
facilities by either Party under this Agreement
constitutes infringement, or misuse or misappropriation
of any patent, copyright, trade secret, or any other
proprietary or intellectual property right of any third
party.
26.8.3 As a condition to the access or use of patents,
copyrights, trade secrets and other intellectual
property (including software) owned or controlled by a
third party to the extent necessary to implement this
Agreement or specifically required by the then
applicable federal and state rules and regulations
relating to Interconnection and access to
telecommunications facilities and services, the Party
providing access may require the other upon written
notice, from time to time, to obtain a license or
permission for such access or use, make all payments in
connection with obtaining such license, and provide
evidence of such license.
26.8.4 Except as expressly provided in this Intellectual
Property Section, nothing in this Agreement shall be
construed as the grant of a license, either express or
implied, with respect to any patent, copyright, logo,
trademark, tradename, trade secret or any other
intellectual property right now or hereafter owned,
controlled or licensable by either Party. ACI may not
use any patent, copyright, logo, trademark, tradename,
trade secret or other intellectual
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property right of USWC or its affiliates without
execution of a separate agreement between the Parties.
26.8.5 ACI shall not, without the express written permission
of USWC, state or imply that; 1) ACI is connected, or
in any way affiliated with USWC or its affiliates, 2)
ACI is part of a joint business association or any
similar arrangement with USWC or its affiliates, 3)
USWC and its affiliates are in any way sponsoring,
endorsing or certifying ACI and its goods and services,
or 4) with respect to ACI advertising or promotional
activities or materials, that the resold goods and
services are in any way associated with or originated
from USWC or any of its affiliates. Nothing in this
paragraph shall prevent ACI from truthfully describing
the Network Elements it uses to provide service to its
end users.
26.8.6 For purposes of resale only and notwithstanding the
above, unless otherwise prohibited by USWC pursuant to
an applicable provision herein, ACI may use the phrase
"ACI is a reseller of U S WEST Communications services"
(the "Authorized Phrase") in ACI's printed materials
provided:
26.8.6.1 The Authorized Phrase is not used in
connection with any goods or services other
than USWC services resold by ACI.
26.8.6.2 ACI's use of the Authorized Phrase does not,
in USWC's sole discretion, cause end users to
believe that ACI is USWC.
26.8.6.3 The Authorized Phrase, when displayed,
appears only in text form (ACI may not use
the U S WEST logo) with all letters being the
same font and point size. The point size of
the Authorized Phrase shall be no greater
than one fourth the point size of the
smallest use of ACI's name and in no event
shall exceed 8 point size.
26.8.6.4 ACI shall provide all printed materials to
USWC for its prior written approval.
26.8.6.5 If USWC determines that ACI's use of the
Authorized Phrase causes end user confusion,
USWC may in its sole discretion, immediately
terminate ACI's right to use the Authorized
Phrase.
26.8.6.6 Upon termination of ACI's right to use the
Authorized Phrase or termination of this
Agreement, all permission or right to use the
Authorized Phrase shall immediately cease to
exist and ACI shall immediately cease any and
all such
PAGE 100
<PAGE>
use of the Authorized Phrase. ACI shall
either promptly return to USWC or destroy all
materials in its possession or control
displaying the Authorized Phrase.
26.8.7 ACI acknowledges the value of the marks "U S WEST" and
"U S WEST Communications" (the "Marks") and the
goodwill associated therewith and acknowledges that
such goodwill is a property right belonging to U S
WEST, Inc. and USWC respectively (the "Owners"). ACI
recognizes that nothing contained in this Agreement is
intended as an assignment or grant to ACI of any right,
title or interest in or to the Marks and that this
Agreement does not confer any right or license to grant
sublicenses or permission to third parties to use the
Marks and is not assignable. ACI will do nothing
inconsistent with the Owner's ownership of the Marks,
and all rights, if any, that may be acquired by use of
the Marks shall inure to the benefit of the Owners.
ACI will not adopt, use (other than as authorized
herein), register or seek to register any mark anywhere
in the world which is identical or confusingly similar
to the Marks or which is so similar thereto as to
constitute a deceptive colorable imitation thereof or
to suggest or imply some association, sponsorship, or
endorsement by the Owners. The Owners make no
warranties regarding ownership of any rights in or the
validity of the Marks.
26.9 WARRANTIES
NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, THE
PARTIES AGREE THAT NEITHER PARTY HAS MADE, AND THAT THERE DOES
NOT EXIST, ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT
LIMITED TO WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
26.10 ASSIGNMENT
Neither Party may assign or transfer (whether by operation of
law or otherwise) this Agreement (or any rights or obligations
hereunder) to a third party without the prior written consent
of the other Party provided that each Party may assign this
Agreement to a corporate affiliate or an entity under its
common control or an entity acquiring all or substantially all
of its assets or equity by providing prior written notice to
the other Party of such assignment or transfer. Any attempted
assignment or transfer that is not permitted is void AB INITIO.
Without limiting the generality of the foregoing, this
Agreement shall be binding upon and shall inure to the benefit
of the Parties' respective successors and assigns.
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<PAGE>
26.11 DEFAULT
If either Party defaults in the payment of any amount due
hereunder, or if either Party violates any other provision of
this Agreement, and such default or violation shall continue
for thirty (30) CALENDAR days after written notice thereof, the
other Party may seek legal and/or regulatory relief. The
failure of either Party to enforce any of the provisions of
this Agreement or the waiver thereof in any instance shall not
be construed as a general waiver or relinquishment on its part
of any such provision, but the same shall, nevertheless, be and
remain in full force and effect.
26.12 DISCLAIMER OF AGENCY
Except for provisions herein expressly authorizing a Party to
act for another, nothing in this Agreement shall constitute a
Party as a legal representative or agent of the other Party,
nor shall a Party have the right or authority to assume, create
or incur any liability or any obligation of any kind, express
or implied, against or in the name or on behalf of the other
Party unless otherwise expressly permitted by such other Party.
Except as otherwise expressly provided in this Agreement, no
Party undertakes to perform any obligation of the other Party
whether regulatory or contractual, or to assume any
responsibility for the management of the other Party's
business.
26.13 SEVERABILITY
In accordance with Section 1 of this Agreement, if one or more
of the provisions contained herein must be modified because of
changes in Existing Rules or modifications to arbitration
proceedings, the Parties will negotiate in good faith for
replacement language. If replacement language cannot be agreed
upon, either Party may seek regulatory intervention, including
negotiations pursuant to Sections 251 and 252 of the Act. In
all other respects, the provisions of this Agreement are not
severable.
26.14 NONDISCLOSURE
26.14.1 All information, including but not limited to
specifications, microfilm, photocopies, magnetic disks,
magnetic tapes, drawings, sketches, models, samples,
tools, technical information, data, employee records,
maps, financial reports, and market data, (i) furnished
by one Party to the other Party dealing with end user
specific, facility specific, or usage specific
information, other than end user information
communicated for the purpose of publication of
directory database inclusion, or (ii) in written,
graphic, electromagnetic, or other tangible form and
marked at the time of delivery as "Confidential" or
"Proprietary", or (iii) communicated and declared to
the receiving Party at the time of delivery, or by
written notice given to the receiving Party within ten
(10) business
PAGE 102
<PAGE>
days after delivery, to be "Confidential" or
"Proprietary" (collectively referred to as "Proprietary
Information"), shall remain the property of the
disclosing Party. A Party who receives Proprietary
Information via an oral communication may request
written confirmation that the material is Proprietary
Information. A Party who delivers Proprietary
Information via an oral communication may request
written confirmation that the Party receiving the
information understands that the material is
Proprietary Information.
26.14.1.1 "Proprietary Information" also includes
information or data that is learned by one
Party by virtue of the operating relationship
between the Parties including while one Party
is on the premises (including leased
collocation space) of the other Party.
26.14.2 Upon request by the disclosing Party, the receiving
Party shall return all tangible copies of Proprietary
Information, whether written, graphic or otherwise,
except that the receiving Party may retain one copy for
archival purposes.
26.14.3 Each Party shall keep all of the other Party's
Proprietary Information confidential and shall use the
other Party's Proprietary Information only in
connection with this Agreement. Neither Party shall
use the other Party's Proprietary Information for any
other purpose except upon such terms and conditions as
may be agreed upon between the Parties in writing.
Each Party shall use its best efforts to ensure that
its retail operations do not have access to, know of,
are permitted to obtain, are provided with, obtain
disclosure about or otherwise have communicated to it
any information defined as Proprietary Information.
26.14.4 Unless otherwise agreed, the obligations of
confidentiality and non-use set forth in this Agreement
do not apply to such Proprietary Information as:
26.14.4.1 was at the time of receipt already known to
the receiving Party free of any obligation to
keep it confidential evidenced by written
records prepared prior to delivery by the
disclosing Party; or
26.14.4.2 is or becomes publicly known through no
wrongful act of the receiving Party; or
26.14.4.3 is rightfully received from a third person
having no direct or indirect secrecy or
confidentiality obligation to the disclosing
Party with respect to such information; or
PAGE 103
<PAGE>
26.14.4.4 is independently developed by an employee,
agent, or contractor of the receiving Party
which individual is not involved in any
manner with the provision of services
pursuant to the Agreement and does not have
any direct or indirect access to the
Proprietary Information; or
26.14.4.5 is disclosed to a third person by the
disclosing Party without similar restrictions
on such third person's rights; or
26.14.4.6 is approved for release by written
authorization of the disclosing Party; or
26.14.4.7 is required to be made public by the
receiving Party pursuant to applicable law or
regulation provided that the receiving Party
shall give sufficient notice of the
requirement to the disclosing Party to enable
the disclosing Party to seek protective
orders.
26.14.5 Effective Date Of This Section. Notwithstanding any
other provision of this Agreement, the Proprietary
Information provisions of this Agreement shall apply to
all information furnished by either Party to the other
in furtherance of the purpose of this Agreement, even
if furnished before the date of this Agreement.
26.15 SURVIVAL
The Parties' obligations under this Agreement which by their
nature are intended to continue beyond the termination or
expiration of this Agreement shall survive the termination or
expiration of this Agreement.
26.16 DISPUTE RESOLUTION
If any claim, controversy or dispute between the Parties, their
agents, employees, officers, directors or affiliated agents
("Dispute") cannot be settled through negotiation, it shall be
resolved by arbitration conducted by a single arbitrator
engaged in the practice of law, under the then current rules of
the American Arbitration Association ("AAA"). The Federal
Arbitration Act, 9 U.S.C. Secs. 1-16, not state law, shall
govern the arbitrability of all Disputes. The arbitrator shall
not have authority to award punitive damages. All expedited
procedures prescribed by the AAA rules shall apply. The
arbitrator's award shall be final and binding and may be
entered in any court having jurisdiction thereof. The
prevailing Party, as determined by the arbitrator, shall be
entitled to an award of reasonable attorneys' fees and costs.
The arbitration shall occur in Denver, Colorado. Nothing in
this Section shall be construed to waive or limit either
Party's right to seek relief from the Commission or the Federal
Communications Commission as provided by state or federal law.
PAGE 104
<PAGE>
No Dispute, regardless of the form of action, arising out of
this Agreement, may be brought by either Party more than two
(2) years after the cause of action accrues.
26.17 CONTROLLING LAW
This Agreement was negotiated by the Parties in accordance with
the terms of the Act and the laws of the state where service is
provided hereunder. It shall be interpreted solely in
accordance with the terms of the Act and the applicable state
law in the state where the service is provided.
26.18 JOINT WORK PRODUCT
This Agreement is the joint work product of the Parties and has
been negotiated by the Parties and their respective counsel and
shall be fairly interpreted in accordance with its terms and,
in the event of any ambiguities, no inferences shall be drawn
against either Party.
26.19 RESPONSIBILITY FOR ENVIRONMENTAL CONTAMINATION
Neither Party shall be liable to the other for any costs
whatsoever resulting from the presence or release of any
environmental hazard that either Party did not introduce to the
affected work location. Both Parties shall defend and hold
harmless the other, its officers, directors and employees from
and against any losses, damages, claims, demands, suits,
liabilities, fines, penalties and expenses (including
reasonable attorneys' fees) that arise out of or result from
(i) any environmental hazard that the indemnifying party, its
contractors or agents introduce to the work locations or (ii)
the presence or release of any environmental hazard for which
the indemnifying party is responsible under applicable law.
26.20 NOTICES
Any notices required by or concerning this Agreement shall be
sent to the Parties at the addresses shown below:
USWC
Director - Interconnection Compliance
1801 California Street, Room 2410
Denver, Colorado 80202
Copy to:
U S WEST Law Department
General Counsel
1801 California Street, Room 5100
Denver, Colorado 80202
PAGE 105
<PAGE>
ACI
Eric Geis
8787 Complex Drive
Suite 200
San Diego, CA 92123
Each Party shall inform the other of any changes in the above
addresses.
26.21 RESPONSIBILITY OF EACH PARTY
Each Party is an independent contractor, and has and hereby
retains the right to exercise full control of and supervision
over its own performance of its obligations under this
Agreement and retains full control over the employment,
direction, compensation and discharge of all employees
assisting in the performance of such obligations. Each Party
will be solely responsible for all matters relating to payment
of such employees, including compliance with social security
taxes, withholding taxes and all other regulations governing
such matters. Each Party will be solely responsible for proper
handling, storage, transport and disposal at its own expense of
all (i) substances or materials that it or its contractors or
agents bring to, create or assume control over at work
locations or, (ii) waste resulting therefrom or otherwise
generated in connection with its or its contractors' or agents'
activities at the work locations. Subject to the limitations
on liability and except as otherwise provided in this
Agreement, each Party shall be responsible for (i) its own acts
and performance of all obligations imposed by applicable law in
connection with its activities, legal status and property, real
or personal and, (ii) the acts of its own affiliates,
employees, agents and contractors during the performance of
that Party's obligations hereunder.
26.22 NO THIRD PARTY BENEFICIARIES
Except as may be specifically set forth in this Agreement, this
Agreement does not provide and shall not be construed to
provide third parties with any remedy, claim, liability,
reimbursement, cause of action, or other privilege.
26.23 REFERENCED DOCUMENTS
All references to Sections or Appendices shall be deemed to be
references to Sections of, and Appendices to, this Agreement
unless the context shall otherwise require. Whenever any
provision of this Agreement refers to a technical reference,
technical publication, ACI practice, USWC practice, any
publication of telecommunications industry administrative or
technical standards, or any other document specifically
incorporated into this Agreement, it will be deemed to be a
reference to the most recent version or edition (including any
PAGE 106
<PAGE>
amendments, supplements, addenda, or successors) of such
document that is in effect, and will include the most recent
version or edition (including any amendments, supplements,
addenda, or successors) of each document incorporated by
reference in such a technical reference, technical publication,
ACI practice, USWC practice, or publication of industry
standards.
26.24 PUBLICITY AND ADVERTISING
Neither Party shall publish or use any advertising, sales
promotions or other publicity materials that use the other
Party's logo, trademarks or service marks without the prior
written approval of the other Party.
26.25 AMENDMENT
ACI and USWC may mutually agree to amend this Agreement in
writing. Since it is possible that amendments to this
Agreement may be needed to fully satisfy the purposes and
objectives of this Agreement, the Parties agree to work
cooperatively, promptly and in good faith to negotiate and
implement any such additions, changes and corrections to this
Agreement.
26.26 EXECUTED IN COUNTERPARTS
This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original; but such
counterparts shall together constitute one and the same
instrument.
26.27 HEADINGS OF NO FORCE OR EFFECT
The headings of Sections of this Agreement are for convenience
of reference only, and shall in no way define, modify or
restrict the meaning or interpretation of the terms or
provisions of this Agreement.
26.28 CANCELLATION CHARGES
Except as provided pursuant to a Network Element, Bona Fide
Request, or as otherwise provided in any applicable Tariff or
contract referenced herein, no cancellation charges shall
apply.
26.29 REGULATORY APPROVAL
The Parties understand and agree that this Agreement will be
filed with the Commission and may thereafter be filed with the
FCC and shall, at all times, be subject to review by the
Commission or the FCC. In the event any such review rejects
any portion of this Agreement, renders it inoperable or creates
any ambiguity of requirement for further amendment, the Parties
agree to meet and negotiate in good faith to arrive at a
mutually acceptable modification.
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<PAGE>
26.30 COMPLIANCE
Each Party shall comply with all applicable federal, state, and
local laws, rules and regulations applicable to its performance
under this Agreement.
26.31 COMPLIANCE WITH THE COMMUNICATIONS LAW ENFORCEMENT ACT OF 1994
("CALEA")
Each Party represents and warrants that any equipment,
facilities or services provided to the other Party under this
Agreement comply with CALEA. Each Party shall indemnify and
hold the other Party harmless from any and all penalties
imposed upon the other Party for such noncompliance and shall
at the non-compliant Party's sole cost and expense, modify or
replace any equipment, facilities or services provided to the
other Party under this Agreement to ensure that such equipment,
facilities and services fully comply with CALEA.
26.32 COOPERATION
The Parties agree that this Agreement involves the provision of
USWC services in ways such services were not previously
available and the introduction of new processes and procedures
to provide and bill such services. Accordingly, the Parties
agree to work jointly and cooperatively in testing and
implementing processes for pre-ordering, ordering, maintenance,
provisioning and billing and in reasonably resolving issues
which result from such implementation on a timely basis.
26.33 ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the
Parties and supersedes all prior oral or written agreements,
representations, statements, negotiations, understandings,
proposals and undertakings with respect to the subject matter
hereof.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective duly authorized representatives.
ACI U S WEST COMMUNICATIONS, INC.
/s/ Eric H. Geis /s/Kathy Fleming
- -------------------------------- --------------------------------
Signature Signature
Eric H. Geis Kathy Fleming
- -------------------------------- --------------------------------
Name Printed/Typed Name Printed/Typed
VP & Secretary Executive Director - Interconnect
- -------------------------------- --------------------------------
Title Title
6/9/98 6/29/98
- -------------------------------- --------------------------------
Date Date
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APPENDIX A
U S WEST UNBUNDLED NETWORK ELEMENTS, ANCILLARY
SERVICES, RESALE PRICE LIST
WASHINGTON
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
INTERCONNECTION - LOCAL EXCHANGE
- -----------------------------------------------------------------------------------------------------------
-----------------------------------------
ENTRANCE FACILITY RECURRING NONRECURRING
-----------------------------------------
<S> <C> <C> <C>
DS1, Electrical $99.78 $563.92
DS3, Electrical $404.24 $668.95
-----------------------------------------
CALL TERMINATION PRICE
-----------------------------------------
Average, Per Minute of Use (Note 1) $0.005341
CALL TRANSPORT
-----------------------------------------
DIRECT TRUNKED TRANSPORT FIXED PER MILE
-----------------------------------------
DS1 - 0 Miles None None
DS1 - Over 0 to 8 $41.72 $0.67
DS1 - Over 8 to 25 $41.72 $0.84
DS1 - Over 25 to 50 $41.73 $2.97
DS1 - Over 50 $41.73 $3.49
DS3 - 0 Miles None None
DS3 - Over 0 to 8 $283.30 $13.83
DS3 - Over 8 to 25 $284.17 $15.03
DS3 - Over 25 to 50 $291.31 $39.19
DS3 - Over 50 $293.91 $44.74
-----------------------------------------
PRICE
-----------------------------------------
TANDEM-SWITCHED TRANSPORT
Tandem Switching, Per Minute of Use (Note 1) $0.003994
-----------------------------------------
Tandem Transmission FIXED PER MILE
-----------------------------------------
0 Mile None None
Over 0 - 8 Miles $0.000411 $0.000009
Over 8 - 25 Miles $0.000411 $0.000008
Over 25 - 50 Miles $0.000408 $0.000008
Over 50 Miles $0.000409 $0.000014
-----------------------------------------
MULTIPLEXING, PER ARRANGEMENT RECURRING NONRECURRING
-----------------------------------------
DS3 to DS1 $218.58 $314.26
- -----------------------------------------------------------------------------------------------------------
INTERCONNECTION - EXCHANGE ACCESS
- -----------------------------------------------------------------------------------------------------------
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<PAGE>
CALL TERMINATION Per Switched Access Tariff
CALL TRANSPORT Per Switched Access Tariff
CALL TRANSIT Per Switched Access Tariff
- -----------------------------------------------------------------------------------------------------------
COMMON CHANNEL SIGNALLING ACCESS SERVICE
- -----------------------------------------------------------------------------------------------------------
-----------------------------------------
ENTRANCE FACILITY RECURRING NONRECURRING
-----------------------------------------
DS1, Electrical $99.78 $563.92
DS3, Electrical $404.24 $668.95
-----------------------------------------
DIRECT LINK TRANSPORT FIXED PER MILE
-----------------------------------------
DS0 - 0 Miles None None
DS0 - Over 0 to 8 $20.89 $0.13
DS0 - Over 8 to 25 $20.88 $0.10
DS0 - Over 25 to 50 $20.88 $0.10
DS0 - Over 50 $20.89 $0.17
DS1 - 0 Miles None None
DS1 - Over 0 to 8 $41.72 $0.67
DS1 - Over 8 to 25 $41.72 $0.84
DS1 - Over 25 to 50 $41.73 $2.97
DS1 - Over 50 $41.73 $3.49
DS3 - 0 Miles None None
DS3 - Over 0 to 8 $283.30 $13.83
DS3 - Over 8 to 25 $284.17 $15.03
DS3 - Over 25 to 50 $291.31 $39.19
DS3 - Over 50 $293.91 $44.74
-----------------------------------------
RECURRING NONRECURRING
-----------------------------------------
CCS LINK -- FIRST LINK None $504.68
CCS LINK -- EACH ADDITIONAL LINK None $72.42
STP PORT -- PER PORT $214.66 None
MULTIPLEXING
DS1 to DS0 $221.08 $306.95
DS3 to DS1 $218.58 $314.26
- -----------------------------------------------------------------------------------------------------------
PHYSICAL AND VIRTUAL COLLOCATION
- -----------------------------------------------------------------------------------------------------------
-----------------------------------------
COMMON ELEMENTS RECURRING NONRECURRING
-----------------------------------------
Quote Preparation Fee None $2,239.79
Entrance Facility - 2 fibers $3.42 $3,213.26
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-----------------------------------------
EICT Channel Terminations RECURRING NONRECURRING
-----------------------------------------
2-wire DS0 EICT $0.92 $300.26
4-wire DS0 EICT $1.84 $300.26
DS1 EICT $9.12 $340.76
DS3 EICT $31.93 $342.53
EICT Regeneration (Note 2)
DS1 EICT, Regeneration $14.38 $340.76
DS3 EICT, Regeneration $94.24 $342.53
Collocation Cross Connection Under Development Under Development
Cable Splicing
Per setup None $489.61
Per Fiber Spliced None $39.14
48 Volt Power, per ampere, per month $18.81 None
48 Volt Power Cable
20 Ampere Capacity - Recurring $0.13 $72.42
40 Ampere Capacity - Recurring $0.18 $98.19
60 Ampere Capacity - Recurring $0.21 $110.59
-----------------------------------------
REGULAR HOURS AFTER HOURS
-----------------------------------------
Inspector per 1/2 Hour $28.62 $37.19
-----------------------------------------
VIRTUAL COLLOCATION RECURRING NONRECURRING
-----------------------------------------
Equipment Bay, Per Shelf $8.58 None
-----------------------------------------
REGULAR HOURS AFTER HOURS
-----------------------------------------
Training per 1/2 Hour $25.36 None
Engineering per 1/2 Hour $24.73 $33.09
Installation per 1/2 Hour $28.62 $37.19
Maintenance per 1/2 Hour $25.36 $33.73
-----------------------------------------
PHYSICAL COLLOCATION RECURRING NONRECURRING
-----------------------------------------
Cage/Hard Wall Enclosure ICB ICB
Rent (w/ Maintenance) - per square foot, Zone 1 (Note 3) $2.75 None
Rent (w/ Maintenance) - per square foot, Zone 2 (Note 3) $2.26 None
Rent (w/ Maintenance) - per square foot, Zone 3 (Note 3) $2.06 None
- -----------------------------------------------------------------------------------------------------------
ANCILLARY SERVICES
- -----------------------------------------------------------------------------------------------------------
-----------------------------------------
PRICE
-----------------------------------------
DIRECTORY ASSISTANCE
Price per Call -- Facilities-Based Providers $0.34
DIRECTORY ASSISTANCE CALL COMPLETION
Price per Call -- Facilities-Based Providers (Note 4) $0.35
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<PAGE>
-----------------------------------------
LISTINGS PRICE
-----------------------------------------
Primary Listings, Directory Assistance, White & Yellow No Charge
Pages
E911
LEC and AECs recover costs from PSAP No Charge
-----------------------------------------
INTERIM NUMBER PORTABILITY RECURRING
-----------------------------------------
Remote Call Forwarding Without Transport
Per Number Ported - First Path $4.72
Per Number Ported - Additional Path $3.03
Remote Call Forwarding With Transport
Per Number Ported - First Path $7.35
Per Number Ported - Additional Path $5.66
-----------------------------------------
Additional Charges NONRECURRING
-----------------------------------------
Service Establishment, per switch, per route -
nonrecurring $43.80
Service Establishment - additional number ported
or changes to existing numbers, per number
ported -- nonrecurring $9.49
Additional and Consecutive Numbers -- additional
number ported on same account name and consecutive
numbers, per number ported -- nonrecurring $7.05
-----------------------------------------
ASSIGNMENT OF NUMBERS PRICE
-----------------------------------------
Assignments per industry guidelines No Charge
BUSY LINE VERIFICATION
Per Call $0.72
BUSY LINE INTERRUPT
Per Call $0.87
- -----------------------------------------------------------------------------------------------------------
UNBUNDLED ELEMENTS
- -----------------------------------------------------------------------------------------------------------
-----------------------------------------
RECURRING NONRECURRING
-----------------------------------------
UNBUNDLED LOOPS
2-Wire LIS-Link, Statewide $36.20
4-Wire LIS-Link, Statewide $67.28
ISDN Extension Increment, Per Loop (Note 5) $26.54
Basic Installation, First LIS-Link $116.18
Basic Installation, Each Additional LIS-Link $63.89
Installation with Conformance Testing, First LIS-Link $186.73
Installation with Conformance Testing, Each Additional
LIS-Link $94.67
Coordinated Installation with Testing, First LIS-Link $238.34
Coordinated Installation with Testing, Each Additional
LIS-Link $146.29
NETWORK INTERFACE DEVICE (NOTE 6) $64.03
CABLE UNLOADING AND BRIDGE TAP REMOVAL (NOTE 7) $590.94
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UNBUNDLED PORTS
End Office Port, Per First Port $1.41 $107.57
End Office Port, Per Each Additional Port $1.41 $57.87
Feature Group 1, per port (Note 8) $1.03
Feature Group 2, per port (Note 8) $5.31
Average Per Minute of Use, Per Port (Note 1) $0.005341
CUSTOMIZED ROUTING ICB ICB
- -----------------------------------------------------------------------------------------------------------
RESALE
- -----------------------------------------------------------------------------------------------------------
-----------------------------------------
CUSTOMER TRANSFER CHARGE NONRECURRING
-----------------------------------------
MECHANIZED CUSTOMER TRANSFER CHARGE
Residence, First Line $12.64
Residence, Each Additional Line $11.16
Business, First Line $16.80
Business, Each Additional Line $13.93
MANUAL CUSTOMER TRANSFER CHARGE
Residence, First Line $22.20
Residence, Each Additional Line $16.38
Business, First Line $22.05
Business, Each Additional Line $16.30
-----------------------------------------
USWC RESOLD SERVICES PRICE AS A % OF CURRENT RETAIL
-----------------------------------------
Residence Basic Exchange (Note 9) 100.00%
Centrex Plus (Note 9) 100.00%
Optional Calling Plans (Note 9) 100.00%
Volume Discount Plans (Note 9) 100.00%
Discounted Feature Packages (Note 9) 100.00%
Private Line Transport (Note 9) 100.00%
Business Basic Exchange 85.40%
PBX Trunks 85.40%
ISDN 85.40%
Advanced Communication Services 88.49%
Directory Listings (Premium and Privacy) 73.51%
Vertical Features 73.51%
IntraLATA Toll 76.95%
WATS 76.95%
</TABLE>
Notes
1 This price includes an amortization of USWC's reserve deficiency at
$0.0022 Per MOU. This reserve deficiency allocation is applicable for 5
years.
2 If required. No NRC applies to regeneration ordered concurrently with
an associated EICT element.
3 Zones per NECA 4 Tariff
4 Price pending the completion of an approved TELRIC Directory Assistance
Call Completion Cost Study
5 This charge applies when a CLEC requests ISDN capability on an
unbundled loop greater than 18 kft.
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<PAGE>
6 This charge applies when USWC must install a Network Interface Device
for a CLEC or when USWC must
connect a CLEC's loop to the USWC Network Interface
Device.
7 This charge applies only when loop unloading is necessary.
8 USWC disagrees with the FCC's position that vertical features -- which
are offered as finished retail services -- must be included as an
unbundled network element. If the state Commission decides to include
features in the unbundled switching elements, these costs must be
included in the per line price
9 USWC believes that the state Commission should establish the wholesale
rate for below cost services (e.g., RESIDENCE BASIC EXCHANGE SERVICE)
at 100% of the retail rate. USWC also believes that the Commission
should not further discount service packages and volume discount plans
since they are already provided at a wholesale rate.
PAGE 115
<PAGE>
EXHIBIT 10.16
IMMEDIATELY EXERCISABLE
RHYTHMS NETCONNECTIONS INC.
STOCK PURCHASE AGREEMENT
AGREEMENT made as of this _____ day of ____________, 19___, by and
among Rhythms NetConnections Inc., (the "Corporation"), ____________________,
the holder of a stock option (the "Optionee") under the Corporation's 1997
Stock Option/Stock Issuance Plan and ________________________, the Optionee's
spouse.
I. EXERCISE OF OPTION
1.1 EXERCISE. Optionee hereby purchases ____________ shares
("Purchased Shares") of the Corporation's common stock ("Common Stock")
pursuant to that certain option ("Option") granted Optionee on _____________,
19___ ("Grant Date") to purchase up to ____________ shares of the Common
Stock ("Total Purchasable Shares") under the Corporation's 1997 Stock
Option/Stock Issuance Plan (the "Plan") at an option price of $__________ per
share ("Option Price").
1.2 PAYMENT. Concurrently with the delivery of this Agreement to
the Corporate Secretary of the Corporation, Optionee shall pay the Option
Price for the Purchased Shares in accordance with the provisions of the
agreement between the Corporation and Optionee evidencing the Option (the
"Option Agreement") and shall deliver whatever additional documents may be
required by the Option Agreement as a condition for exercise, together with a
duly-executed blank Assignment Separate from Certificate (in the form
attached hereto as Exhibit I) with respect to the Purchased Shares.
1.3 DELIVERY OF CERTIFICATES. The certificates representing the
Purchased Shares hereunder shall be held in escrow by the Corporate Secretary
of the Corporation in accordance with the provisions of Article VII.
1.4 SHAREHOLDER RIGHTS. Until such time as the Corporation
actually exercises its repurchase right, rights of first refusal or special
purchase right under this Agreement, Optionee (or any successor in interest)
shall have all the rights of a shareholder (including voting and dividend
rights) with respect to the Purchased Shares, including the Purchased Shares
held in escrow under Article VII, subject, however, to the transfer
restrictions of Article IV.
II. SECURITIES LAW COMPLIANCE
2.1 EXEMPTION FROM REGISTRATION. The Purchased Shares have not
been registered under the Securities Act of 1933, as amended (the "1933
Act"), and are accordingly being issued to Optionee in reliance upon the
exemption from such registration provided by Rule 701 of the Securities and
Exchange Commission for stock issuances under compensatory benefit plans such
as the Plan. Optionee hereby acknowledges previous receipt of a copy of the
documentation for such Plan in the form of Exhibit C to the Notice of Grant
of Stock Option (the "Grant Notice") accompanying the Option Agreement.
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2.2 RESTRICTED SECURITIES.
A. Optionee hereby confirms that Optionee has been informed
that the Purchased Shares are restricted securities under the 1933 Act and
may not be resold or transferred unless the Purchased Shares are first
registered under the Federal securities laws or unless an exemption from such
registration is available. Accordingly, Optionee hereby acknowledges that
Optionee is prepared to hold the Purchased Shares for an indefinite period
and that Optionee is aware that Rule 144 of the Securities and Exchange
Commission issued under the 1933 Act is not presently available to exempt the
sale of the Purchased Shares from the registration requirements of the 1933
Act.
B. Upon the expiration of the ninety (90)-day period
immediately following the date on which the Corporation first becomes subject
to the reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Purchased Shares, to the extent vested
under Article V, may be sold (without registration) pursuant to the
applicable requirements of Rule 144. If Optionee is at the time of such sale
an affiliate of the Corporation for purposes of Rule 144 or was such an
affiliate during the preceding three (3) months, then the sale must comply
with all the requirements of Rule 144 (including the volume limitation on the
number of shares sold, the broker/market-maker sale requirement and the
requisite notice to the Securities and Exchange Commission); however, the two
(2)-year holding period requirement of the Rule will not be applicable. If
Optionee is not at the time of the sale an affiliate of the Corporation nor
was such an affiliate during the preceding three (3) months, then none of the
requirements of Rule 144 (other than the broker/market-maker sale requirement
for Purchased Shares held for less than three (3) years following payment in
cash of the Option Price therefor) will be applicable to the sale.
C. Should the Corporation not become subject to the
reporting requirements of the Exchange Act, then Optionee may, provided
he/she is not at the time an affiliate of the Corporation (nor was such an
affiliate during the preceding three (3) months), sell the Purchased Shares
(without registration) pursuant to paragraph (k) of Rule 144 after the
Purchased Shares have been held for a period of three (3) years following the
payment in cash of the Option Price for such shares.
2.3 DISPOSITION OF SHARES. Optionee hereby agrees that Optionee
shall make no disposition of the Purchased Shares (other than a permitted
transfer under paragraph 4.1) unless and until there is compliance with all
of the following requirements:
(a) Optionee shall have notified the Corporation of the
proposed disposition and provided a written summary of the terms and
conditions of the proposed disposition.
(b) Optionee shall have complied with all requirements of this
Agreement applicable to the disposition of the Purchased Shares.
(c) Optionee shall have provided the Corporation with written
assurances, in form and substance satisfactory to the Corporation, that
(i) the proposed disposition does not require registration of the
Purchased Shares under the 1933 Act or
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(ii) all appropriate action necessary for compliance with the registration
requirements of the 1933 Act or of any exemption from registration
available under the 1933 Act (including Rule 144) has been taken.
(d) Optionee shall have provided the Corporation with written
assurances, in form and substance satisfactory to the Corporation, that
the proposed disposition will not result in the contravention of any
transfer restrictions applicable to the Purchased Shares pursuant to the
provisions of the Commissioner Rules identified in paragraph 2.5.
The Corporation shall NOT be required (i) to transfer on its books
any Purchased Shares which have been sold or transferred in violation of the
provisions of this Article II NOR (ii) to treat as the owner of the Purchased
Shares, or otherwise to accord voting or dividend rights to, any transferee
to whom the Purchased Shares have been transferred in contravention of this
Agreement.
2.4 RESTRICTIVE LEGENDS. In order to reflect the restrictions on
disposition of the Purchased Shares, the stock certificates for the Purchased
Shares will be endorsed with restrictive legends, including one or more of
the following legends:
(i) "The shares represented by this certificate have not
been registered under the Securities Act of 1933. The shares may not be sold
or offered for sale in the absence of (a) an effective registration statement
for the shares under such Act, (b) a "no action" letter of the Securities and
Exchange Commission with respect to such sale or offer, or (c) satisfactory
assurances to the Corporation that registration under such Act is not
required with respect to such sale or offer."
(ii) "The shares represented by this certificate are
unvested and accordingly may not be sold, assigned, transferred, encumbered,
or in any manner disposed of except in conformity with the terms of a written
agreement dated ____________, 19 between the Corporation and the
registered holder of the shares (or the predecessor in interest to the
shares). Such agreement grants certain repurchase rights and rights of first
refusal to the Corporation (or its assignees) upon the sale, assignment,
transfer, encumbrance or other disposition of the Corporation's shares or
upon termination of service with the Corporation. The Corporation will upon
written request furnish a copy of such agreement to the holder hereof without
charge."
III. SPECIAL TAX ELECTION
3.1 SECTION 83(b) ELECTION APPLICABLE TO THE EXERCISE OF A
NON-STATUTORY STOCK OPTION. If the Purchased Shares are acquired hereunder
pursuant to the exercise of a NON-STATUTORY STOCK OPTION, as specified in the
Grant Notice, then the Optionee understands that under Section 83 of the
Internal Revenue Code of 1986, as amended (the "Code"), the excess of the
fair market value of the Purchased Shares on the date any forfeiture
restrictions applicable to such shares lapse over the Option Price paid for
such shares will be reportable as ordinary income on such lapse date. For
this purpose, the term "forfeiture restrictions" includes the right of the
Corporation to repurchase the Purchased Shares pursuant to the Repurchase
Right provided
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under Article V of this Agreement. Optionee understands that he/she may
elect under Section 83(b) of the Code to be taxed at the time the Purchased
Shares are acquired hereunder, rather than when and as such Purchased Shares
cease to be subject to such forfeiture restrictions. Such election must be
filed with the Internal Revenue Service within thirty (30) days after the
date of this Agreement. Even if the fair market value of the Purchased
Shares at the date of this Agreement equals the Option Price paid (and thus
no tax is payable), the election must be made to avoid adverse tax
consequences in the future. THE FORM FOR MAKING THIS ELECTION IS ATTACHED AS
EXHIBIT II HERETO. OPTIONEE UNDERSTANDS THAT FAILURE TO MAKE THIS FILING
WITHIN THE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY
INCOME BY THE OPTIONEE AS THE FORFEITURE RESTRICTIONS LAPSE.
3.2 CONDITIONAL SECTION 83(b) ELECTION APPLICABLE TO THE EXERCISE
OF AN INCENTIVE STOCK OPTION. If the Purchased Shares are acquired hereunder
pursuant to the exercise of an INCENTIVE STOCK OPTION under the Federal tax
laws, as specified in the Grant Notice, then the following tax principles
shall be applicable to the Purchased Shares:
A. For regular tax purposes, no taxable income will be
recognized at the time the Option is exercised.
B. The excess of (i) the fair market value of the Purchased
Shares on the date the Option is exercised or (if later) on the date any
forfeiture restrictions applicable to the Purchased Shares lapse over (ii)
the Option Price paid for the Purchased Shares will be includible in the
Optionee's taxable income for alternative minimum tax purposes.
C. If the Optionee makes a disqualifying disposition of the
Purchased Shares, then the Optionee will recognize ordinary income in the
year of such disposition equal in amount to the excess of (i) the fair market
value of the Purchased Shares on the date the Option is exercised or (if
later) on the date any forfeiture restrictions applicable to the Purchased
Shares lapse over (ii) the Option Price paid for the Purchased Shares. Any
additional gain recognized upon the disqualifying disposition will be either
short-term or long-term capital gain depending upon the period for which the
Purchased Shares are held prior to the disposition.
D. For purposes of the foregoing, the term "forfeiture
restrictions" will include the right of the Corporation to repurchase the
Purchased Shares pursuant to the Repurchase Right provided under Article V of
this Agreement. The term "disqualifying disposition" means any sale or other
disposition of the Purchased Shares within two (2) years after the Grant Date
or within one (1) year after the execution date of this Agreement.
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1 Generally, a disposition of shares purchased under an incentive stock
option includes any transfer of legal title, including a transfer by sale,
exchange or gift, but does not include a transfer to the Optionee's spouse, a
transfer into joint ownership with right of survivorship if Optionee remains
one of the joint owners, a pledge, a transfer by bequest or inheritance or
certain tax free exchanges permitted under the Code.
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E. In the absence of final Treasury Regulations relating to
incentive stock options, it is not certain whether the Optionee may, in
connection with the exercise of the Option for any Purchased Shares at the
time subject to forfeiture restrictions, file a protective election under
Section 83(b) of the Code which would limit (I) the Optionee's alternative
minimum taxable income upon exercise and (II) the Optionee's ordinary income
upon a disqualifying disposition, to the excess of (i) the fair market value
of the Purchased Shares on the date the Option is exercised over (ii) the
Option Price paid for the Purchased Shares. THE APPROPRIATE FORM FOR MAKING
SUCH A PROTECTIVE ELECTION IS ATTACHED AS EXHIBIT II TO THIS AGREEMENT AND
MUST BE FILED WITH THE INTERNAL REVENUE SERVICE WITHIN THIRTY (30) DAYS AFTER
THE DATE OF THIS AGREEMENT. HOWEVER, SUCH ELECTION IF PROPERLY FILED WILL
ONLY BE ALLOWED TO THE EXTENT THE FINAL TREASURY REGULATIONS PERMIT SUCH A
PROTECTIVE ELECTION.
3.3 OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE
RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER
SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE CORPORATION OR ITS
REPRESENTATIVES TO MAKE THIS FILING ON HIS/HER BEHALF. This filing should be
made by registered or certified mail, return receipt requested, and Optionee
must retain two (2) copies of the completed form for filing with his or her
State and Federal tax returns for the current tax year and an additional copy
for his or her records.
IV. TRANSFER RESTRICTIONS
4.1 RESTRICTION ON TRANSFER. Optionee shall not transfer, assign,
encumber or otherwise dispose of any of the Purchased Shares which are
subject to the Corporation's Repurchase Right under Article V. In addition,
Purchased Shares which are released from the Repurchase Right shall not be
transferred, assigned, encumbered or otherwise made the subject of
disposition in contravention of the Corporation's First Refusal Right under
Article VI. Such restrictions on transfer, however, shall NOT be applicable
to (i) a gratuitous transfer of the Purchased Shares made to the Optionee's
spouse or issue, including adopted children, or to a trust for the exclusive
benefit of the Optionee or the Optionee's spouse or issue, PROVIDED AND ONLY
IF the Optionee obtains the Corporation's prior written consent to such
transfer, (ii) a transfer of title to the Purchased Shares effected pursuant
to the Optionee's will or the laws of intestate succession or (iii) a
transfer to the Corporation in pledge as security for any purchase-money
indebtedness incurred by the Optionee in connection with the acquisition of
the Purchased Shares.
4.2 TRANSFEREE OBLIGATIONS. Each person (other than the
Corporation) to whom the Purchased Shares are transferred by means of one of
the permitted transfers specified in paragraph 4.1 must, as a condition
precedent to the validity of such transfer, acknowledge in writing to the
Corporation that such person is bound by the provisions of this Agreement and
that the transferred shares are subject to (i) both the Corporation's
Repurchase Right and the Corporation's First Refusal Right granted hereunder
and (ii) the market stand-off provisions of paragraph 4.4, to the same extent
such shares would be so subject if retained by the Optionee.
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4.3 DEFINITION OF OWNER. For purposes of Articles IV, V, VI and
VII and Section 9.4 of this Agreement, the term "Owner" shall include the
Optionee and all subsequent holders of the Purchased Shares who derive their
chain of ownership through a permitted transfer from the Optionee in
accordance with paragraph 4.1.
4.4 MARKET STAND-OFF PROVISIONS.
A. In connection with any underwritten public offering by
the Corporation of its equity securities pursuant to an effective
registration statement filed under the 1933 Act, including the Corporation's
initial public offering, Owner shall not sell, make any short sale of, loan,
hypothecate, pledge, grant any option for the purchase of, or otherwise
dispose or transfer for value or otherwise agree to engage in any of the
foregoing transactions with respect to, any Purchased Shares without the
prior written consent of the Corporation or its underwriters. Such
limitations shall be in effect for such period of time from and after the
effective date of such registration statement as may be requested by the
Corporation or such underwriters; PROVIDED, however, that in no event shall
such period exceed one hundred-eighty (180) days. The limitations of this
paragraph 4.4 shall remain in effect for the two-year period immediately
following the effective date of the Corporation's initial public offering and
shall thereafter terminate and cease to have any force or effect.
B. Owner shall be subject to the market stand-off provisions
of this paragraph 4.4 PROVIDED AND ONLY IF the officers and directors of the
Corporation are also subject to similar arrangements.
C. In the event of any stock dividend, stock split,
recapitalization or other change affecting the Corporation's outstanding
Common Stock effected as a class without receipt of consideration, then any
new, substituted or additional securities distributed with respect to the
Purchased Shares shall be immediately subject to the provisions of this
paragraph 4.4, to the same extent the Purchased Shares are at such time
covered by such provisions.
D. In order to enforce the limitations of this paragraph
4.4, the Corporation may impose stop-transfer instructions with respect to
the Purchased Shares until the end of the applicable stand-off period.
V. REPURCHASE RIGHT
5.1 GRANT. The Corporation is hereby granted the right (the
"Repurchase Right"), exercisable at any time during the sixty (60)-day period
following the date the Optionee ceases for any reason to remain in Service or
(if later) during the sixty (60)-day period following the execution date of
this Agreement, to repurchase at the Option Price all or (at the discretion
of the Corporation and with the consent of the Optionee) any portion of the
Purchased Shares in which the Optionee has not acquired a vested interest in
accordance with the vesting provisions of paragraph 5.3 (such shares to be
hereinafter called the "Unvested Shares"). For purposes of this Agreement,
the Optionee shall be deemed to remain in Service for so long as the Optionee
continues to render periodic services to the Corporation or any parent or
subsidiary corporation, whether as an employee, a non-employee member of the
board of directors, or an independent contractor or consultant.
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5.2 EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall
be exercisable by written notice delivered to the Owner of the Unvested
Shares prior to the expiration of the applicable sixty (60)-day period
specified in paragraph 5.1. The notice shall indicate the number of Unvested
Shares to be repurchased and the date on which the repurchase is to be
effected, such date to be not more than thirty (30) days after the date of
notice. To the extent one or more certificates representing Unvested Shares
may have been previously delivered out of escrow to the Owner, then Owner
shall, prior to the close of business on the date specified for the
repurchase, deliver to the Secretary of the Corporation the certificates
representing the Unvested Shares to be repurchased, each certificate to be
properly endorsed for transfer. The Corporation shall, concurrently with the
receipt of such stock certificates (either from escrow in accordance with
paragraph 7.3 or from Owner as herein provided), pay to Owner in cash or cash
equivalents (including the cancellation of any purchase-money indebtedness),
an amount equal to the Option Price previously paid for the Unvested Shares
which are to be repurchased.
5.3 TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right
shall terminate with respect to any Unvested Shares for which it is not
timely exercised under paragraph 5.2. In addition, the Repurchase Right
shall terminate, and cease to be exercisable, with respect to any and all
Purchased Shares in which the Optionee vests in accordance with the vesting
schedule specified in the Grant Notice. All Purchased Shares as to which the
Repurchase Right lapses shall, however, continue to be subject to (i) the
First Refusal Right of the Corporation and its assignees under Article VI,
(ii) the market stand-off provisions of paragraph 4.4 and (iii) the Special
Purchase Right under Article VIII.
5.4 AGGREGATE VESTING LIMITATION. If the Option is exercised in
more than one increment so that the Optionee is a party to one or more other
Stock Purchase Agreements ("Prior Purchase Agreements") which are executed
prior to the date of this Agreement, then the total number of Purchased
Shares as to which the Optionee shall be deemed to have a fully-vested
interest under this Agreement and all Prior Purchase Agreements shall not
exceed in the aggregate the number of Purchased Shares in which the Optionee
would otherwise at the time be vested, in accordance with the vesting
provisions of paragraph 5.3, had all the Purchased Shares been acquired
exclusively under this Agreement.
5.5 FRACTIONAL SHARES. No fractional shares shall be repurchased
by the Corporation. Accordingly, should the Repurchase Right extend to a
fractional share (in accordance with the vesting provisions of paragraph 5.3)
at the time the Optionee ceases Service, then such fractional share shall be
added to any fractional share in which the Optionee is at such time vested in
order to make one whole vested share no longer subject to the Repurchase
Right.
5.6 ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of
any stock dividend, stock split, recapitalization or other change affecting
the Corporation's outstanding Common Stock as a class effected without
receipt of consideration, then any new, substituted or additional securities
or other property (including money paid other than as a regular cash
dividend) which is by reason of any such transaction distributed with respect
to the Purchased Shares shall be immediately subject to the Repurchase Right,
but only to the extent the Purchased Shares are at the time covered by such
right. Appropriate adjustments to reflect the distribution of such
securities or property shall be made to the number of Purchased Shares and
Total Purchasable Shares hereunder and to the price per share to be paid upon
the exercise of the
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Repurchase Right in order to reflect the effect of any such transaction upon
the Corporation's capital structure; PROVIDED, however, that the aggregate
purchase price shall remain the same.
5.7 CORPORATE TRANSACTION.
A. The Repurchase Rights shall automatically terminate and
cease to be exercisable with respect to a portion of the Purchased Shares
upon the consummation of any Corporate Transaction, provided that such
repurchase right shall not terminate if and to the extent the repurchase
rights are assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction. The portion of the Purchased
Shares with respect to which the repurchase rights will terminate shall be a
number of Purchased Shares equal to the total number of Unvested Shares
immediately prior to the Corporate Transaction multiplied by a fraction, the
NUMERATOR of which is the number of complete months which elapsed after the
Vesting Commencement Date set forth in the Grant Notice and the date of the
Corporate Transaction, and the DENOMINATOR of which is the number of months
required under the Grant Notice for all of the Purchased Shares to become
fully vested. Any and all repurchase rights which will not be either
assigned or terminated at the time of the Corporate Transaction may be
exercised by the Company immediately prior to the Corporate Transaction.
B. Repurchase rights which are assigned in connection with a
Corporate Transaction shall be exercisable with respect to the property
issued to the Optionee upon consummation of such Corporate Transaction in
exchange for the Common Stock held by the Optionee subject to the repurchase
rights immediately prior to the Corporate Transaction.
C. Any Repurchase Rights which are assigned in a Corporate
Transaction and do not otherwise become vested at that time, shall
automatically terminate and cease to be exercisable in the event the
Optionee's Service should subsequently terminate by reason of an Involuntary
Termination within twenty-four (24) months following the effective date of
such Corporate Transaction.
D. This Agreement shall not in any way affect the right of
the Corporation to adjust, reclassify, reorganize or otherwise make changes
in its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
VI. RIGHT OF FIRST REFUSAL
6.1 GRANT. The Corporation is hereby granted rights of first
refusal (the "First Refusal Right"), exercisable in connection with any
proposed transfer of the Purchased Shares in which the Optionee has vested in
accordance with the vesting provisions of Article V. For purposes of this
Article VI, the term "transfer" shall include any sale, assignment, pledge,
encumbrance or other disposition for value of the Purchased Shares intended
to be made by the Owner, but shall not include any of the permitted transfers
under paragraph 4.1.
6.2 NOTICE OF INTENDED DISPOSITION. In the event the Owner
desires to accept a bona fide third-party offer for the transfer of any or
all of the Purchased Shares (the shares subject to such offer to be
hereinafter called the "Target Shares"), Owner shall promptly (i)
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deliver to the Corporate Secretary of the Corporation written notice (the
"Disposition Notice") of the terms and conditions of the offer, including the
purchase price and the identity of the third-party offeror, and (ii) provide
satisfactory proof that the disposition of the Target Shares to such
third-party offeror would not be in contravention of the provisions set forth
in Articles II and IV of this Agreement.
6.3 EXERCISE OF RIGHT. The Corporation shall, for a period of
forty-five (45) days following receipt of the Disposition Notice, have the
right to repurchase any or all of the Target Shares specified in the
Disposition Notice upon the same terms and conditions specified therein or
upon terms and conditions which do not materially vary from those specified
therein. Such right shall be exercisable by delivery of written notice (the
"Exercise Notice") to Owner prior to the expiration of the forty-five
(45)-day exercise period. If such right is exercised with respect to all the
Target Shares specified in the Disposition Notice, then the Corporation (or
its assignees) shall effect the repurchase of the Target Shares, including
payment of the purchase price, not more than ten (10) business days after
delivery of the Exercise Notice; and at such time Owner shall deliver to the
Corporation the certificates representing the Target Shares to be
repurchased, each certificate to be properly endorsed for transfer. To the
extent any of the Target Shares are at the time held in escrow under Article
VII, the certificates for such shares shall automatically be released from
escrow and delivered to the Corporation for purchase. Should the purchase
price specified in the Disposition Notice be payable in property other than
cash or evidences of indebtedness, the Corporation (or its assignees) shall
have the right to pay the purchase price in the form of cash equal in amount
to the value of such property. If the Owner and the Corporation (or its
assignees) cannot agree on such cash value within ten (10) days after the
Corporation's receipt of the Disposition Notice, the valuation shall be made
by an appraiser of recognized standing selected by the Owner and the
Corporation (or its assignees) or, if they cannot agree on an appraiser
within twenty (20) days after the Corporation's receipt of the Disposition
Notice, each shall select an appraiser of recognized standing and the two
appraisers shall designate a third appraiser of recognized standing, whose
appraisal shall be determinative of such value. The cost of such appraisal
shall be shared equally by the Owner and the Corporation. The closing shall
then be held on the LATER of (i) the tenth business day following delivery of
the Exercise Notice or (ii) the tenth business day after such cash valuation
shall have been made.
6.4 NON-EXERCISE OF RIGHT. In the event the Exercise Notice is
not given to Owner within forty-five (45) days following the date of the
Corporation's receipt of the Disposition Notice, Owner shall have a period of
thirty (30) days thereafter in which to sell or otherwise dispose of the
Target Shares to the third-party offeror identified in the Disposition Notice
upon terms and conditions (including the purchase price) no more favorable to
such third-party offeror than those specified in the Disposition Notice;
PROVIDED, however, that any such sale or disposition must not be effected in
contravention of the provisions of Article II of this Agreement. To the
extent any of the Target Shares are at the time held in escrow under Article
VII, the certificates for such shares shall automatically be released from
escrow and surrendered to the Owner. The third-party offeror shall acquire
the Target Shares free and clear of the Corporation's Repurchase Right under
Article V and the Corporation's First Refusal Right hereunder, but the
acquired shares shall remain subject to (i) the securities law restrictions
of paragraph 2.2(a) and (ii) the market stand-off provisions of paragraph
4.4. In the event Owner
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does not effect such sale or disposition of the Target Shares within the
specified thirty (30)-day period, the Corporation's First Refusal Right shall
continue to be applicable to any subsequent disposition of the Target Shares
by Owner until such right lapses in accordance with paragraph 6.7.
6.5 PARTIAL EXERCISE OF RIGHT. In the event the Corporation (or
its assignees) makes a timely exercise of the First Refusal Right with
respect to a portion, but not all, of the Target Shares specified in the
Disposition Notice, Owner shall have the option, exercisable by written
notice to the Corporation delivered within thirty (30) days after the date of
the Disposition Notice, to effect the sale of the Target Shares pursuant to
one of the following alternatives:
(i) sale or other disposition of all the Target Shares to
the third-party offeror identified in the Disposition Notice, but in full
compliance with the requirements of paragraph 6.4, as if the Corporation
did not exercise the First Refusal Right hereunder; or
(ii) sale to the Corporation (or its assignees) of the
portion of the Target Shares which the Corporation (or its assignees) has
elected to purchase, such sale to be effected in substantial conformity
with the provisions of paragraph 6.3.
Failure of Owner to deliver timely notification to the Corporation
under this paragraph 6.5 shall be deemed to be an election by Owner to sell
the Target Shares pursuant to alternative (i) above.
6.6 RECAPITALIZATION/MERGER.
(a) In the event of any stock dividend, stock split,
recapitalization or other transaction affecting the Corporation's
outstanding Common Stock as a class effected without receipt of
consideration, then any new, substituted or additional securities or other
property which is by reason of such transaction distributed with respect
to the Purchased Shares shall be immediately subject to the Corporation's
First Refusal Right hereunder, but only to the extent the Purchased Shares
are at the time covered by such right.
(b) In the event of any of the following transactions:
(i) a merger or consolidation in which the
Corporation is not the surviving entity,
(ii) a sale, transfer or other disposition of all or
substantially all of the Corporation's assets,
(iii) a reverse merger in which the Corporation is
the surviving entity but in which the Corporation's outstanding voting
securities are transferred in whole or in part to person or persons other
than those who held such securities immediately prior to the merger, or
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(iv) any transaction effected primarily to change the
State in which the Corporation is incorporated, or to create a holding
company structure,
the Corporation's First Refusal Right shall remain in
full force and effect and shall apply to the new capital stock or other
property received in exchange for the Purchased Shares in consummation of the
transaction but only to the extent the Purchased Shares are at the time
covered by such right.
6.7 LAPSE. The First Refusal Right under this Article VI shall
lapse and cease to have effect upon the EARLIEST to occur of (i) the first
date on which shares of the Corporation's Common Stock are held of record by
more than five hundred (500) persons, (ii) a determination is made by the
Corporation's Board of Directors that a public market exists for the
outstanding shares of the Corporation's Common Stock, or (iii) a firm
commitment underwritten public offering pursuant to an effective registration
statement under the 1933 Act, covering the offer and sale of the
Corporation's Common Stock in the aggregate amount of at least $20,000,000.
However, the market stand-off provisions of paragraph 4.4 shall continue to
remain in full force and effect following the lapse of the First Refusal
Right hereunder.
VII. ESCROW
7.1 DEPOSIT. Upon issuance, the certificates for any Unvested
Shares purchased hereunder shall be deposited in escrow with the Corporate
Secretary of the Corporation to be held in accordance with the provisions of
this Article VII. Each deposited certificate shall be accompanied by a
duly-executed Assignment Separate from Certificate in the form of Exhibit I.
The deposited certificates, together with any other assets or securities from
time to time deposited with the Corporate Secretary pursuant to the
requirements of this Agreement, shall remain in escrow until such time or
times as the certificates (or other assets and securities) are to be released
or otherwise surrendered for cancellation in accordance with paragraph 7.3.
Upon delivery of the certificates (or other assets and securities) to the
Corporate Secretary of the Corporation, the Owner shall be issued an
instrument of deposit acknowledging the number of Unvested Shares (or other
assets and securities) delivered in escrow.
7.2 RECAPITALIZATION. All regular cash dividends on the Unvested
Shares (or other securities at the time held in escrow) shall be paid
directly to the Owner and shall not be held in escrow. However, in the event
of any stock dividend, stock split, recapitalization or other change
affecting the Corporation's outstanding Common Stock as a class effected
without receipt of consideration or in the event of a Corporate Transaction,
any new, substituted or additional securities or other property which is by
reason of such transaction distributed with respect to the Unvested Shares
shall be immediately delivered to the Corporate Secretary to be held in
escrow under this Article VII, but only to the extent the Unvested Shares are
at the time subject to the escrow requirements of paragraph 7.1.
7.3 RELEASE/SURRENDER. The Unvested Shares, together with any
other assets or securities held in escrow hereunder, shall be subject to the
following terms and conditions relating to their release from escrow or their
surrender to the Corporation for repurchase and cancellation:
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(i) Should the Corporation (or its assignees) elect to
exercise the Repurchase Right under Article V with respect to any Unvested
Shares, then the escrowed certificates for such Unvested Shares (together
with any other assets or securities issued with respect thereto) shall be
delivered to the Corporation concurrently with the payment to the Owner,
in cash or cash equivalent (including the cancellation of any purchase-
money indebtedness), of an amount equal to the aggregate Option Price for
such Unvested Shares, and the Owner shall cease to have any further rights
or claims with respect to such Unvested Shares (or other assets or
securities attributable to such Unvested Shares).
(ii) Should the Corporation (or its assignees) elect to
exercise its First Refusal Right under Article VI with respect to any
vested Target Shares held at the time in escrow hereunder, then the
escrowed certificates for such Target Shares (together with any other
assets or securities attributable thereto) shall, concurrently with the
payment of the paragraph 6.3 purchase price for such Target Shares to the
Owner, be surrendered to the Corporation, and the Owner shall cease to
have any further rights or claims with respect to such Target Shares (or
other assets or securities).
(iii) Should the Corporation (or its assignees) elect
NOT to exercise its First Refusal Right under Article VI with respect to
any Target Shares held at the time in escrow hereunder, then the escrowed
certificates for such Target Shares (together with any other assets or
securities attributable thereto) shall be surrendered to the Owner for
disposition in accordance with provisions of paragraph 6.4.
(iv) As the interest of the Optionee in the Unvested
Shares or any other assets or securities attributable thereto) vests in
accordance with the provisions of Article V, the certificates for such
vested shares (as well as all other vested assets and securities) shall be
released from escrow and delivered to the Owner in accordance with the
following schedule:
a. The initial release of vested shares (or
other vested assets and securities) from escrow shall be effected
within thirty (30) days following the expiration of the initial
twelve (12)-month period measured from the Grant Date.
b. Subsequent releases of vested shares (or
other vested assets and securities) from escrow shall be effected at
semi-annual intervals thereafter, with the first such semi-annual
release to occur eighteen (18) months after the Grant Date.
c. Upon the Optionee's cessation of Service,
any escrowed Purchased Shares (or other assets or securities) in
which the Optionee is at the time vested shall be promptly released
from escrow.
d. Upon any earlier termination of the
Corporation's Repurchase Right in accordance with the applicable
provisions of Article V, any Purchased Shares (or other assets or
securities) at the time held in escrow
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hereunder shall promptly be released to the Owner as fully-vested
shares or other property.
(v) All Purchased Shares (or other assets or securities)
released from escrow in accordance with the provisions of subparagraph
(iv) above shall nevertheless remain subject to (I) the Corporation's
First Refusal Right under Article VI until such right lapses pursuant to
paragraph 6.7, (II) the market stand-off provisions of paragraph 4.4 until
such provisions terminate in accordance therewith and (III) the Special
Purchase Right under Article VIII.
VIII. MARITAL DISSOLUTION OR LEGAL SEPARATION
8.1 GRANT. In connection with the dissolution of the Optionee's
marriage or the legal separation of the Optionee and the Optionee's spouse,
the Corporation shall have the right (the "Special Purchase Right"),
exercisable at any time during the thirty (30)-day period following the
Corporation's receipt of the required Dissolution Notice under paragraph 8.2,
to purchase from the Optionee's spouse, in accordance with the provisions of
paragraph 8.3, all or any portion of the Purchased Shares which would
otherwise be awarded to such spouse in settlement of any community property
or other marital property rights such spouse may have in such shares.
8.2 NOTICE OF DECREE OR AGREEMENT. The Optionee shall promptly
provide the Secretary of the Corporation with written notice (the
"Dissolution Notice") of (i) the entry of any judicial decree or order
resolving the property rights of the Optionee and the Optionee's spouse in
connection with their marital dissolution or legal separation or (ii) the
execution of any contract or agreement relating to the distribution or
division of such property rights. The Dissolution Notice shall be accompanied
by a copy of the actual decree of dissolution or settlement agreement between
the Optionee and the Optionee's spouse which provides for the award to the
spouse of one or more Purchased Shares in settlement of any community
property or other marital property rights such spouse may have in such shares.
8.3 EXERCISE OF SPECIAL PURCHASE RIGHT. The Special Purchase
Right shall be exercisable by delivery of written notice (the "Purchase
Notice") to the Optionee and the Optionee's spouse within thirty (30) days
after the Corporation's receipt of the Dissolution Notice. The Purchase
Notice shall indicate the number of shares to be purchased by the
Corporation, the date such purchase is to be effected (such date to be not
less than five (5) business days, nor more than ten (10) business days, after
the date of the Purchase Notice), and the fair market value to be paid for
such Purchased Shares. The Optionee (or the Optionee's spouse, to the extent
such spouse has physical possession of the Purchased Shares) shall, prior to
the close of business on the date specified for the purchase, deliver to the
Corporate Secretary of the Corporation the certificates representing the
shares to be purchased, each certificate to be properly endorsed for
transfer. To the extent any of the shares to be purchased by the Corporation
are at the time held in escrow under Article VII, the certificates for such
shares shall be promptly delivered out of escrow to the Corporation. The
Corporation shall, concurrently with the receipt of the stock certificates,
pay to the Optionee's spouse (in cash or cash equivalents) an amount equal to
the fair market value specified for such shares in the Purchase Notice.
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If the Optionee's spouse does not agree with the fair market
value specified for the shares in the Purchase Notice, then the spouse shall
promptly notify the Corporation in writing of such disagreement and the fair
market value of such shares shall thereupon be determined by an appraiser of
recognized standing selected by the Corporation and the spouse. If they
cannot agree on an appraiser within twenty (20) days after the date of the
Purchase Notice, each shall select an appraiser of recognized standing, and
the two appraisers shall designate a third appraiser of recognized standing
whose appraisal shall be determinative of such value. The cost of the
appraisal shall be shared equally by the Corporation and the Optionee's
spouse. The closing shall then be held on the fifth business day following
the completion of such appraisal; PROVIDED, however, that if the appraised
value is more than fifteen percent (15%) greater than the fair market value
specified for the shares in the Purchase Notice, the Corporation shall have
the right, exercisable prior to the expiration of such five (5)-business-day
period, to rescind the exercise of the Special Purchase Right and thereby
revoke its election to purchase the shares awarded to the spouse.
8.4 LAPSE. The Special Purchase Right under this Article VIII
shall lapse and cease to have effect upon the EARLIER to occur of (i) the
first date on which the First Refusal Right under Article VI lapses or (ii)
the expiration of the thirty (30)-day exercise period specified in paragraph
8.3, to the extent the Special Purchase Right is not timely exercised in
accordance with such paragraph.
IX. GENERAL PROVISIONS
9.1 ASSIGNMENT. The Corporation may assign its Repurchase Right
under Article V, its First Refusal Right under Article VI and/or its Special
Purchase Right under Article VIII to any person or entity selected by the
Corporation's Board of Directors, including (without limitation) one or more
shareholders of the Corporation.
If the assignee of the Repurchase Right is other than a one
hundred percent (100%) owned subsidiary corporation of the Corporation or the
parent corporation owning one hundred percent (100%) of the Corporation, then
such assignee must make a cash payment to the Corporation, upon the
assignment of the Repurchase Right, in an amount equal to the excess (if any)
of (i) the fair market value of the Unvested Shares at the time subject to
the assigned Repurchase Right over (ii) the aggregate repurchase price
payable for the Unvested Shares thereunder.
9.2 DEFINITIONS. For purposes of this Agreement, the following
provisions shall be applicable in determining the parent and subsidiary
corporations of the Corporation:
(i) Any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation shall be
considered to be a parent corporation of the Corporation, provided each
such corporation in the unbroken chain (other than the Corporation) owns,
at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
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(ii) Each corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation shall be
considered to be a subsidiary of the Corporation, provided each such
corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
9.3 NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement
or in the Plan shall confer upon the Optionee any right to continue in the
Service of the Corporation (or any parent or subsidiary corporation of the
Corporation employing or retaining Optionee) for any period of specific
duration or interfere with or otherwise restrict in any way the rights of the
Corporation (or any parent or subsidiary corporation of the Corporation
employing or retaining Optionee) or the Optionee, which rights are hereby
expressly reserved by each, to terminate the Optionee's Service at any time
for any reason whatsoever, with or without cause.
9.4 CERTAIN POOLING TRANSACTIONS. In the event that the Board of
Directors of the Corporation and holders of a majority of the Common Stock
issuable or issued upon conversion of the Series A Preferred Stock of the
Corporation vote in favor of a Pooling Corporate Transaction (as defined
below), each Optionee and Owner hereby agrees not to take any action
inconsistent with the pooling-of-interest accounting treatment to the extent
applicable to such Pooling Corporate Transaction, as reasonably deemed
necessary by the Corporation's Board of Directors. For purposes of this
Section 9.4, Pooling Corporate Transaction shall mean the acquisition of the
Corporation by another entity by means of any transaction or series of
related transactions (including, without limitation, any reorganization,
merger or consolidation) that results in the transfer of fifty percent (50%)
or more of the outstanding voting power of the Corporation.
9.5 NOTICES. Any notice required in connection with (i) the
Repurchase Right, the Special Purchase Right or the First Refusal Right or
(ii) the disposition of any Purchased Shares covered thereby shall be given
in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States mail, registered or certified, postage prepaid
and addressed to the party entitled to such notice at the address indicated
below such party's signature line on this Agreement or at such other address
as such party may designate by ten (10) days advance written notice under
this paragraph 9.4 to all other parties to this Agreement.
9.6 NO WAIVER. The failure of the Corporation (or its assignees)
in any instance to exercise the Repurchase Right granted under Article V, or
the failure of the Corporation (or its assignees) in any instance to exercise
the First Refusal Right granted under Article VI, or the failure of the
Corporation (or its assignees) in any instance to exercise the Special
Purchase Right granted under Article VIII shall not constitute a waiver of
any other repurchase rights and/or rights of first refusal that may
subsequently arise under the provisions of this Agreement or any other
agreement between the Corporation and the Optionee or the Optionee's spouse.
No waiver of any breach or condition of this Agreement shall be deemed to be
a waiver of any other or subsequent breach or condition, whether of like or
different nature.
9.7 CANCELLATION OF SHARES. If the Corporation (or its assignees)
shall make available, at the time and place and in the amount and form
provided in this Agreement, the
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consideration for the Purchased Shares to be repurchased in accordance with
the provisions of this Agreement, then from and after such time, the person
from whom such shares are to be repurchased shall no longer have any rights
as a holder of such shares (other than the right to receive payment of such
consideration in accordance with this Agreement), and such shares shall be
deemed purchased in accordance with the applicable provisions hereof and the
Corporation (or its assignees) shall be deemed the owner and holder of such
shares, whether or not the certificates therefor have been delivered as
required by this Agreement.
X. MISCELLANEOUS PROVISIONS
10.1 OPTIONEE UNDERTAKING. Optionee hereby agrees to take whatever
additional action and execute whatever additional documents the Corporation
may in its judgment deem necessary or advisable in order to carry out or
effect one or more of the obligations or restrictions imposed on either the
Optionee or the Purchased Shares pursuant to the express provisions of this
Agreement.
10.2 AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the
entire contract between the parties hereto with regard to the subject matter
hereof. This Agreement is made pursuant to the provisions of the Plan and
shall in all respects be construed in conformity with the express terms and
provisions of the Plan.
10.3 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California, as such
laws are applied to contracts entered into and performed in such State
without resort to that State's conflict-of-laws rules.
10.4 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which together
shall constitute one and the same instrument.
10.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement
shall inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and the Optionee and the Optionee's legal
representatives, heirs, legatees, distributees, assigns and transferees by
operation of law, whether or not any such person shall have become a party to
this Agreement and have agreed in writing to join herein and be bound by the
terms and conditions hereof.
10.6 POWER OF ATTORNEY. Optionee's spouse hereby appoints Optionee
his or her true and lawful attorney in fact, for him or her and in his or her
name, place and stead, and for his or her use and benefit, to agree to any
amendment or modification of this Agreement and to execute such further
instruments and take such further actions as may reasonably be necessary to
carry out the intent of this Agreement. Optionee's spouse further gives and
grants unto Optionee as his or her attorney in fact full power and authority
to do and perform every act necessary and proper to be done in the exercise
of any of the foregoing powers as fully as he or she might or could do if
personally present, with full power of substitution and revocation, hereby
ratifying and confirming all that Optionee shall lawfully do and cause to be
done by virtue of this power of attorney.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first indicated above.
RHYTHMS NETCONNECTIONS INC.
By:
Title:____________________________________
Address:
__________________________________________
__________________________________________
__________________________________________
Optionee*
Address:__________________________________________
__________________________________________
The undersigned spouse of Optionee has read and hereby approves the
foregoing Stock Purchase Agreement. In consideration of the Corporation's
granting the Optionee the right to acquire the Purchased Shares in accordance
with the terms of such Agreement, the undersigned hereby agrees to be
irrevocably bound by all the terms and provisions of such Agreement,
including (specifically) the right of the Corporation (or its assignees) to
purchase any and all interest or right the undersigned may otherwise have in
such shares pursuant to community property laws or other marital property
rights.
__________________________________________
Optionee's Spouse
Address:
__________________________________________
__________________________________________
- --------------
* I have executed the Section 83(b) election that was attached hereto as an
Exhibit. As set forth in Article III, I understand that I, and NOT the
Corporation, will be responsible for completing the form and filing the
election with the appropriate office of the Federal and State tax authorities
and that if such filing is not completed within thirty (30) days after the
date of this Agreement, I will not be entitled to the tax benefits provided
by Section 83(b).
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<PAGE>
EXHIBIT I
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED _____________________ hereby sell(s), assign(s)
and transfer(s) unto Rhythms NetConnections Inc. (the "Corporation"),
_____________________ (____________) shares of the Common Stock of the
Corporation standing in his\her name on the books of the Corporation
represented by Certificate No. _________________ and do hereby irrevocably
constitute and appoint ________________________ as Attorney to transfer the
said stock on the books of the Corporation with full power of substitution in
the premises.
Dated: ________________________
Signature____________________________________
INSTRUCTION: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Corporation to exercise its
Repurchase Right set forth in the Agreement without requiring additional
signatures on the part of the Optionee.
<PAGE>
REPURCHASE RIGHTS
EXHIBIT II
SECTION 83(b) TAX ELECTION
This statement is being made under Section 83(b) of the Internal Revenue Code,
pursuant to Treas. Reg. Section 1.83-2.
(1) The taxpayer who performed the services is:
Name:
Address:
Taxpayer Ident. No.:
(2) The property with respect to which the election is being made is _________
shares of the common stock of Rhythms NetConnections Inc.
(3) The property was issued on ____________, 19___.
(4) The taxable year in which the election is being made is the calendar
year 19__.
(5) The property is subject to a repurchase right pursuant to which the issuer
has the right to acquire the property at the original purchase price if for
any reason taxpayer's employment with the issuer is terminated. The
issuer's repurchase right lapses in a series of annual and monthly
installments over a four year period ending on ____________, 19___.
(6) The fair market value at the time of transfer (determined without regard
to any restriction other than a restriction which by its terms will never
lapse) is $____________ per share.
(7) The amount paid for such property is $____________ per share.
(8) A copy of this statement was furnished to Rhythms NetConnections Inc. for
whom taxpayer rendered the services underlying the transfer of property.
(9) This statement is executed as of: ________________________.
__________________________ _____________________________
Spouse (if any) Taxpayer
This form must be filed with the Internal Revenue Service Center with which
taxpayer files his/her Federal income tax returns. The filing must be made
within 30 days after the execution date of the Stock Purchase Agreement.
<PAGE>
SPECIAL PROTECTIVE ELECTION PURSUANT TO SECTION 83(b)
OF THE INTERNAL REVENUE CODE WITH RESPECT TO PROPERTY
ACQUIRED UPON EXERCISE OF AN INCENTIVE STOCK OPTION
The property described in the above Section 83(b) election is comprised of
shares of common stock acquired pursuant to the exercise of an incentive
stock option under Section 422 of the Code. Accordingly, it is the intent of
the Taxpayer to utilize this election to achieve the following tax results:
1. The purpose of this election is to have the alternative
minimum taxable income attributable to the purchased shares measured by the
amount by which the fair market value of such shares at the time of their
transfer to the Taxpayer exceeds the purchase price paid for the shares. In
the absence of this election, such alternative minimum taxable income would
be measured by the spread between the fair market value of the purchased
shares and the purchase price which exists on the various lapse dates in
effect for the forfeiture restrictions applicable to such shares. The
election is to be effective to the full extent permitted under the Internal
Revenue Code.
2. Section 421(a)(1) of the Code expressly excludes from income
any excess of the fair market value of the purchased shares over the amount
paid for such shares. Accordingly, this election is also intended to be
effective in the event there is a "disqualifying disposition" of the shares,
within the meaning of Section 421(b) of the Code, which would otherwise
render the provisions of Section 83(a) of the Code applicable at that time.
Consequently, the Taxpayer hereby elects to have the amount of disqualifying
disposition income measured by the excess of the fair market value of the
purchased shares on the date of transfer to the Taxpayer over the amount paid
for such shares. Since Section 421(a) presently applies to the shares which
are the subject of this Section 83(b) election, no taxable income is actually
recognized for regular tax purposes at this time, and no income taxes are
payable, by the Taxpayer as a result of this election.
This form should be filed with the Internal Revenue Service Center with which
taxpayer files his/her Federal income tax returns. The filing must be made
within 30 days after the execution date of the Stock Purchase Agreement.
NOTE: PAGE 2 SHOULD BE ATTACHED ONLY IF YOU ARE
EXERCISING AN INCENTIVE STOCK OPTION.
<PAGE>
RHYTHMS NETCONNECTIONS INC.
STOCK OPTION AGREEMENT
RECITALS
A. The Board of Directors of the Corporation has adopted the
Rhythms NetConnections Inc. 1997 Stock Option/Stock Issuance Plan (the "Plan")
for the purpose of attracting and retaining the services of persons who
contribute to the growth and financial success of the Corporation.
B. Optionee is a person who the Plan Administrator believes has and
will contribute to the growth and financial success of the Corporation and this
Agreement is executed pursuant to and is intended to carry out the purposes of
the Plan.
AGREEMENT
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. Subject to and upon the terms and conditions set
forth in this Agreement, the Corporation hereby grants to Optionee, as of the
grant date (the "Grant Date") specified in the accompanying Notice of Grant of
Stock Option (the "Grant Notice"), a stock option to purchase up to that number
of shares of the Corporation's Common Stock (the "Option Shares") as is
specified in the Grant Notice. The Option Shares shall be purchasable from
time to time during the option term at the option price per share (the "Option
Price") specified in the Grant Notice. Capitalized terms used herein which are
not otherwise defined shall have the meaning ascribed to such terms in the
Plan.
2. OPTION TERM. This option shall have a maximum term of ten (10) years
measured from the Grant Date and shall expire at the close of business on the
expiration date (the "Expiration Date") specified in the Grant Notice, unless
sooner terminated in accordance with Paragraph 5, 6 or 17.
3. LIMITED TRANSFERABILITY. This option shall be neither transferable
nor assignable by Optionee other than by will or by the laws of descent and
distribution following Optionee's death and may be exercised, during Optionee's
lifetime, only by Optionee.
4. DATES OF EXERCISE. This option may not be exercised in whole or in
part at any time prior to the time the Plan is approved by the Corporation's
shareholders in accordance with Paragraph 17. Provided such shareholder
approval is obtained, this option shall thereupon become exercisable for the
Option Shares in one or more installments as is specified in the Grant Notice.
As the option becomes exercisable in one or more installments, the installments
shall accumulate and the option shall remain exercisable for such installments
until the Expiration Date or the sooner termination of the option term under
Paragraph 5 or Paragraph 6 of this Agreement.
<PAGE>
5. SPECIAL TERMINATION OF OPTION TERM. The option term specified in
Paragraph 2 shall terminate (and this option shall cease to be exercisable)
prior to the Expiration Date should any of the following provisions become
applicable:
(i) Except as otherwise provided in subparagraph (ii) or
(iii) below, should Optionee cease to remain in Service while this option
is outstanding, then the period for exercising this option shall be
reduced to a three (3)-month period commencing with the date of such
cessation of Service, but in no event shall this option be exercisable at
any time after the Expiration Date. Upon the expiration of such three (3)-
month period or (if earlier) upon the Expiration Date, this option shall
terminate and cease to be outstanding.
(ii) Should Optionee die while this option is outstanding,
then the personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the law of descent and distribution shall have the
right to exercise this option. Such right shall lapse and this option
shall cease to be exercisable upon the EARLIER of (A) the expiration of
the twelve (12) month period measured from the date of Optionee's death or
(B) the Expiration Date. Upon the expiration of such twelve (12) month
period or (if earlier) upon the Expiration Date, this option shall
terminate and cease to be outstanding.
(iii) Should Optionee become permanently disabled and
cease by reason thereof to remain in Service while this option is
outstanding, then the Optionee shall have a period of twelve (12) months
(commencing with the date of such cessation of Service) during which to
exercise this option, but in no event shall this option be exercisable at
any time after the Expiration Date. Optionee shall be deemed to be
permanently disabled if Optionee is unable to engage in any substantial
gainful activity for the Corporation or the parent or subsidiary
corporation retaining his/her services by reason of any medically
determinable physical or mental impairment, which can be expected to
result in death or which has lasted or can be expected to last for a
continuous period of not less than twelve (12) months. Upon the
expiration of such limited period of exercisability or (if earlier) upon
the Expiration Date, this option shall terminate and cease to be
outstanding.
(iv) During the limited period of exercisability applicable
under subparagraph (i), (ii) or (iii) above, this option may be exercised
for any or all of the Option Shares for which this option is, at the time
of the Optionee's cessation of Service, exercisable in accordance with the
exercise schedule specified in the Grant Notice and the provisions of
Paragraph 6 of this Agreement.
(v) For purposes of this Paragraph 5 and for all other
purposes under this Agreement:
A. The Optionee shall be deemed to remain in SERVICE for so long as
the Optionee continues to render periodic services to the Corporation or any
parent or subsidiary corporation, whether as an Employee, a non-employee member
of the board of directors, or an independent contractor or consultant.
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B. The Optionee shall be deemed to be an EMPLOYEE of the
Corporation and to continue in the Corporation's employ for so long as the
Optionee remains in the employ of the Corporation or one or more of its parent
or subsidiary corporations, subject to the control and direction of the
employer entity as to both the work to be performed and the manner and method
of performance.
C. A corporation shall be considered to be a SUBSIDIARY corporation
of the Corporation if it is a member of an unbroken chain of corporations
beginning with the Corporation, provided each such corporation in the chain
(other than the last corporation) owns, at the time of determination, stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
D. A corporation shall be considered to be a PARENT corporation of
the Corporation if it is a member of an unbroken chain ending with the
Corporation, provided each such corporation in the chain (other than the
Corporation) owns, at the time of determination, stock possessing 50% or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
6. EFFECT OF CORPORATE TRANSACTION.
A. Optionee shall automatically vest with respect to a portion of
the Option Shares in the event of a Corporate Transaction so that such portion
shall, immediately prior to the effective date of the Corporate Transaction,
become fully exercisable for vested shares of Common Stock, provided that no
Option Shares shall automatically vest in full if and to the extent: (i) this
option is, in connection with the Corporate Transaction, either to be assumed
by the successor corporation (or parent thereof) or to be replaced with a
comparable option to purchase shares of the capital stock of the successor
corporation (or parent thereof), or (ii) such option is to be replaced with a
cash incentive program of the successor corporation which preserves the spread
existing on the unvested option shares at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same vesting schedule
applicable to those option shares. The determination of option comparability
under clause (i) above shall be made by the Plan Administrator, and its
determination shall be final, binding and conclusive. The portion of the
Option Shares which will automatically vest hereunder shall be a number of
shares equal to the number of unvested Option Shares immediately prior to the
Corporate Transaction multiplied by a fraction, the NUMERATOR of which is the
number of complete months of which elapsed after the Vesting Commencement Date
set forth in the Grant Notice and the date of the Corporate Transaction, and
the DENOMINATOR of which is the number of months required under the Grant
Notice for the rights of Optionee to become fully vested.
B. To the extent not previously exercised, this Option shall
terminate and cease to be exercisable upon the consummation of a Corporate
Transaction unless it is expressly assumed by the successor corporation or
parent thereof.
C. Option Shares available under any options which are assumed or
replaced in the Corporate Transaction and do not otherwise accelerate at that
time, shall automatically vest in full in the event the Optionee's Service
should subsequently terminated by reason of an Involuntary Termination within
twenty-four (24) months following the effective date of such
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Corporate Transaction. Any options so accelerated shall remain exercisable for
fully-vested shares until the EARLIER of (i) the expiration of the option term
or (ii) the expiration of the one (1)-year period measured from the effective
date of the Involuntary Termination.
D. This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise make changes in its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
7. EFFECT OF HOSTILE CHANGE IN CONTROL.
In the event of any Hostile Change in Control, Optionee shall
automatically vest in full with respect to all Option Shares so that each such
option shall, immediately prior to the effective date of the Hostile Change in
Control, be fully exercisable for any or all of Option Shares as fully-vested
shares of Common Stock.
8. ADJUSTMENT IN OPTION SHARES.
A. In the event any change is made to the Corporation's outstanding
Common Stock by reason of any stock split, stock dividend, combination of
shares, exchange of shares, or other change affecting the outstanding Common
Stock as a class without receipt of consideration, then appropriate adjustments
shall be made to (i) the total number of Option Shares subject to this option,
(ii) the number of Option Shares for which this option is to be exercisable
from and after each installment date specified in the Grant Notice and (iii)
the Option Price payable per share in order to reflect such change and thereby
preclude a dilution or enlargement of benefits hereunder.
B. If this option is to be assumed in connection with a Corporate
Transaction described in Paragraph 6 or is otherwise to remain outstanding,
then this option shall be appropriately adjusted, immediately after such
Corporate Transaction, to apply and pertain to the number and class of
securities which would have been issuable to the Optionee in the consummation
of such Corporate Transaction had the option been exercised immediately prior
to such Corporate Transaction, and appropriate adjustments shall also be made
to the Option Price payable per share, PROVIDED the aggregate Option Price
payable hereunder shall remain the same.
9. PRIVILEGE OF STOCK OWNERSHIP. The holder of this option shall not
have any of the rights of a shareholder with respect to the Option Shares until
such individual shall have exercised the option and paid the Option Price.
10. MANNER OF EXERCISING OPTION.
A. In order to exercise this option with respect to all or any part
of the Option Shares for which this option is at the time exercisable, Optionee
(or in the case of exercise after Optionee's death, the Optionee's executor,
administrator, heir or legatee, as the case may be) must take the following
actions:
(i) Execute and deliver to the Secretary of the
Corporation a stock purchase agreement (the "Purchase Agreement") in
substantially the form of Exhibit B to the Grant Notice.
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(ii) Pay the aggregate Option Price for the purchased
shares in one or more forms approved under the Plan.
(iii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the option, if other
than Optionee, have the right to exercise this option.
B. For purposes of this Agreement, the Exercise Date shall be the
date on which the executed Purchase Agreement shall have been delivered to the
Corporation, and the fair market value of a share of Common Stock on any
relevant date shall be determined in accordance with subparagraphs (i) through
(iii) below:
(i) If the Common Stock is not at the time listed or
admitted to trading on any stock exchange but is traded on the Nasdaq
National Market System, the fair market value shall be the closing selling
price of one share of Common Stock on the date in question, as such price
is reported by the National Association of Securities Dealers through its
Nasdaq system or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the closing
selling price on the last preceding date for which such quotation exists
shall be determinative of fair market value.
(ii) If the Common Stock is at the time listed or
admitted to trading on any stock exchange, then the fair market value
shall be the closing selling price per share of Common Stock on the date
in question on the stock exchange determined by the Plan Administrator
to be the primary market for the Common Stock, as such price is officially
quoted in the composite tape of transactions on such exchange. If there
is no reported sale of Common Stock on such exchange on the date in
question, then the fair market value shall be the closing selling price
on the exchange on the last preceding date for which such quotation exists.
(iii) If the Common Stock at the time is neither listed
nor admitted to trading on any stock exchange nor traded in the over-the-
counter market, or if the Plan Administrator determines that the value
determined pursuant to subparagraphs (i) and (ii) above does not
accurately reflect the fair market value of the Common Stock, then such
fair market value shall be determined by the Plan Administrator after
taking into account such factors as the Plan Administrator shall deem
appropriate.
C. As soon after the Exercise Date as practical, the Corporation
shall mail or deliver to Optionee or to the other person or persons exercising
this option a certificate or certificates representing the shares so purchased
and paid for, with the appropriate legends affixed thereto.
D. In no event may this option be exercised for any fractional
shares.
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11. COMPLIANCE WITH LAWS AND REGULATIONS.
A. The exercise of this option and the issuance of Option Shares
upon such exercise shall be subject to compliance by the Corporation and the
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange on which shares of the
Corporation's Common Stock may be listed at the time of such exercise and
issuance.
B. B. In connection with the exercise of this option, Optionee
shall execute and deliver to the Corporation such representations in writing as
may be requested by the Corporation in order for it to comply with the
applicable requirements of Federal and State securities laws.
12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in
Paragraph 3 or 6, the provisions of this Agreement shall inure to the benefit
of, and be binding upon, the successors, administrators, heirs, legal
representatives and assigns of Optionee and the successors and assigns of the
Corporation.
13. LIABILITY OF CORPORATION.
A. If the Option Shares covered by this Agreement exceed, as of the
Grant Date, the number of shares of Common Stock which may without shareholder
approval be issued under the Plan, then this option shall be void with respect
to such excess shares, unless shareholder approval of an amendment sufficiently
increasing the number of shares of Common Stock issuable under the Plan is
obtained in accordance with the provisions of Article IV, Section 3, of the
Plan.
B. The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be necessary to
the lawful issuance and sale of any Common Stock pursuant to this option shall
relieve the Corporation of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have been
obtained. The Corporation, however, shall use its best efforts to obtain all
such approvals.
14. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation in care of the Corporate Secretary at its principal
corporate offices. Any notice required to be given or delivered to Optionee
shall be in writing and addressed to Optionee at the address indicated below
Optionee's signature line on the Grant Notice. All notices shall be deemed to
have been given or delivered upon personal delivery or upon deposit in the U.S.
mail, postage prepaid and properly addressed to the party to be notified.
15. LOANS. The Plan Administrator may, in its absolute discretion and
without any obligation to do so, assist the Optionee in the exercise of this
option by (i) authorizing the extension of a loan to the Optionee from the
Corporation or (ii) permitting the Optionee to pay the option price for the
purchased Common Stock in installments over a period of years. The terms of
any such loan or installment method of payment (including the interest rate,
the
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requirements for collateral and the terms of repayment) shall be established
by the Plan Administrator in its sole discretion.
16. CONSTRUCTION. This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects limited by and
subject to the express terms and provisions of the Plan. All decisions of the
Plan Administrator with respect to any question or issue arising under the Plan
or this Agreement shall be conclusive and binding on all persons having an
interest in this option.
17. GOVERNING LAW. The interpretation, performance, and enforcement of
this Agreement shall be governed by the laws of the State of California without
resort to that State's conflict-of-laws rules.
18. SHAREHOLDER APPROVAL. The grant of this option is subject to
approval of the Plan by the Corporation's shareholders within twelve (12)
months after the adoption of the Plan by the Board of Directors.
NOTWITHSTANDING ANY PROVISION OF THIS AGREEMENT TO THE CONTRARY, THIS OPTION
MAY NOT BE EXERCISED IN WHOLE OR IN PART UNTIL SUCH SHAREHOLDER APPROVAL IS
OBTAINED. In the event that such shareholder approval is not obtained, then
this option shall thereupon terminate in its entirety and the Optionee shall
have no further rights to acquire any Option Shares hereunder.
19. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE STOCK OPTION. In the
event this option is designated an incentive stock option in the Grant Notice,
the following terms and conditions shall also apply to the grant:
A. This option shall cease to qualify for favorable tax treatment
as an incentive stock option under the Federal tax laws if (and to the extent)
this option is exercised for one or more Option Shares: (i) more than three
(3) months after the date the Optionee ceases to be an Employee for any reason
other than death or permanent disability (as defined in Paragraph 5) or (ii)
more than one (1) year after the date the Optionee ceases to be an Employee by
reason of permanent disability.
B. Should this option be designated as immediately exercisable in
the Grant Notice, then this option shall not become exercisable in the calendar
year in which granted if (and to the extent) the aggregate fair market value
(determined at the Grant Date) of the Corporation's Common Stock for which this
option would otherwise first become exercisable in such calendar year would,
when added to the aggregate fair market value (determined as of the respective
date or dates of grant) of the Corporation's Common Stock for which this option
or one or more other incentive stock options granted to the Optionee prior to
the Grant Date (whether under the Plan or any other option plan of the
Corporation or its parent or subsidiary corporations) first become exercisable
during the same calendar year, exceed One Hundred Thousand Dollars ($100,000)
in the aggregate. To the extent the exercisability of this option is deferred
by reason of the foregoing limitation, the deferred portion will first become
exercisable in the first calendar year or years thereafter in which the One
Hundred Thousand Dollar ($100,000) limitation of this Paragraph 18.B would not
be contravened.
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C. Should this option be designated as exercisable in installments
in the Grant Notice, then no installment under this option (whether annual or
monthly) shall qualify for favorable tax treatment as an incentive stock option
under the Federal tax laws if (and to the extent) the aggregate fair market
value (determined at the Grant Date) of the Corporation's Common Stock for
which such installment first becomes exercisable hereunder will, when added to
the aggregate fair market value (determined as of the respective date or dates
of grant) of the Corporation's Common Stock for which one or more other
incentive stock options granted to the Optionee prior to the Grant Date
(whether under the Plan or any other option plan of the Corporation or any
parent or subsidiary corporation) first become exercisable during the same
calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate.
20. WITHHOLDING. Optionee hereby agrees to make appropriate arrangements
with the Corporation or parent or subsidiary corporation employing Optionee for
the satisfaction of all Federal, State or local income tax withholding
requirements and Federal social security employee tax requirements applicable
to the exercise of this option.
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RHYTHMS NETCONNECTIONS INC.
1997 STOCK OPTION/STOCK ISSUANCE PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1997 Stock Option/Stock Issuance Plan is intended to promote the
interests of Rhythms NetConnections Inc. by providing eligible persons with the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two separate equity programs:
- the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock, and
- the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of Common
Stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered the Corporation (or any Parent or Subsidiary).
B. The provisions of Articles One and Four shall apply to all
equity programs under the Plan and shall govern the interests of all persons
under the Plan.
III. ADMINISTRATION OF THE PLAN
A. Except as provided in Paragraph B of this Section III, the Plan
shall be administered by the Board or one or more committees appointed by the
Board, provided that (1) beginning with the Section 12 Registration Date, the
Primary Committee shall have sole and exclusive authority to administer the
Plan with respect to Section 16 Insiders, and (2) administration of the Plan
may otherwise, at the Board's discretion, be vested in the Primary Committee or
a Secondary Committee.
B. Members of the Primary Committee or any Secondary Committee
shall serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may also at any time terminate the
functions of any Secondary Committee and reassume all powers and authority
previously delegated to such committee.
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C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it
may deem appropriate for proper administration of the Discretionary Option
Grant and Stock Issuance Programs and to make such determinations under, and
issue such interpretations of, the provisions of such programs and any
outstanding options or stock issuances thereunder as it may deem necessary or
advisable. Decisions of the Plan Administrator within the scope of its
administrative functions under the Plan shall be final and binding on all
parties who have an interest in the Discretionary Option Grant and Stock
Issuance Programs under its jurisdiction or any option or stock issuance
thereunder.
D. Service on the Primary Committee or the Secondary Committee
shall constitute service as a Board member, and members of each such committee
shall accordingly be entitled to full indemnification and reimbursement as
Board members for their service on such committee. No member of the Primary
Committee or the Secondary Committee shall be liable for any act or omission
made in good faith with respect to the Plan or any option grants or stock
issuances under the Plan.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or times
when such option grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option
or a Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or
to effect stock issuances in accordance with the Stock Issuance Program.
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V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including
shares repurchased by the Corporation on the open market. The
maximum number of shares of Common Stock initially reserved for
issuance over the term of the Plan shall not exceed 4,863,971
shares.
B. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent
those options expire or terminate for any reason prior to exercise
in full. Unvested shares issued under the Plan and subsequently
cancelled or repurchased by the Corporation, at the original issue
price paid per share, pursuant to the Corporation's repurchase
rights under the Plan shall not be added back to the number of
shares of Common Stock reserved for issuance under the Plan.
C. If any change is made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of
shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's
receipt of consideration, appropriate adjustments shall be made to
(i) the maximum number and/or class of securities issuable under
the Plan, (ii) the number and/or class of securities for which any
one person may be granted stock options, separately exercisable
stock appreciation rights and direct stock issuances under this
Plan per calendar year, and (iii) the number and/or class of
securities and the exercise price per share in effect under each
outstanding option under the Plan. Such adjustments to the
outstanding options are to be effected in a manner which shall
preclude the enlargement or dilution of rights and benefits under
such options. The adjustments determined by the Plan Administrator
shall be final, binding and conclusive.
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; PROVIDED, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the option grant date, provided that
the Plan Administrator may fix the exercise price at less than 85% if the
optionee, at the time of the option grant, shall have made a payment to the
Company (including payment made by means of a salary reduction) equal to the
excess of the Fair Market Value of the Common Stock on the option grant date
over such exercise price.
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2. The exercise price shall become immediately due upon
exercise of the option and may, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in one or more
of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) with respect to the exercise of options after the
Section 12 Registration Date, shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation's earnings
for financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(iii) with respect to the exercise of options for
vested shares after the Section 12 Registration Date and to the extent the
sale complies with all applicable laws relating to the regulation and sale
of securities, through a special sale and remittance procedure pursuant to
which the Optionee shall concurrently provide irrevocable written
instructions to (a) a Corporation-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the Corporation, out
of the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the purchased shares plus
all applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise, and
(b) the Corporation to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable
at such time or times, during such period and for such number of shares as
shall be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option (which shall in no
event be less than six (6) months in the case of death or disability nor
less than thirty (30) days in the case of any other cessation of Service),
provided no such option shall be exercisable after the expiration of the
option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by the
personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution.
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(iii) Subject to clause C.2.(ii) below of this Section
I, during the applicable post-Service exercise period, the option may not
be exercised in the aggregate for more than the number of vested shares
for which the option is exercisable on the date of the Optionee's
cessation of Service. Upon the expiration of the applicable exercise
period or (if earlier) upon the expiration of the option term, the option
shall terminate and cease to be outstanding for any vested shares for
which the option has not been exercised.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
limited exercise period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem appropriate,
but in no event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the Optionee
would have vested had the Optionee continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock and to reserve the right to repurchase any or all of those unvested
shares should the optionee thereafter cease to be in Service to the
Corporation. The terms upon which such repurchase right shall be exercisable
(including the period and procedure for exercise and the appropriate vesting
schedule for the purchased shares) shall be established by the Plan
Administrator and set forth in the document evidencing such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, options shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Four shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall NOT be subject to the terms of this Section
II.
A. ELIGIBILITY. Incentive Options may only be granted to
Employees.
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B. EXERCISE PRICE. The exercise price per share shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the
shares of Common Stock (determined as of the respective date or dates of grant)
for which one or more options granted to any Employee under the Plan (or any
other option plan of the Corporation or any Parent or Subsidiary) may for the
first time become exercisable as Incentive Options during any one calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed
five (5) years measured from the option grant date.
III. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders,
the cancellation of any or all outstanding options under the Discretionary
Option Grant Program and to grant in substitution new options covering the same
or different number of shares of Common Stock but with an exercise price per
share based on the Fair Market Value per share of Common Stock on the new grant
date.
ARTICLE THREE
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCES
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
II. STOCK ISSUANCE TERMS
A. PURCHASE PRICE.
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the issuance date.
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2. Subject to the provisions of Section I of Article Four,
shares of Common Stock may be issued under the Stock Issuance Program for any
of the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. VESTING PROVISIONS.
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program, namely:
(i) the Service period to be completed by the Participant
or the performance objectives to be attained,
(ii) the number of installments in which the shares are to
vest,
(iii) the interval or intervals (if any) which are to
lapse between installments, and
(iv) the effect which death, Permanent Disability or other
event designated by the Plan Administrator is to have upon the vesting
schedule,
shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock
and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or
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should the performance objectives not be attained with respect to one or more
such unvested shares of Common Stock, then those shares shall be immediately
surrendered to the Corporation for cancellation, and the Participant shall
have no further stockholder rights with respect to those shares. To the
extent the surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the Participant's
purchase-money indebtedness), the Corporation shall repay to the Participant
the cash consideration paid for the surrendered shares and shall cancel the
unpaid principal balance of any outstanding purchase-money note of the
Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares as to which the waiver applies. Such waiver may be effected at any
time, whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.
ARTICLE FOUR
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering
a full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
II. SHARE ESCROW/LEGENDS
Unvested shares issued under the Plan may, in the Plan
Administrator's discretion, be held in escrow by the Corporation until the
Participant's interest in such shares vests or may be issued directly to the
Participant with restrictive legends on the certificates evidencing those
unvested shares.
III. CORPORATE TRANSACTION
A. Except as otherwise provided in the agreements evidencing an
option, a portion of each outstanding option under the Discretionary Option
Grant Program shall automatically accelerate in the event of a Corporate
Transaction so that such portion shall, immediately prior to the effective
date of the Corporate Transaction, become fully exercisable
8
<PAGE>
for vested shares of Common Stock, provided that no portion of any
outstanding option shall so accelerate if and to the extent: (i) such option
is, in connection with the Corporate Transaction, either to be assumed by the
successor corporation (or parent thereof) or to be replaced with a comparable
option to purchase shares of the capital stock of the successor corporation
(or parent thereof), (ii) such option is to be replaced with a cash incentive
program of the successor corporation which preserves the spread existing on
the unvested option shares at the time of the Corporate Transaction and
provides for subsequent payout in accordance with the same vesting schedule
applicable to those option shares or (iii) the acceleration of such option is
subject to other limitations imposed by the Plan Administrator at the time of
the option grant. The determination of option comparability under clause (i)
above shall be made by the Plan Administrator, and its determination shall be
final, binding and conclusive. The portion of the option which will
automatically accelerate hereunder shall be a number of shares equal to the
number of unvested shares immediately prior to the Corporate Transaction
available under the option multiplied by a fraction, the NUMERATOR of which
is the number of complete months of which elapsed after the vesting
commencement date under the option and the date of the Corporate Transaction,
and the DENOMINATOR of which is the number of months required under the
option agreement for the rights of the optionee to become fully vested.
B. Except as otherwise provided in the agreements creating the
repurchase rights, outstanding repurchase rights, if any, shall terminate
automatically with respect to a portion of the shares subject to repurchase
rights, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
provided that such repurchase right shall not lapse to the extent: (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the option is issued or the repurchase right is
created. The portion of the shares with respect to which the repurchase
rights will terminate shall be a number of shares equal to the total number
of shares subject to repurchase rights immediately prior to the Corporate
Transaction multiplied by a fraction, the NUMERATOR of which is the number of
complete months which elapsed after the vesting commencement date under the
option or stock issuance agreement pursuant to which the shares were issued
and the date of the Corporate Transaction, and the DENOMINATOR of which is
the number of months required under the option or stock issuance agreement
for the rights of the optionee to become fully vested. Any and all repurchase
rights which will not terminate at the time of the Corporate Transaction may
be exercised by the Company immediately prior to the Corporate Transaction.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction
had the option been exercised immediately prior to such Corporate
Transaction. Appropriate adjustments to reflect such Corporate Transaction
shall also be made to (i) the exercise price payable per share under each
outstanding option, PROVIDED the aggregate exercise price payable for such
securities shall remain the same, (ii) the maximum
9
<PAGE>
number and/or class of securities available for issuance over the remaining
term of the Plan and (iii) the maximum number and/or class of securities for
which any one person may be granted stock options, separately exercisable
stock appreciation rights and direct stock issuances under the Plan per
calendar year.
E. Repurchase rights which are assigned in connection with a
Corporate Transaction shall be exercisable with respect to the property
issued to the Optionee of Participant upon consummation of such Corporate
Transaction in exchange for the Common Stock held by the Optionee or
Participant subject to the repurchase rights immediately prior to the
Corporate Transaction.
F. Except as otherwise limited by the Plan Administrator at the
time an Option is granted, vesting under outstanding options will
automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within twenty-four (24)
months following the effective date of any Corporate Transaction in which
those options are assumed or replaced and do not otherwise accelerate. Any
options so accelerated shall remain exercisable for fully-vested shares until
the EARLIER of (i) the expiration of the option term or (ii) the expiration
of the one (1)-year period measured from the effective date of the
Involuntary Termination. The portion of any Incentive Option accelerated in
connection with a Corporate Transaction or Hostile Change in Control shall
remain exercisable as an Incentive Option only to the extent the applicable
One Hundred Thousand Dollar limitation is not exceeded and the provisions
governing the exercise and holding period are met. To the extent such dollar
limitation is exceeded, the accelerated portion of such option shall be
exercisable as a Non-Statutory Option under the Federal tax laws.
G. Except as otherwise limited by the Plan Administrator at the
time the option is granted under the Discretionary Option Program or the
repurchase rights are created, the outstanding repurchase rights with respect
to shares held by an Optionee or Participant will automatically lapse and
cease to be exercisable in the event the Optionee's or the Participant's
Service subsequently terminates by means of an Involuntary Termination within
twenty-four (24) months following the effective date of any Corporate
Transaction in which those repurchase rights are assigned or otherwise
continue.
H. The outstanding options or repurchase rights shall in no way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
IV. HOSTILE CHANGE IN CONTROL
A. In the event of any Hostile Change in Control, each
outstanding option under the Discretionary Option Grant Program shall
automatically accelerate so that each such option shall, immediately prior to
the effective date of the Hostile Change in Control, become fully exercisable
with respect to the total number of shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock.
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<PAGE>
B. Outstanding repurchase rights, if any, shall terminate
automatically, and the shares of Common Stock subject to those terminated
rights shall immediately vest in full, in the event of any Hostile Change in
Control.
V. VESTING
Notwithstanding any other provision of this agreement, the vesting
schedule imposed with respect to any option grant or share issuance shall not
result in the Optionee or Participant vesting in fewer than 20% per year for
five years from the date of the option grant or share issuance.
VI. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under
the Plan shall be subject to the satisfaction of all applicable Federal, state
and local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or
all holders of Non-Statutory Options or unvested shares of Common Stock under
the Plan with the right to use shares of Common Stock in satisfaction of all or
part of the Taxes incurred by such holders in connection with the exercise of
their options or the vesting of their shares. Such right may be provided to
any such holder in either or both of the following formats:
STOCK WITHHOLDING: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.
STOCK DELIVERY: The election to deliver to the Corporation, at
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
VII. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately upon the Plan
Effective Date. Options may be granted under the Discretionary Option Grant at
any time on or after the Plan Effective Date. However, no options granted
under the Plan may be exercised, and no shares shall be issued under the Plan,
until the Plan is approved by the Corporation's stockholders. If such
stockholder approval is not obtained within twelve (12) months after the Plan
Effective Date, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.
11
<PAGE>
B. The Plan shall terminate upon the EARLIEST of (i) the tenth
anniversary of the Plan Effective Date, (ii) the date on which all shares
available for issuance under the Plan shall have been issued as fully-vested
shares or (iii) the termination of all outstanding options in connection with a
Corporate Transaction. Upon such plan termination, all outstanding option
grants and unvested stock issuances shall thereafter continue to have force and
effect in accordance with the provisions of the documents evidencing such
grants or issuances.
VIII. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
if so determined by the Board or pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and shares of Common Stock may be issued under
the Stock Issuance Program that are in each instance in excess of the number of
shares then available for issuance under the Plan, provided any excess shares
actually issued under those programs shall be held in escrow until there is
obtained any required approval of an amendment sufficiently increasing the
number of shares of Common Stock available for issuance under the Plan. If
such approval is not obtained within twelve (12) months after the date the
first such excess issuances are made, then (i) any unexercised options granted
on the basis of such excess shares shall terminate and cease to be outstanding
and (ii) the Corporation shall promptly refund to the Optionees and the
Participants the exercise or purchase price paid for any excess shares issued
under the Plan and held in escrow, together with interest (at the applicable
Short Term Federal Rate) for the period the shares were held in escrow, and
such shares shall thereupon be automatically cancelled and cease to be
outstanding.
IX. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
X. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall
be subject to the Corporation's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the stock
options granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable
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<PAGE>
listing requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which Common Stock is then listed for trading.
XI. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by
each, to terminate such person's Service at any time for any reason, with or
without cause.
XII. FINANCIAL REPORTS
The Corporation shall deliver a balance sheet and an income statement
at least annually to each individual holding an outstanding option under the
Plan, unless such individual is a key Employee whose duties in connection with
the Corporation (or any Parent or Subsidiary) assure such individual access to
equivalent information.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
13
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APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CODE shall mean the Internal Revenue Code of 1986, as amended.
C. COMMON STOCK shall mean the Corporation's common stock.
D. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets.
E. CORPORATION shall mean Rhythms NetConnections Inc., a Delaware
corporation, and its successors.
F. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary
option grant program in effect under the Plan.
G. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
H. EXERCISE DATE shall mean the date on which the Corporation shall
have received written notice of the option exercise.
I. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be deemed equal to the
closing selling price per share of Common Stock on the date in question,
as such price is reported on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock on the
date in question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be deemed equal to the closing
selling price per share of Common Stock on the date in question on the
Stock Exchange determined by the Plan
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<PAGE>
Administrator to be the primary market for the Common Stock, as such
price is officially quoted in the composite tape of transactions on such
exchange. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(iii) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is to be sold in the initial
public offering pursuant to the Underwriting Agreement.
(iv) For purposes of any option grants made prior to the
Underwriting Date, the Fair Market Value shall be determined by the Plan
Administrator, after taking into account such factors as it deems
appropriate.
J. HOSTILE CHANGE IN CONTROL shall mean a change in ownership or
control of the Corporation effected through either of the following
transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders which the Board does
not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
K. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
L. INVOLUNTARY TERMINATION shall mean the termination of the
Service of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially
reduces his or her level of responsibility, (B) a reduction in his or her
level of compensation (including base salary,
15
<PAGE>
fringe benefits and participation in any corporate-performance based
bonus or incentive programs) by more than fifteen percent (15%) or (C) a
relocation of such individual's place of employment by more than fifty
(50) miles, provided and only if such change, reduction or relocation is
effected by the Corporation without the individual's consent.
M. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of
the Corporation (or any Parent or Subsidiary), or any other intentional
misconduct by such person adversely affecting the business or affairs of the
Corporation (or any Parent or Subsidiary) in a material manner. The foregoing
definition shall not be deemed to be inclusive of all the acts or omissions
which the Corporation (or any Parent or Subsidiary) may consider as grounds for
the dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
N. 1934 ACT shall mean the Securities Exchange Act of 1934,
as amended.
O. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.
P. OPTIONEE shall mean any person to whom an option is granted
under the Discretionary Option Grant Program.
Q. PARENT shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
R. PARTICIPANT shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.
S. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of
twelve (12) months or more.
T. PLAN shall mean the Corporation's 1997 Stock Option/Stock
Issuance Plan, as set forth in this document.
U. PLAN ADMINISTRATOR shall mean the particular entity, whether
the Primary Committee, the Board or the Secondary Committee, which is
authorized to administer the Discretionary Option Grant and Stock Issuance
Programs with respect to one or more classes of eligible persons, to the
extent such entity is carrying out its administrative functions under those
programs with respect to the persons under its jurisdiction.
V. PLAN EFFECTIVE DATE shall mean the date on which the Plan was
adopted by the Board.
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<PAGE>
W. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to
Section 16 Insiders following the Section 12 Registration Date.
X. SECONDARY COMMITTEE shall mean a committee of two (2) or more
Board members appointed by the Board to administer any aspect of Plan not
required hereunder to be administered by the Primary Committee. The members
of the Secondary Committee may be Board members who are Employees eligible to
receive discretionary option grants or direct stock issuances under the Plan
or any other stock option, stock appreciation, stock bonus or other stock
plan of the Corporation (or any Parent or Subsidiary).
Y. SECTION 12 REGISTRATION DATE shall mean the date on which the
Common Stock is first registered under Section 12(g) or Section 15 of the
1934 Act.
Z. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of
the 1934 Act.
AA. SERVICE shall mean the performance of services for the
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in
the documents evidencing the option grant or stock issuance.
BB. STOCK EXCHANGE shall mean either the American Stock Exchange
or the New York Stock Exchange.
CC. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into
by the Corporation and the Participant at the time of issuance of shares of
Common Stock under the Stock Issuance Program.
DD. STOCK ISSUANCE PROGRAM shall mean the stock issuance program
in effect under the Plan.
EE. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in
the unbroken chain owns, at the time of the determination, stock possessing
fifty percent (50%) or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
FF. TAXES shall mean the Federal, state and local income and
employment tax liabilities incurred by the holder of Non-Statutory Options or
unvested shares of Common Stock in connection with the exercise of those
options or the vesting of those shares.
GG. 10% STOCKHOLDER shall mean the owner of stock (as determined
under Code Section 424(d)) possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Corporation (or
any Parent or Subsidiary).
HH. UNDERWRITING AGREEMENT shall mean the agreement between
the
17
<PAGE>
Corporation and the underwriter or underwriters managing the initial
public offering of the Common Stock.
II. UNDERWRITING DATE shall mean the date on which the Underwriting
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
18
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EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. ACI Corp., a Delaware corporation. This subsidiary does business as
Accelerated Connections, Inc. and as Accelerated Connections.
2. ACI Corp. - Virginia, a Virginia corporation.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Rhythms NetConnections Inc. of our
report dated March 13, 1998 relating to the financial statements of the
issuer, which appears in such Prospectus. We also consent to the reference to
us under the heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
San Diego, California
July 16, 1998
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
---------
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305(B)(2) /X/
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, NATIONAL ASSOCIATION
(EXACT NAME OF TRUSTEE AS SPECIFIED IN ITS CHARTER)
United States 06-1143380
(JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER
ORGANIZATION IF NOT A U.S. NATIONAL BANK) IDENTIFICATION NO.)
633 West 5th Street, 12th Floor, Los Angeles, California 90071
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Lynda A. Vogel, Senior Vice President and Managing Director
633 West 5th Street, 12th Floor, Los Angeles, California 90071
(213) 362-7399
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
Rhythms NetConnections Inc.
(EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER)
Delaware 33-0747515
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7337 South Revere Parkway
Englewood, Colorado
80112-3931
(Address of principal executive offices) (Zip Code)
290,000 Units consisting of 13 1/2% Senior Discount Notes due 2008
and Warrants to Purchase 1,972,000 Shares of Common Stock
<PAGE>
GENERAL
ITEM 1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO
WHICH IT IS SUBJECT.
Comptroller of the Currency, Western District Office, 50 Fremont
Street, Suite 3900, San Francisco, California, 94105-2292
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
The obligor is not an affiliate of the trustee or of its parent,
State Street Bank and Trust Company.
(See note on page 2.)
ITEM 3. THROUGH ITEM 15. NOT APPLICABLE.
ITEM 16. LIST OF EXHIBITS.
LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF
ELIGIBILITY.
1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN
EFFECT.
A copy of the Articles of Association of the trustee, as now in
effect, is on file with the Securities and Exchange Commission as
Exhibits with corresponding exhibit numbers to the Form T-1of Western
Digital Corporation, filed pursuant to Section 305(b)(2) of the Act,
on May 12, 1998 (Registration No. 333-52463), and are incorporated
herein by reference.
2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE
BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION.
A Certificate of Corporate Existence (with fiduciary powers) from
the Comptroller of the Currency, Administrator of National Banks is on
file with the Securities and Exchange Commission as Exhibits with
corresponding exhibit numbers to the Form T-1 of Western Digital
Corporation, filed pursuant to Section 305(b)(2) of the Act, on May
12, 1998 (Registration No. 333-52463), and are incorporated herein by
reference.
3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE
TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS
SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE.
Authorization of the Trustee to exercise fiduciary powers
(included in Exhibits 1 and 2; no separate instrument).
4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS
CORRESPONDING THERETO.
A copy of the by-laws of the trustee, as now in effect, is on
file with the Securities and Exchange Commission as Exhibits with
corresponding exhibit numbers to the Form T-1 of Western Digital
Corporation, filed pursuant to Section 305(b)(2) of the Act, on May
12, 1998 (Registration No. 333-52463), and are incorporated herein by
reference.
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<PAGE>
5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS
IN DEFAULT.
Not applicable.
6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY
SECTION 321(b) OF THE ACT.
The consent of the trustee required by Section 321(b) of the Act
is annexed hereto as Exhibit 6 and made a part hereof.
7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED
PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY.
A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining
authority is annexed hereto as Exhibit 7 and made a part hereof.
NOTES
In answering any item of this Statement of Eligibility which relates
to matters peculiarly within the knowledge of the obligor or any underwriter for
the obligor, the trustee has relied upon information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.
The answer furnished to Item 2. of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which would
have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company of California,
NATIONAL ASSOCIATION, organized and existing under the laws of the United States
of America, has duly caused this statement of eligibility to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of Los
Angeles, and State of California, on the 4th of June, 1998.
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, NATIONAL ASSOCIATION
By: /S/ Scott C. Emmons
-----------------------------------
SCOTT C. EMMONS
ASSISTANT VICE PRESIDENT
2
<PAGE>
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939, as amended, in connection with the proposed issuance by Rhythms
NetConnections Inc. of its 290,000 Units consisting of 13 1/2% Senior Discount
Notes due 2008 and Warrants to Purchase 1,972,000 Shares of Common Stock, we
hereby consent that reports of examination by Federal, State, Territorial or
District authorities may be furnished by such authorities to the Securities and
Exchange Commission upon request therefor.
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, NATIONAL ASSOCIATION
By: /S/ Scott C. Emmons
-----------------------------------
SCOTT C. EMMONS
ASSISTANT VICE PRESIDENT
DATED: JUNE 4, 1998
3
<PAGE>
EXHIBIT 7
Consolidated Report of Condition and Income for A Bank With Domestic Offices
Only and Total Assets of Less Than $100 Million of State Street Bank and Trust
Company of California, a national banking association duly organized and
existing under and by virtue of the laws of the United States of America, at the
close of business MARCH 31, 1998, published in accordance with a call made by
the Federal Deposit Insurance Corporation pursuant to the required law: 12
U.S.C. Section 324 (State member banks); 12 U.S.C. Section 1817 (State nonmember
banks); and 12 U.S.C. Section 161 (National banks).
<TABLE>
<CAPTION>
ASSETS Thousands
of Dollars
<S> <C> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin . . 6,852
Interest-bearing balances. . . . . . . . . . . . . . . 0
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Federal funds sold and securities purchased
under agreements to resell in domestic offices
of the bank and its Edge subsidiary. . . . . . . . . . 0
Loans and lease financing receivables:
Loans and leases, net of unearned income . . 0
Allowance for loan and lease losses. . . . . 0
Allocated transfer risk reserve. . . . . . . 0
Loans and leases, net of unearned income and allowances. . . . . 0
Assets held in trading accounts. . . . . . . . . . . . . . . . . 0
Premises and fixed assets. . . . . . . . . . . . . . . . . . . . 253
Other real estate owned. . . . . . . . . . . . . . . . . . . . . 0
Investments in unconsolidated subsidiaries . . . . . . . . . . . 0
Customers' liability to this bank on acceptances outstanding . . 0
Intangible assets. . . . . . . . . . . . . . . . . . . . . . . . 0
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 814
-----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . 7,957
-----------
-----------
LIABILITIES
Deposits:
In domestic offices. . . . . . . . . . . . . . . . . . 0
Noninterest-bearing. . . . . . . . . . . . . 0
Interest-bearing . . . . . . . . . . . . . . 0
In foreign offices and Edge subsidiary . . . . . . . . 0
Noninterest-bearing. . . . . . . . . . . . . 0
Interest-bearing . . . . . . . . . . . . . . 0
Federal funds purchased and securities sold under
agreements to repurchase in domestic offices of
the bank and of its Edge subsidiary. . . . . . . . . . 0
Demand notes issued to the U.S. Treasury and Trading Liabilities 0
Other borrowed money . . . . . . . . . . . . . . . . . . . . . . 0
Subordinated notes and debentures. . . . . . . . . . . . . . . . 0
Bank's liability on acceptances executed and outstanding . . . . 0
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . 4,356
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . 4,356
-----------
EQUITY CAPITAL
Perpetual preferred stock and related surplus. . . . . . . . . . 0
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . 500
Surplus 750
Undivided profits and capital reserves/Net unrealized holding
gains (losses) . . . . . . . . . . . . . . . . . . . . 2,352
Cumulative foreign currency translation adjustments. . . . . . . 0
Total equity capital . . . . . . . . . . . . . . . . . . . . . . 3,602
-----------
Total liabilities and equity capital . . . . . . . . . . . . . . 7,958
-----------
-----------
</TABLE>
4
<PAGE>
I, Kevin R. Wallace, Vice President and Comptroller of the above named bank do
hereby declare that this Report of Condition and Income for this report date
have been prepared in conformance with the instructions issued by the
appropriate Federal regulatory authority and is true to the best of my knowledge
and belief.
Kevin R. Wallace
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and is true and correct.
Lynda A. Vogel
James A. Quale
Stephen Rivero
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 26,519
<SECURITIES> 0
<RECEIVABLES> 10
<ALLOWANCES> 0
<INVENTORY> 226
<CURRENT-ASSETS> 28,721
<PP&E> 136
<DEPRECIATION> 12
<TOTAL-ASSETS> 29,670
<CURRENT-LIABILITIES> 2,697
<BONDS> 0
0
17
<COMMON> 3
<OTHER-SE> 26,559
<TOTAL-LIABILITY-AND-EQUITY> 29,670
<SALES> 10
<TOTAL-REVENUES> 10
<CGS> 198
<TOTAL-COSTS> 198
<OTHER-EXPENSES> 2,244
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> (2,286)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,286)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,286)
<EPS-PRIMARY> (2.54)
<EPS-DILUTED> (2.54)
</TABLE>
<PAGE>
LETTER OF TRANSMITTAL
FOR
13 1/2% SENIOR DISCOUNT NOTES DUE 2008
OF
RHYTHMS NETCONNECTIONS INC.
PURSUANT TO THE EXCHANGE OFFER IN RESPECT OF
ALL OF ITS OUTSTANDING 13 1/2% SENIOR DISCOUNT NOTES DUE 2008, SERIES A
FOR
13 1/2% SENIOR DISCOUNT NOTES DUE 2008, SERIES B
---------------------------
PURSUANT TO THE PROSPECTUS DATED ____________, 1998
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ______ __,
1998 UNLESS THE EXCHANGE OFFER IS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF
NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
TO: STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., EXCHANGE AGENT
BY MAIL, HAND OR OVERNIGHT CARRIER: THE EXCHANGE AGENT
State Street Bank and Trust Company of State Street Bank and Trust Company of
California, N.A. California, N.A.
c/o State Street Bank and Trust BY FACSIMILE:
Company (For Eligible Institutions Only)
2 International Place (617) 664-5290
Boston, MA 02110 CONFIRM BY TELEPHONE:
Attn: Kellie Mullen (617) 664-5587
Attn: Kellie Mullen
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION VIA
FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR OLD NOTES
PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR OLD
NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
By execution hereof, the undersigned acknowledges receipt of the
Prospectus dated _______ ___, 1998 (the "Prospectus") of Rhythms
NetConnections Inc., a Delaware corporation (the "Company"), which, together
with this Letter of Transmittal and the instructions hereto (the "Letter of
Transmittal"), constitutes the Company's offer (the "Exchange Offer") to
exchange $1,000 principal amount of its new 13 1/2% Senior Discount Notes Due
2008, Series B (the "New Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which the Prospectus constitutes a part, for each
$1,000 principal amount of its outstanding 13 1/2% Senior Discount Notes Due
2008, Series A (the "Old Notes"), upon the terms and subject to the
conditions set forth in the Prospectus. Capitalized terms used but not
defined herein have the meaning given to them in the Prospectus.
This Letter of Transmittal is to be used if certificates for the Old Notes
are to be forwarded herewith. If delivery of the Old Notes is to be made
through book-entry transfer into the Exchange Agent's account at The Depository
Trust Company ("DTC"), this Letter of Transmittal need not be delivered;
provided, however, that tenders of the Old Notes must be effected in accordance
with DTC's Automated Tender Offer Program procedures and the procedures set
forth in the
<PAGE>
Prospectus under the caption "The Exchange Offer--Procedures for Tendering" and
"--Book-Entry Transfer; Delivery and Form."
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount at maturity equal to that of the
surrendered Old Note. Principal on the New Notes will accrete from the date of
issuance of the New Notes. If (a) the Company fails to file any of the
Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), (c) the
Company fails to consummate the Exchange Offer within 30 business days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Old Notes during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above a "Registration Default"), then interest
("Additional Interest") will accrue on the Old Notes and the New Notes (in
addition to the stated interest on the Old Notes and the New Notes) at a rate of
0.50% per annum of the Accreted Value of the Old Notes and the New Notes, as
applicable, commencing upon the occurrence of such Registration Default, which
rate will increase by 0.50% at the end of each 90-day period in which such
Registration Default is not cured, provided that the maximum aggregate
Additional Interest that so accrues as a result of all Registration Defaults
will in no event exceed 1.5% per annum. Additional Interest shall be computed
based on the actual number of days elapsed in each 90-day period in which
Additional Interest accrues on the Old Notes and the New Notes, as applicable.
Holders of Old Notes accepted for exchange will be deemed to have waived the
right to receive any other payments or accrued interest on the Old Notes. The
Company reserves the right, at any time or from time to time, to extend the
Exchange Offer at its discretion, in which event the term "Expiration Date"
shall mean the latest time and date to which the Exchange Offer is extended.
The Company shall notify the holders of the Old Notes of any extension by means
of a press release or other public announcement prior to 9:00 A.M., New York
City time, on the next business day after the previously scheduled Expiration
Date.
This Letter of Transmittal is to be completed by a holder of Old Notes if
certificates are to be forwarded herewith. Holders of Old Notes whose
certificates are not immediately available, or who are unable to deliver there
certificates and all other documents required by this Letter of Transmittal or
confirmation of the book-entry tender of their Old Notes into the Exchange
Agent's account at DTC (a "Book-Entry Confirmation") to the Exchange Agent on or
prior to the Expiration Date, must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed
Delivery Procedures" section of the Prospectus. See Instruction 2. Delivery of
documents to DTC does not constitute delivery to the Exchange Agent.
The undersigned has completed the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
List below the Old Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, the certificate numbers and principal
amount at maturity of Old Notes should be listed on a separate signed schedule
affixed hereto.
<PAGE>
DESCRIPTION OF OLD NOTES TENDERED HEREBY
- --------------------------------------------------------------------------------
Aggregate
Principal
Name(s) and Address(es) of Certificate Amount Principal
Registered Owner(s) or Registration Represented Amount
(Please Fill In) Numbers* by Old Notes Tendered**
- --------------------------------------------------------------------------------
- --------------------------- ----------------- --------------- ------------
- --------------------------- ----------------- --------------- ------------
- --------------------------- ----------------- --------------- ------------
- --------------------------- ----------------- --------------- ------------
- --------------------------- ----------------- --------------- ------------
- --------------------------- ----------------- --------------- ------------
Total
- --------------------------------------------------------------------------------
* Need not be completed by Book-entry Holders.
** Unless otherwise indicated, the Holder will be deemed to have tendered the
full aggregate principal amount represented by such Old Notes. All tenders
must be in integral multiples of $1,000. See Instruction 1.
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
---------------------------------------------
Account Number
------------------------------------------------------------
Transaction Code Number
---------------------------------------------------
/ / CHECK HERE IF OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name of Registered Holder(s)
----------------------------------------------
Window Ticket (if any)
----------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
------------------------
Name of Institution which guaranteed delivery
-----------------------------
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number
------------------------------------------------------------
Transaction Code Number
---------------------------------------------------
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
----------------------------------------------------------------------
Address:
------------------------------------------------------------------
Telephone Number:
----------------------------------------------------------
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer,
the undersigned hereby tenders to the Company the principal amount of the Old
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of such Old Notes tendered hereby, the undersigned hereby exchanges,
assigns and transfers to, or upon the order of, the Company all right, title in
and interest in and to such Old Notes as are being tendered hereby, including
all rights to accrued and unpaid interest thereon as of the Expiration Date.
The undersigned hereby irrevocably constitutes and appoints the Exchange Agent
the true and lawful agent and attorney-in-fact of the undersigned (with full
knowledge that said Exchange Agent acts as the agent of the Company in
connection with the Exchange Offer) to cause the Old Notes to be assigned,
transferred and exchanged. The undersigned represents and warrants that it has
full power and authority to tender, exchange, assign and transfer the Old Notes
and to acquire New Notes issuable upon the exchange of such tendered Old Notes,
and that when the same are accepted for exchange, the Company will acquire good
and unencumbered title to the tendered Old Notes, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim.
The undersigned represents to the Company that (i) the New Notes
acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New Notes, whether or not such
person is the undersigned, and (ii) neither the undersigned nor any such other
person has an arrangement or understanding with any person to participate in a
distribution of such New Notes. If the undersigned is not a broker-dealer, the
undersigned represents that it is not engaged in, and does not intend to engage
in, a distribution of New Notes. If the undersigned is a broker-dealer that
will receive New Notes for its own account in exchange for Old Notes, it
represents that the Old Notes to be exchanged for New Notes were acquired by it
as a result of market-making activities or other trading activities and
acknowledges that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes pursuant to the
Exchange Offer; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. The undersigned and any such other person
acknowledge that, if they are participating in the Exchange Offer for the
purpose of distributing the New Notes, (i) they cannot rely on the position of
the staff of the Securities and Exchange Commission enunciated in Exxon Capital
Holdings Corporation (available April 13, 1989), Morgan Stanley & Co., Inc.
(available June 5, 1991) Sherman & Sterling (available July 2, 1993) or similar
no-action letters and, in the absence of an exemption therefrom, must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction and (ii) failure to comply with such
requirements in such instance could result in the undersigned or any such other
person incurring liability under the Securities Act for which such persons are
not indemnified by the Company. If the undersigned or the person receiving the
New Notes covered by this letter is an "affiliate" (as defined under Rule 405 of
the Securities Act) of the Company, the undersigned represents to the Company
that the undersigned understands and acknowledges that such New Notes may not be
offered for resale, resold or otherwise transferred by the undersigned or such
other person without registration under the Securities Act or an exemption
therefrom.
The undersigned also warrants that it will, upon request, execute and
deliver any additional documents deemed by the Exchange Agent or the Company to
be necessary or desirable to complete the exchange, assignment and transfer of
the Old Notes tendered hereby or transfer ownership of such Old Notes on the
account books maintained by a book-entry transfer facility. The undersigned
further agrees that acceptance of any tendered Old Notes by the Company and the
issuance of New Notes in exchange therefor shall constitute performance in full
by the Company of its obligations under the Registration Rights Agreement and
that the Company shall have no further obligations or liabilities thereunder for
the registration of the Old Notes or the New Notes.
The Exchange Offer is subject to certain conditions set forth in the
Prospectus under the caption "The Exchange Offer--Conditions." The undersigned
recognizes that as a result of these conditions (which may be waived, in whole
or in part, by the Company), as more particularly set forth in the Prospectus,
the Company may not be required to exchange any of the Old Notes tendered hereby
and, in such event, the Old Notes not exchanged will be returned to the
undersigned at the address shown above in the box entitled "Description of Old
Notes Tendered Hereby."
All authority herein conferred or agreed to be conferred shall survive
the death or incapacity of the undersigned and every obligation of the
undersigned hereunder shall be binding upon the heirs, personal representatives,
successors and assigns
<PAGE>
of the undersigned. This tender may be withdrawn only in accordance with the
procedures set forth in "The Exchange Offer--Withdrawal of Tenders" section of
the Prospectus.
Unless otherwise indicated in the box entitled "Special Issuance
Instructions" or the box entitled "Special Delivery Instructions" in this Letter
of Transmittal, certificates for all New Notes delivered in exchange for
tendered Old Notes, and any Old Notes delivered herewith but not exchanged, will
be registered in the name of the undersigned and shall be delivered to the
undersigned at the address shown above in the box entitled "Description of Old
Notes Tendered Hereby." If a New Note is to be issued to a person other than
the person(s) signing this Letter of Transmittal, or if the New Note is to be
mailed to someone other than the person(s) signing this Letter of Transmittal or
to the person(s) signing this Letter of Transmittal at an address different than
the address shown on this Letter of Transmittal, the appropriate boxes of this
Letter of Transmittal should be completed. If Old Notes are surrendered by
Holder(s) that have completed either the box entitled "Special Issuance
Instructions" or the box entitled "Special Delivery Instructions" in this Letter
of Transmittal, signature(s) on this Letter of Transmittal must be guaranteed by
an Eligible Institution (defined in Instruction 4).
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD
NOTES TENDERED HEREBY" ABOVE AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE
DEEMED TO HAVE TENDERED THE OLD NOTES AS SET FORTH IN SUCH BOX ABOVE.
- ------------------------------------ -----------------------------------
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4 AND 5) (SEE INSTRUCTIONS 4 AND 5)
To be completed ONLY if To be completed ONLY if
certificates for Old Notes not certificates for Old Notes not
exchanged and/or New Notes are to exchanged and/or New Notes are to
be issued in the name of and sent be sent to someone other than the
to someone other than the person(s) person(s) whose signature(s)
whose signature(s) appear(s) on appear(s) on this Letter above or
this Letter above, or if Old Notes to such person(s) at an address
delivered by book-entry transfer other than shown in the box
which are not accepted for exchange entitled "Description of Old Notes
are to be returned by credit to an Tendered Hereby" on this Letter
account maintained at the Book- above.
Entry Transfer Facility other than
the account indicated above. Mail New Notes and/or Old Notes to:
Issue New Notes and/or Old Notes
to: Name(s):
---------------------------
Name(s): (PLEASE TYPE OR PRINT)
---------------------------
(PLEASE TYPE OR PRINT) -----------------------------------
(PLEASE TYPE OR PRINT)
-----------------------------------
(PLEASE TYPE OR PRINT) Address:
---------------------------
Address:
--------------------------- -----------------------------------
(INCLUDING ZIP CODE)
-----------------------------------
(INCLUDING ZIP CODE)
(Complete accompanying
Substitute Form W-9) Credit
unexchanged Old Notes delivered by
book-entry transfer to the Book-
Entry Transfer Facility account set
forth below.
-----------------------------------
(BOOK-ENTRY TRANSFER FACILITY
ACCOUNT NUMBER, IF APPLICABLE)
- ------------------------------------ -----------------------------------
<PAGE>
REGISTERED HOLDER(S) OF NOTES SIGN HERE
(IN ADDITION, COMPLETE SUBSTITUTE FORM W-9 BELOW)
Dated: , 1998
------------------------------ -------------------------
X , 1998
------------------------------ -------------------------
X , 1998
------------------------------ -------------------------
Signature(s) of Owner(s) Date
Area Code and Telephone Number:
--------------------------------------
SIGNATURE(s) OF REGISTERED HOLDER(s):
Must be signed by registered holder(s) exactly as name(s) appear(s) on
the Old Notes or on a security position listing as the owner of the Old Notes or
by person(s) authorized to become registered holder(s) by properly completed
bond powers transmitted herewith. If signature is by attorney-in-fact, trustee,
executor, administrator, guardian, officer of a corporation or other person
acting in a fiduciary capacity, please provide the following information.
(PLEASE PRINT OR TYPE).
Name(s):
-----------------------------------------------------------------------
- --------------------------------------------------------------------------------
Capacity (full title):
---------------------------------------------------------
Address (including zip code):
--------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Area Code and Telephone Number:
----------------------------
Taxpayer Identification or Social Security No.:
----------------------
Dated:
-----------------------
SIGNATURE GUARANTEE
(IF REQUIRED - SEE INSTRUCTION 4)
Authorized Signature:
----------------------------------------------------------
(Signature of Representative of Signature Guarantor)
Name and Title:
----------------------------------------------------------------
Name of Plan:
------------------------------------------------------------------
Area Code and Telephone Number:
-----------------------
Dated:
-----------------------
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER
WITH THE CERTIFICATES FOR OLD NOTES OR A BOOK-ENTRY
CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE
OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE
AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE.
PLEASE READ THIS LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE
<PAGE>
PAYOR'S NAME: RHYTHMS NETCONNECTIONS INC.
THIS SUBSTITUTE FORM W-9 MUST BE COMPLETED AND SIGNED
Please provide your social security number or other taxpayer
identification number on the following Substitute Form W-9 and certify therein
that you are subject to backup withholding.
- --------------------------------------------------------------------------------
Name
- --------------------------------------------------------------------------------
Business name, if different from above
<TABLE>
<S> <C> <C> <C> <C>
Check appropriate box: / / Individual/Sole proprietor / / Corporation / / Partnership / / Other
----------------
</TABLE>
- --------------------------------------------------------------------------------
Address (number, street, and apt. or suite no.)
- --------------------------------------------------------------------------------
City, state, and ZIP code
- --------------------------------------------------------------------------------
SUBSTITUTE Part 1 -- PLEASE PROVIDE Social security
FORM W-9 YOUR TIN IN THE BOX AT number
RIGHT AND CERTIFY BY ---------------------
SIGNING AND DATING BELOW OR
Employer
identification
number
---------------
- --------------------------------------------------------------------------------
Part 2 -- Check the box if you are NOT subject to
Department of the Treasury backup withholding under the provisions of
Internal Revenue Service Section 3406 of the Internal Revenue Code because
(1) you are exempt from backup withholding, (2)
you have not been notified that you are subject
to backup withholding as a result of failure to
report all interest or dividends or (3) the
Internal Revenue Service has notified you that
you are no longer subject to backup withholding.
[ ]
- --------------------------------------------------------------------------------
PAYER'S REQUEST FOR Part 3 -- CERTIFICATION -- UNDER THE PENALTIES OF
TAXPAYER IDENTIFICATION PERJURY, I CERTIFY THAT THE INFORMATION PROVIDED
NUMBER (TIN) ON THIS FORM IS TRUE, CORRECT AND COMPLETE.
Awaiting TIN [ ]
SIGNATURE: DATE:
-------------------- ------------
- --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF PAYMENTS MADE TO YOU.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 3 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAX IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office, or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number within 60 days, 31% of all reportable
payments made to me thereafter will be withheld, until I provide a number.
- ---------------------------------------- -----------------------------------
Signature Date
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES.
All physically delivered Old Notes or confirmation of any book-entry
transfer to the Exchange Agent's account at a book-entry transfer facility of
Old Notes tendered by book-entry transfer, as well as a properly completed and
duly executed copy of this Letter of Transmittal or facsimile thereof, and any
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent at its address set forth herein on or prior to the Expiration
Date. The method of delivery of this Letter of Transmittal, the Old Notes and
any other required documents is at the election and risk of the Holder, and
except as otherwise provided below, the delivery will be deemed made only when
actually received by the Exchange Agent. If such delivery is by mail, it is
suggested that registered mail with return receipt requested, properly insured,
be used. Old Notes tendered hereby must be in denominations of principal amount
at maturity of $1,000 and any integral multiple thereof.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering Holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the Old Notes for exchange.
Delivery to an address of the Trustee other than as set forth herein,
or instructions via a facsimile number other than the ones set forth herein,
will not constitute a valid delivery.
2. GUARANTEED DELIVERY PROCEDURES.
Holders who wish to tender their Old Notes and (i) whose Old Notes are
not immediately available, or (ii) who cannot deliver their Old Notes, the
Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the Holder of the Old
Notes, the certificate number or numbers of such Old Notes and the
principal amount at maturity of Old Notes tendered, stating that the tender
is being made thereby and guaranteeing that, within three New York Stock
Exchange trading days after the Expiration Date, the Letter of Transmittal
(or facsimile thereof) together with the certificate(s) representing the
Old Notes to be tendered in proper form for transfer and any other
documents required by the Letter of Transmittal, or a Book-Entry
Confirmation, as the case may be, will be delivered by the Eligible
Institution to the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal
(or facsimile thereof), as well as the certificate(s) representing all
tendered Old Notes in proper form for transfer and all other documents
required by the Letter of Transmittal, or a Book-Entry Confirmation, as the
case may be, are received by the Exchange Agent within three New York Stock
Exchange trading days after the Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery
will be sent to Holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above. Any Holder who wishes to tender
Old Notes pursuant to the guaranteed delivery procedures described above must
ensure that the Exchange Agent receives the Notice of Guaranteed Delivery
relating to such Old Notes prior to the Expiration Date. Failure to complete
the guaranteed delivery procedures outlined above will not, of itself, affect
the validity or effect a revocation of any Letter of Transmittal form properly
completed and executed by a Holder who attempted to use the guaranteed delivery
procedures.
<PAGE>
3. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS WHO TENDER BY BOOK-ENTRY
TRANSFER); WITHDRAWALS.
If less than all of the Old Notes evidenced by a submitted certificate
are to be tendered, the tendering holder(s) should fill in the aggregate
principal amount at maturity of Old Notes to be tendered in the column entitled
"Principal Amount Tendered" of the box above entitled "Description of Old Notes
Tendered Hereby." A reissued certificate representing the balance of untendered
Old Notes will be sent to such tendering holder, unless otherwise provided in
the appropriate box on this Letter of Transmittal, promptly after the Expiration
Date. All of the Old Notes delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise indicated.
Old Notes tendered pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date as described in the Prospectus, after
which tenders of Old Notes are irrevocable.
4. SIGNATURE ON THIS LETTER OF TRANSMITTAL, WRITTEN INSTRUMENTS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES.
If this Letter of Transmittal is signed by the registered Holder(s) of
the Old Notes tendered hereby, the signature must correspond exactly with the
name(s) as written on the face of the certificates without alternation or
enlargement or any change whatsoever. If this Letter of Transmittal is signed
by a participant in the Depository, the signature must correspond with the name
as it appears on the security position listing as the owner of the Old Notes.
If any of the Old Notes tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
If a number of Old Notes registered in different names are tendered,
it will be necessary to complete, sign and submit as many separate copies of
this Letter of Transmittal as there are different registrations of Old Notes.
Signatures on this Letter of Transmittal or a notice of withdrawal, as
the case may be, must be guaranteed by an Eligible Institution unless the Old
Notes tendered hereby are tendered (i) by a registered Holder (which term, for
the purposes described herein, shall include a participant in the Depository
whose name appears on a security listing as the owner of the Old Notes) who has
not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on this Letter of Transmittal or (ii) for the account of
an Eligible Institution.
When this Letter of Transmittal is signed by the registered holder or
holders of the Old Notes specified herein and tendered hereby, no endorsements
of certificates or separate bond powers are required. If, however, the New
Notes are to be issued, or any untendered Old Notes are to be reissued, to a
person other than the registered holder, then endorsements of any certificates
transmitted hereby or separate bond powers are required. Signatures on such
certificate(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of any certificate(s) specified herein, such
certificate(s) must be endorsed or accompanied by appropriate bond powers, in
either case signed exactly as the name or names of the registered holder or
holders appear(s) on the certificate(s) and signatures on such certificate(s)
must be guaranteed by an Eligible Institution.
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
Please contact the Company if there are any questions regarding what constitutes
proper evidence.
Endorsements on certificates for Old Notes or signatures on bond
powers required by this Instruction 4 must be guaranteed by a firm which is a
member of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States or by such other Eligible
Institution within the meaning of Rule 17(A)(d)-15 under the Securities Exchange
Act of 1934, as amended (each an "Eligible Institution").
<PAGE>
5. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering Holders should indicate, in the applicable box, the name and
address (or account at the Depository) in which the New Notes issued pursuant to
the Exchange Offer and/or substitute certificates evidencing Old Notes not
exchanged are to be issued (or deposited), if different from the names and
addresses or accounts of the person signing this Letter of Transmittal. In the
case of issuance in a different name, the employer identification number or
social security number of the person named must also be indicated and the
tendering Holder should complete the applicable box. Holders tendering Old
Notes by book-entry transfer may request that Old Notes not exchanged be
credited to such account maintained at DTC as such holder may designate hereon.
If no such instructions are given, such Old Notes not exchanged will be returned
to the name and address of the person signing this Letter of transmittal.
6. TRANSFER TAXES.
The Company shall pay all transfer taxes, if any, applicable to the
transfer and exchange of Old Notes to it or its order pursuant to the Exchange
Offer. If, however, New Notes and/or substitute Old Notes not exchanged are to
be delivered to, or are to be registered or issued in the name of, any person
other than the registered holder of the Old Notes tendered hereby, or if
tendered Old Notes are registered in the name of any person other than the
person signing this Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the transfer of Old Notes to the Company or its order
pursuant to the Exchange Offer, the amount of any such transfer taxes (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted herewith, the amount of such transfer taxes
will be collected from the tendering Holder by the Exchange Agent.
Except as provided in this Instruction 6, it will not be necessary for
transfer stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
7. WAIVER OF CONDITIONS.
The Company reserves the right, in its reasonable judgment, to waive,
in whole or in part, any of the conditions to the Exchange Offer set forth in
the Prospectus.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter of
Transmittal, shall waive any right to reserve notice of the acceptance of their
Old Notes for exchange.
Neither the Company, the Exchange Agent nor any other person is
obligated to give notice of any defect or irregularity with respect to any
tender of Old Notes nor shall any of them incur any liability for failure to
give any such notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any Holder whose Old Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above for
further instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering as well as requests
for additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent at the address and telephone number(s) set forth
above.
10. VALIDITY AND FORM.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject
any and all Old Notes not properly tendered or any Old Notes
<PAGE>
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right, in its reasonable
judgment, to waive any defects, irregularities or conditions of tender as to
particular Old Notes. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in this Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured within such
time as the Company shall determine. Although the Company intends to notify
Holders of defects or irregularities with respect to tenders of Old Notes,
neither the Company, the Exchange Agent nor any other person shall incur any
liability for failure to give such notification. Tenders of Old Notes will not
be deemed to have been made until such defects or irregularities have been cured
or waived. Any Old Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering Holder as soon as
practicable following the Expiration Date.
<PAGE>
IMPORTANT TAX INFORMATION
Under federal income tax law, a Holder tendering Old Notes is required
to provide the Exchange Agent with such Holder's correct Taxpayer Identification
Number ("TIN") on Substitute Form W-9 above. If such Holder is an individual,
the TIN is the Holder's social security number. The Certificate of Awaiting
Taxpayer Identification Number should be completed if the tendering Holder has
not been issued a TIN and has applied for a number or intends to apply for a
number in the near future. If the Exchange Agent is not provided with the
correct TIN, the Holder may be subject to a $50 penalty imposed by the Internal
Revenue Service. In addition, payments that are made to such Holder with
respect to tendered Old Notes may be subject to backup withholding.
Certain Holders (including, among others, all domestic corporations
and certain foreign individuals and foreign entities) are not subject to these
backup withholding and reporting requirements. Such a Holder, who satisfies one
or more of the conditions set forth in Part 2 of the Substitute Form W-9 should
execute the certification following such Part 2. In order for a foreign Holder
to qualify as an exempt recipient, that Holder must submit to the Exchange Agent
a properly completed Internal Revenue Service Form W-9, signed under penalties
of perjury, attesting to that Holder's exempt status. Such forms can be
obtained from the Exchange Agent.
If backup withholding applies, the Exchange Agent is required to
withhold 31% of any amounts otherwise payable to the Holder. Backup withholding
is not an additional tax. Rather, the tax liability of persons subject to
backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be obtained from
the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments that are made to a Holder
with respect to Old Notes tendered for exchange, the Holder is required to
notify the Exchange Agent of his or her correct TIN by completing the form
herein certifying that the TIN provided on Substitute Form W-9 is correct (or
that such Holder is awaiting a TIN) and that (i) each Holder is exempt, (ii)
such Holder has not been notified by the Internal Revenue Service that he or she
is subject to backup withholding as a result of failure to report all interest
or dividends or (iii) the Internal Revenue Service has notified such Holder that
he or she is no longer subject to backup withholding.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
Each Holder is required to give the Exchange Agent the social security
number or employer identification number of the record Holder(s) of the Old
Notes. If Old Notes are in more than one name or are not in the name of the
actual Holder, consult the instructions on Internal Revenue Service Form W-9,
which may be obtained from the Exchange Agent, for additional guidance on which
number to report.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
If the tendering Holder has not been issued a TIN and has applied for
a number or intends to apply for a number in the near future, write "Applied
For" in the space for the TIN or Substitute Form W-9, sign and date the form and
the Certificate of Awaiting Taxpayer Identification Number and return them to
the Exchange Agent. If such certificate is completed and the Exchange Agent is
not provided with the TIN within 60 days, the Exchange Agent will withhold 31%
of all payments made thereafter until a TIN is provided to the Exchange Agent.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE THEREOF (TOGETHER
WITH OLD NOTES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER REQUIRED
DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE EXCHANGE
AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
<PAGE>
NOTICE OF GUARANTEED DELIVERY
FOR
13 1/2% SENIOR DISCOUNT NOTES DUE 2008
OF
RHYTHMS NETCONNECTIONS INC.
As set forth in the Prospectus dated __________ ___, 1998 (the
"Prospectus") of Rhythms NetConnections Inc. (the "Company") and in the
accompanying Letter of Transmittal and instructions thereto (the "Letter of
Transmittal"), this form or one substantially equivalent hereto must be used to
accept the Company's exchange offer (the "Exchange Offer") to purchase all of
its outstanding 13 1/2% Senior Discount Notes due 2008, Series A (the "Old
Notes") in exchange for the Company's 13 1/2% Senior Discount Notes due 2008,
Series B, if (i) certificates representing the Old Notes to be tendered for
purchase and payment are not lost but are not immediately available, (ii) time
will not permit the Letter of Transmittal, certificates representing such Old
Notes or other required documents to reach State Street Bank and Trust Company
of California, N.A. (the "Exchange Agent") on or prior to 5:00 p.m., New York
City time, on the Expiration Date or (iii) the procedures for delivery of the
Old Notes through book-entry transfer into the Exchange Agent's account at The
Depository Trust Company ("DTC") in accordance with DTC's Automated Tender Offer
Program cannot be completed on a timely basis. This form may be delivered by an
Eligible Institution by mail or hand delivery or transmitted, via facsimile
(receipt confirmed by telephone) to the Exchange Agent as set forth below. All
capitalized terms used herein but not defined herein shall have the meanings
ascribed to them in the Prospectus.
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
__________ ___, 1998 UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE").
TENDERS OF OLD NOTES MAY BE WITHDRAWN UNDER THE PROCEDURES DESCRIBED IN THE
PROSPECTUS AT ANY TIME PRIOR TO 5:00 P.M.
ON THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
BY MAIL, HAND OR OVERNIGHT CARRIER: THE EXCHANGE AGENT
State Street Bank and Trust Company of State Street Bank and Trust Company of
California, N.A. California,N.A.
c/o State Street Bank and Trust Company BY FACSIMILE:
2 International Place (617) 664-5290
Boston, MA 02110 CONFIRM BY TELEPHONE:
Attn: Kellie Mullen (617) 664-5587
Attn: Kellie Mullen
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION VIA FACSIMILE,
OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on the
Letter of Transmittal is required to be guaranteed by an "Eligible Institution"
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
Ladies and Gentlemen:
The undersigned hereby tender(s) to the Company, upon the terms and subject
to the conditions set forth in the Exchange Offer (as described in the
Prospectus) and the Letter of Transmittal, receipt of which is hereby
acknowledged, the aggregate principal amount of Old Notes set forth below
pursuant to the guaranteed delivery procedures set forth in the Prospectus under
the caption "The Exchange Offer -- Guaranteed Delivery Procedures."
<PAGE>
The undersigned understands that tenders of Old Notes will be accepted only
in principal amounts equal to $1,000 or integral multiples thereof. The
undersigned understands that tenders of Old Notes pursuant to the Exchange Offer
may not be withdrawn after 5:00 p.m., New York City time, on the Expiration
Date. Tenders of Old Notes may also be withdrawn if the Exchange Offer is
terminated without any such Old Notes being purchased thereunder or as otherwise
provided in the Prospectus under the caption "The Exchange Offer -- Withdrawal
of Tenders."
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned,
and every obligation of the undersigned under this Notice of Guaranteed Delivery
shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
PLEASE COMPLETE AND SIGN
SIGNATURE(S) OF REGISTERED HOLDER(S) NAME(S) OF REGISTERED HOLDER(S):
OR AUTHORIZED SIGNATORY:
-------------------------------------
- -------------------------------------
-------------------------------------
- -------------------------------------
ADDRESS:
- -------------------------------------
-------------------------------------
- -------------------------------------
-------------------------------------
PRINCIPAL AMOUNT OF OLD NOTES
TENDERED: AREA CODE AND TELEPHONE NO.:
- ------------------------------------- -------------------------------------
- ------------------------------------- IF OLD NOTES WILL BE DELIVERED BY BOOK-
ENTRY TRANSFER AT THE DEPOSITORY TRUST
CERTIFICATE NO(S). OF OLD NOTES (IF COMPANY, INSERT DEPOSITORY ACCOUNT NO.:
AVAILABLE):
-------------------------------------
- -------------------------------------
-------------------------------------
- -------------------------------------
DATE:
- -------------------------------------
This Notice of Guaranteed Delivery must be signed by the registered
holder(s) of Old Notes exactly as its (their) name(s) appear on certificates for
Old Notes or on a security position listing as the owner of Old Notes, or by
person(s) authorized to become registered holder(s) by endorsements and
documents transmitted with this Notice of Guaranteed Delivery. If signature is
by a trustee, executor, administrator, guardian, attorney-in-fact, officer or
other person acting in a fiduciary or representative capacity, such person must
provide the following information.
Please print name(s) and address(es)
Name(s):
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Capacity:
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Address(es):
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Do not send Old Notes with this form. Old Notes should be sent to the
Exchange Agent together with a properly completed and duly executed Letter of
Transmittal.
The undersigned, a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc. or a commercial bank
or trust company having an office or a correspondent in the United States,
hereby (a) represents that each holder of Old Notes on whose behalf this tender
is being made "own(s)" the Old Notes covered hereby within the meaning of
Rule 14e-4 under the Securities Exchange Act of 1934, as amended, (b) represents
<PAGE>
that such tender of Old Notes complies with such Rule 14e-4, and (c) guarantees
that, within three New York Stock Exchange trading days from the date of this
Notice of Guaranteed Delivery, a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof), together with certificates representing
the Old Notes covered hereby in proper form for transfer (or confirmation of the
book-entry transfer of such Old Notes into the Exchange Agent's account at The
Depository Trust Company, pursuant to the procedure for book-entry transfer set
forth in the Prospectus) and required documents will be deposited by the
undersigned with the Exchange Agent.
The undersigned acknowledges that it must deliver the Letter of Transmittal
and Old Notes tendered hereby to the Exchange Agent within the time period set
forth above and that failure to do so could result in financial loss to the
undersigned.
Name of Firm: ----------------------------------------
------------------------ Authorized Signature
Address: Name:
--------------------------- -----------------------------------
(Please Type or Print)
---------------------------
Title:
Area Code and Telephone No.: ----------------------------------
--------- Date:
-----------------------------------
