<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 5, 1999
REGISTRATION NO. 333-72409
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
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 (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
6933 SOUTH REVERE PARKWAY
ENGLEWOOD, COLORADO 80112
(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.
6933 SOUTH REVERE PARKWAY
ENGLEWOOD, COLORADO 80112
(303) 476-4200
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
--------------------------
COPIES TO:
JOHN A. DENNISTON, ESQ. MALCOLM I. ROSS, ESQ.
MARTIN C. NICHOLS, ESQ. MICHAEL S. NOVINS, ESQ.
BROBECK, PHLEGER & HARRISON LLP BAKER & MCKENZIE
550 WEST "C" STREET, SUITE 1200 805 THIRD AVENUE
SAN DIEGO, CALIFORNIA 92101 NEW YORK, NEW YORK 10022
(619) 234-1966 (212) 751-5700
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common stock (including the associated Rights to purchase
Series 1 Junior Participating Stock)(2)......................................... $165,000,000 $45,870
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(2) The Rights to purchase shares of our Series 1 Junior Participating Preferred
Stock initially are attached to and trade with the shares of our common
stock being registered. Value attributed to such Rights, if any, is
reflected in the market price of our common stock.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 5, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
<PAGE>
P_R_O_S_P_E_C_T_U_S
______ SHARES
[LOGO]
RHYTHMS NETCONNECTIONS INC.
COMMON STOCK
--------------
This is Rhythms' initial public offering of common stock.
We expect the public offering price to be between $ and $ per share.
Currently, no public market exists for the shares. After pricing of the
offering, we expect that the common stock will trade on The Nasdaq National
Market under the symbol "RTHM".
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
-----------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------------- -----------
<S> <C> <C>
Public Offering Price........................................ $ $
Underwriting Discount........................................ $ $
Proceeds, before expenses, to Rhythms........................ $ $
</TABLE>
The underwriters may also purchase up to an additional shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
------------------
JOINT BOOK-RUNNING MANAGERS
MERRILL LYNCH & CO. SALOMON SMITH BARNEY
HAMBRECHT & QUIST THOMAS WEISEL PARTNERS LLC
-------------
The date of this prospectus is , 1999
<PAGE>
[MAP OF UNITED STATES SHOWING RHYTHMS NATIONAL COVERAGE]
Our goal is to provide service in 50 metropolitan areas which contain
approximately 60% of U.S. LANs.*
*In addition to the 33 metropolitan areas indicated above, our plan is to
launch service in an additional 17 metropolitan areas in 2000.
[MAP OF UNITED STATES SHOWING RHYTHMS NETWORK ARCHITECTURE]
We use market data and industry forecasts throughout this prospectus, which
we have obtained from internal surveys, market research, publicly available
information and industry publications. Industry publications generally state
that the information they provide has been obtained from sources believed to be
reliable, but that the accuracy and completeness of such information is not
guaranteed. Similarly, we believe that the surveys and market research we or
others have performed is reliable, but we have not independently verified this
information. Neither we nor any of the underwriters represents that any such
information is accurate.
We own applications for federal registration and claim rights in the
following trademarks: ACI-TM-; ACCELERATED CONNECTIONS-TM-; APPLINET-TM-; CHOICE
ROUTE-TM-; DSL ... CAN YOU HANDLE THE SPEED?-TM-; HOME.RHYTHMS-TM-;
LOOP.RHYTHMS-TM-; NET.RHYTHMS-TM-; NETRHYTHMS-TM-; RHYTHM WORKS-TM-;
RHYTHMS-TM-; RHYTHMS COGNITIVE NETWORK-TM-; RHYTHMS NETCONNECTIONS-TM-; RHYTHMS
PBXPRESS-TM-; RHYTHMS TOOLBAR-TM-; RING.RHYTHMS-TM-; WORK.RHYTHMS-TM- and
[LOGO].
This prospectus also refers to trade names and trademarks of other
companies.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary.................................................................................................... 4
Risk Factors............................................................................................... 8
Use of Proceeds............................................................................................ 22
Dividend Policy............................................................................................ 22
Capitalization............................................................................................. 23
Dilution................................................................................................... 24
Selected Consolidated Financial Data....................................................................... 25
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 26
Description of Certain Indebtedness........................................................................ 32
Business................................................................................................... 33
Management................................................................................................. 52
Certain Relationships and Related Transactions............................................................. 59
Principal Stockholders..................................................................................... 62
Description of Capital Stock............................................................................... 64
Shares Eligible for Future Sale............................................................................ 68
Underwriting............................................................................................... 69
Legal Matters.............................................................................................. 71
Experts.................................................................................................... 71
Where You Can Find More Information........................................................................ 71
Glossary of Terms.......................................................................................... A-1
Index to Financial Statements.............................................................................. F-1
</TABLE>
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. IF THEY GIVE YOU SUCH INFORMATION OR MAKE SUCH REPRESENTATIONS, YOU
MUST NOT RELY UPON THEM AS HAVING BEEN AUTHORIZED BY US OR THE UNDERWRITERS.
THIS PROSPECTUS IS NOT AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY,
ANY SECURITIES OTHER THAN THESE REGISTERED SECURITIES. IT IS ALSO NOT AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
OFFER OR SALE SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT WE
HAVE HAD NO CHANGE IN OUR BUSINESS SINCE THE DATE OF THIS PROSPECTUS OR THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANYTIME AFTER THE DATE
OF THIS PROSPECTUS.
UNTIL , 1999, ALL DEALERS SELLING OR BUYING OUR COMMON STOCK MAY
BE REQUIRED TO DELIVER A PROSPECTUS EVEN IF THEY ARE NOT PARTICIPATING IN THIS
OFFERING. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS CERTAIN SIGNIFICANT ASPECTS OF OUR BUSINESS AND THIS
OFFERING, BUT YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL
DATA AND RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. WHEN WE REFER TO
OUR COMPANY IN THIS PROSPECTUS, WE REFER TO US AND OUR SUBSIDIARIES, AS A
COMBINED ENTITY, EXCEPT WHERE WE INDICATE OTHERWISE. UNLESS OTHERWISE NOTED, ALL
COMMON STOCK NUMBERS IN THIS PROSPECTUS REFLECT A FOR ONE STOCK SPLIT
EFFECTED IN 1999 AND ASSUME THE CONVERSION OF ALL OUTSTANDING SHARES OF
PREFERRED STOCK INTO COMMON STOCK UPON COMPLETION OF THIS OFFERING AND THAT THE
UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT OPTION. WE HAVE PROVIDED A
GLOSSARY OF TERMS FOR YOUR CONVENIENCE BEGINNING ON PAGE A-1. YOU SHOULD
CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER "RISK FACTORS."
We are a leading service provider of high-speed local access networking
solutions using digital subscriber line ("DSL") technology to businesses. We
have designed our network to give our customers a high-speed "always on" local
connection to the Internet and to private local and wide area networks. We offer
a variety of DSL technologies that deliver data transfer rates ranging from 128
Kilobits per second (Kbps) to 7.1 Megabits per second (Mbps). For customers that
subscribe at the 7.1 Mbps rate, our network provides transfer speeds faster than
frame relay and T-1 circuits, and is approximately 125 times the speed of the
fastest dial-up modem and over 55 times the speed of integrated services digital
network (ISDN) lines. Through our packet-based network, multiple users on a
single connection are able to simultaneously access the Internet and private
networks. Beyond high-speed access, we also offer a growing suite of features
and applications that we can individually configure to each user's needs. We
believe our network solutions will increase remote office and worker
productivity and reduce the complexity of communications for businesses.
Since our inception in February 1997, we have made substantial progress in
implementing a scalable nationwide network. We began offering commercial
services in San Diego in April 1998, and have subsequently begun service in nine
additional markets: San Francisco, San Jose, Oakland/East Bay, Chicago, Los
Angeles, Orange County, Boston, Sacramento and New York. We intend to continue
our network rollout into an additional 23 markets in 1999 and a further 17
markets by the end of 2000. Upon completion of this network expansion, we
anticipate providing services in 50 of the nation's largest metropolitan areas,
which we believe contain 60% of the nation's local area networks. We have signed
interconnection agreements with Ameritech, Bell Atlantic, Bell South, GTE,
Pacific Bell and U S WEST, and we are currently pursuing interconnection
arrangements with two other incumbent carriers. As of January 31, 1999, we
provide service or have installed equipment in nearly 200 incumbent carrier
central offices. We have obtained competitive carrier authority or have been
permitted to operate as a competitive carrier in 21 states.
In March 1999, we entered into a strategic arrangement with MCI WorldCom,
Inc. As part of this strategic arrangement, MCI WorldCom's investment fund
invested $30 million in us. The arrangement also designates us as MCI WorldCom's
preferred provider of business DSL lines in certain circumstances, and provides
that MCI WorldCom is committed to sell at least 100,000 of our DSL lines over a
period of five years, subject to penalties for failure to reach target
commitments. In turn, we have designated MCI WorldCom as our preferred provider
of network services in certain circumstances. MCI WorldCom will also work with
us to develop voice and data applications over a single DSL connection.
We also market our services through our direct sales force and through our
partnerships with recognized leaders in the networking industry, including Cisco
Systems, Inc. and a contemplated arrangement with Verio Inc. Under our strategic
partnership with Cisco, Cisco agreed to jointly market and sell our networking
solutions to its customer base and will engage in joint development projects
with us. As of January 31, 1999, we had over 650 lines in service, and we are
currently under contract to supply over 9,000 additional DSL lines to our
business and service provider customers, including Cisco, Silicon Graphics,
Inc., QUALCOMM Incorporated, Wind River Systems and Broadcom Corporation.
4
<PAGE>
Our senior management team has extensive experience in developing
next-generation networking businesses. Our President and Chief Executive
Officer, Catherine Hapka, was previously the founder, President and Chief
Operating Officer of !NTERPRISE Networking Services, U S WEST's data networking
business. Scott Chandler, our Chief Financial Officer, was previously President
and Chief Executive Officer of C-COR Electronics, Inc., a manufacturer of
broadband telecommunications equipment. James Greenberg, our Chief Network
Officer, directed the design, planning, operation and construction of Sprint
Corporation's data networks. Frank Tolve, our Chief Sales Officer, previously
served as Vice President, Sales Operations of Bay Networks. Our sponsors, which
include MCI WorldCom's investment fund, Kleiner Perkins Caufield & Byers,
Enterprise Partners, Brentwood Venture Capital, the Sprout Group and a
subsidiary of Enron Corporation, have to date invested approximately $60.3
million.
MARKET OPPORTUNITY
We believe that a substantial market opportunity exists as a result of the
convergence of six factors:
- the growing demand for high-speed access to the Internet and corporate
networks;
- the inherent limitations of dial-up modems as a connection to data
networks;
- the need for large companies to improve the productivity of their remote
offices and workers;
- the need for small and medium businesses to have an integrated
communication solution for their networking requirements;
- the increasing adoption of DSL and widespread use of packet-based
networks; and
- the 1996 Telecommunications Act.
These factors create a dual market opportunity: new carriers can create
efficient high-speed data, voice and video networks using existing
infrastructure, and business customers can better address their local and wide
area networking needs through a single carrier.
THE RHYTHMS SOLUTIONS
We believe our network solutions effectively address many of the unmet
communication needs of today's businesses by offering an appealing combination
of quality, performance, price and service. Our network consists of:
- HIGH-SPEED, "ALWAYS ON" LOCAL CONNECTIONS. Using DSL technology over
standard telephone lines, our network is capable of delivering data at
speeds ranging from 128 Kbps to 7.1 Mbps.
- METROPOLITAN AND WIDE AREA OVERLAY NETWORK. We have designed our network
architecture so that we can effectively and efficiently manage data
traffic within and among metropolitan areas in which we offer our
services. We manage the network and monitor service levels on a nationwide
basis from our Network Operations Center in Denver.
- PRODUCTIVITY-ENHANCING FEATURES AND APPLICATIONS. We offer a growing suite
of network-enabled features and applications to extend the functionality
of corporate communications and networking resources for remote offices
and workers. We also offer high performance Internet access solutions to
remote offices and workers as well as small and medium businesses in
conjunction with our Internet Service Provider customers.
- SERVICE FLEXIBILITY. We have designed our network so that, over a single
DSL connection, we are able to customize the features and applications for
each individual user and local area network user.
5
<PAGE>
- TURNKEY SOLUTION. We offer turnkey network solutions for our customers by
providing each customer with a single point of contact for all of our
services, including network implementation, maintenance and billing.
BUSINESS STRATEGY
Our goal is to become the leading national service provider of high
performance networking solutions for remote offices and workers. We intend to
implement the following strategies in an effort to achieve our goal:
- exploit our early market entrance by deploying our network rapidly and
building strong relationships with businesses and service provider
customers;
- focus on businesses that demand high performance networking solutions;
- use our network as a platform for productivity-enhancing features and
applications that we and third parties develop;
- continue to establish strong distribution channels to reach large, medium
and small businesses; and
- provide superior service and customer care.
------------------------
Our principal executive office is located at 6933 South Revere Parkway,
Englewood, Colorado 80112, and our telephone number is (303) 476-4200 or (800)
RHYTHMS.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......................... shares
Common stock to be outstanding after this
offering................................... shares(1)
Use of proceeds.............................. We will use the net proceeds to fund the
continuing deployment of network services in
our existing markets, as well as our planned
rollout in additional markets. We also expect
to use these proceeds for expenses associated
with the continued development of our sales
and marketing activities, to fund operating
losses, to pay our debt obligations and for
general corporate purposes.
Dividend policy.............................. We currently intend to retain any future
earnings to fund the development of our
business. Therefore, we do not currently
anticipate paying cash dividends.
Proposed Nasdaq National Market symbol....... RTHM
</TABLE>
- ------------------------
(1) Based on the number of shares outstanding as of March 4, 1999. Includes
shares of common stock to be issued upon conversion of our preferred
stock and shares of common stock which are currently subject to
repurchase by us. Excludes shares of common stock issuable upon the
exercise of stock options outstanding as of March 4, 1999, with a weighted
average exercise price of $ per share, all of which are exercisable and
of which are vested, and shares of common stock issuable upon
the exercise of outstanding warrants, with a weighted average exercise price
of $ per share. See "Capitalization" and "Business-- Legal
Proceedings."
7
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN US.
YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. THE RISKS AND UNCERTAINTIES
DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY.
WE CANNOT PREDICT OUR SUCCESS BECAUSE WE HAVE A SHORT OPERATING HISTORY
We formed our company in February 1997, and we have a short operating
history for you to review in evaluating our business. We have limited historical
financial and operating data upon which you can evaluate our business and
prospects. We entered into our first interconnection agreement with an incumbent
carrier in July 1997 and began to offer commercial services in San Diego in
April 1998. We have limited commercial operations and have recognized limited
revenues since our inception. In addition, our senior management team and our
other employees have worked together at our company for only a short period of
time.
BECAUSE OUR MARKET IS NEW AND EVOLVING, WE CANNOT PREDICT ITS FUTURE GROWTH OR
ULTIMATE SIZE, AND WE MAY BE UNABLE TO COMPETE EFFECTIVELY
The market for packet-based high-speed digital communication services using
telephone lines is in the early stages of development. Since this market is new
and evolving and because current and future competitors are likely to introduce
competing services, we cannot accurately predict the rate at which this market
will grow, if at all, or whether new or increased competition will result in
market saturation. Various providers of high-speed digital communication
services are testing products from various suppliers for various applications,
and suppliers have not broadly adopted an industry standard. Certain critical
issues concerning commercial use of DSL for Internet and local area network
access, including security, reliability, ease and cost of access and quality of
service, remain unresolved and may impact the growth of these services. If the
markets for our services fail to develop, grow more slowly than anticipated or
become saturated with competitors, these events could materially and adversely
affect our business, prospects, operating results and financial condition.
Our success will depend on the development of this new and rapidly evolving
market and our ability to compete effectively in this market. To address these
risks, we must, among other things:
- rapidly expand the geographic coverage of our network services;
- raise additional capital;
- enter into interconnection agreements and working arrangements with
additional incumbent carriers, substantially all of which we expect to be
our competitors;
- deploy an effective network infrastructure;
- attract and retain customers;
- successfully develop relationships and activities with our partners and
distributors, including MCI WorldCom and Cisco;
- continue to attract, retain and motivate qualified personnel;
- accurately assess potential markets and effectively respond to competitive
developments;
- continue to develop and integrate our operational support system and other
back office systems;
- obtain any required governmental authorizations;
- comply with evolving governmental regulatory requirements;
- increase awareness of our services;
8
<PAGE>
- continue to upgrade our technologies; and
- effectively manage our expanding operations.
We may not be successful in addressing these and other risks, and our
failure to address risks would materially and adversely affect our business,
prospects, operating results and financial condition.
WE CANNOT PREDICT OUR SUCCESS BECAUSE OUR BUSINESS MODEL IS UNPROVEN
We have not validated our business model and strategy in the market. We
believe that the combination of our unproven business model and the highly
competitive and fast changing market in which we compete make it impossible to
predict the extent to which our network service will achieve market acceptance
and our overall success. To be successful, we must develop and market network
services that are widely accepted by businesses at profitable prices. We may
never be able to deploy our network as planned, achieve significant market
acceptance, favorable operating results or profitability or generate sufficient
cash flow to repay our debt. Of the 9,800 lines that we have committed to
deliver to date, we committed approximately 8,700 to only two customers. None of
our large business customers has rolled out our services broadly to its
employees, and we cannot be certain when or if these rollouts will occur. We
will not receive significant revenue from our large customers unless these
rollouts occur. Any continued or ongoing failure for any reason of large
business customers to roll out our services, failure to validate our business
model in the market, including failure to build out our network, achieve
widespread market acceptance or sustain desired pricing would materially and
adversely affect our business, prospects, operating results and financial
condition.
WE EXPECT OUR LOSSES TO CONTINUE
We have incurred losses and experienced negative operating cash flow for
each month since our formation. As of December 31, 1998, we had an accumulated
deficit of approximately $38.8 million. We intend to rapidly and substantially
increase our expenditures and operating expenses in an effort to expand our
network services. We expect to have annual interest and amortization expense
relating to our senior discount notes of approximately $23.6 million in 1999 and
increasing to $41.5 million in 2003. In addition, we intend to seek additional
debt financing in the future. As a result of these factors, we expect to incur
substantial operating and net losses and negative operating cash flow for the
foreseeable future. We will need to obtain additional financing to pay our
expenses and to make payments on our debt. We cannot give you any assurance
about whether or when we will have sufficient revenues to satisfy our funding
requirements or pay our debt service obligations.
OUR OPERATING RESULTS IN ONE OR MORE FUTURE PERIODS ARE LIKELY TO FLUCTUATE
SIGNIFICANTLY AND MAY FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES
ANALYSTS OR INVESTORS
Our annual and quarterly operating results are likely to fluctuate
significantly in the future due to numerous factors, many of which are outside
of our control. These factors include:
- the rate of customer acquisition and turnover;
- the prices our customers are willing to pay;
- the amount and timing of expenditures relating to the expansion of our
services and infrastructure;
- the timing and availability of incumbent carrier central office
collocation facilities and transport facilities;
- the success of our relationships with our partners and distributors,
including MCI WorldCom and Cisco;
9
<PAGE>
- our ability to deploy our network on a timely basis;
- introduction of new services or technologies by our competitors;
- price competition;
- the ability of our equipment and service suppliers to meet our needs;
- regulatory developments, including interpretations of the 1996
Telecommunications Act;
- technical difficulties or network downtime;
- the success of our strategic alliances; and
- the condition of the telecommunication and network service industries and
general economic conditions.
Because of these factors, our operating results in one or more future
periods could fail to meet or exceed the expectations of securities analysts or
investors. In that event, the trading price of our common stock would likely
decline.
IF SALES FORECASTED FOR A PARTICULAR PERIOD ARE NOT REALIZED IN THAT PERIOD DUE
TO THE LENGTHY SALES CYCLE OF OUR SERVICES, OUR OPERATING RESULTS FOR THAT
PERIOD WILL BE HARMED
The sales cycle of our network services can be very lengthy, particularly
for large businesses. The sales cycle for large businesses typically involves:
- a significant technical evaluation;
- an initial trial rollout to a relatively small number of end users;
- a commitment of capital and other resources by the customer;
- delays associated with the customer's internal procedures to approve large
capital expenditures;
- time required to engineer the deployment of our services;
- coordination of the activation of multiple access lines with incumbent
carriers; and
- testing and acceptance of our services.
For these and other reasons, our sales cycle for large businesses lasts at
least six months. During this lengthy sales cycle, we will incur significant
expenses in advance of the receipt of revenues. If sales that we forecast for a
particular period do not occur because of our lengthy sales cycle, this event
could materially and adversely affect our business, prospects, operating results
and financial condition.
WE DEPEND ON INCUMBENT CARRIERS FOR COLLOCATION AND TRANSMISSION FACILITIES
We must use copper telephone lines controlled by the incumbent carriers to
provide DSL connections to customers. We also depend on the incumbent carriers
for collocation and for a substantial portion of the transmission facilities we
use to connect our equipment in incumbent carrier central offices to our Metro
Service Centers. In addition, we depend on the incumbent carriers to test and
maintain the quality of the copper lines that we use. We have not established a
history of obtaining access to collocation and transmission facilities from
incumbent carriers in large volumes. In many cases, we may be unable to obtain
access to collocation and transmission facilities from the incumbent carriers,
or to gain access at acceptable rates, terms and conditions, including
timeliness. We have experienced, and expect to experience in the future, lengthy
periods between our request for and the actual provision of the collocation
space and telephone lines. An inability to obtain adequate and timely access to
collocation space or transmission facilities on acceptable terms and conditions
from
10
<PAGE>
incumbent carriers could have a material and adverse effect on our business,
prospects, operating results and financial condition.
Because we compete with incumbent carriers in our markets, they may be
reluctant to cooperate with us. The incumbent carriers may experience, or claim
to experience, a shortage of collocation space or transmission capacity. If this
occurs, we may not have alternate means of connecting our DSL equipment with the
copper lines or connecting our equipment in central offices to Metro Service
Centers. We have experienced rejections of some of our collocation applications
on the grounds that no space is available. We may receive additional rejections
in the future. The number of other competitive local exchange carriers that
request collocation space will also affect the availability of collocation space
and transmission capacity. If we are unable to obtain physical collocation space
or transmission capacity from our targeted incumbent carriers, we may face
delays, additional costs or an inability to provide services in certain
locations. In many cases where our application for physical collocation is
rejected, we expect to have the option of adjacent location -- where we install
our equipment in a building that is very close to the incumbent carrier central
office -- or virtual collocation -- where the incumbent carrier manages and
operates our equipment. While we have used adjacent and virtual collocation in
our network, those alternatives reduce our control over our equipment, and
therefore may reduce the level of quality and service we provide to our
customers. We are currently in an arbitration proceeding with SBC Communications
Inc. concerning the availability of DSL-enabled copper lines, as well as other
operational issues. Delays in obtaining access to collocation space and
telephone lines or the rejection of our applications for collocation could
result in delays in, and increased expenses associated with, the rollout of our
services, which in turn could have a material and adverse effect on our
business, prospects, operating results and financial condition.
WE ARE UNABLE TO CONTROL THE TERMS AND CONDITIONS UNDER WHICH WE GAIN ACCESS TO
INCUMBENT CARRIER COLLOCATION AND TRANSMISSION FACILITIES
We cannot control the terms under which we collocate our equipment, connect
to copper lines or gain the use of an incumbent carrier's transmission
facilities. State tariffs, state public utility commissions and interconnection
agreements with the incumbent carriers determine the price, terms and conditions
under which collocation space is made available, and they make these
administrative determinations in ongoing hearings. Interconnection agreements
and state public utility commissions also determine the terms and conditions of
access to copper lines and other components of an incumbent carrier's network.
We may be unable to negotiate or enter into interconnection agreements on
acceptable terms or at all. In addition, we cannot be sure that incumbent
carriers will abide by their obligations under those agreements. Delays in
obtaining interconnection agreements would delay our entry into certain markets.
In addition, disputes may arise between us and the incumbent carriers with
respect to interconnection agreements, and we may be unable to resolve disputes
in our favor. If we are unable to enter into, or experience a delay in
obtaining, interconnection agreements, this inability or delay could adversely
affect our business, prospects, operating results and financial condition.
Further, the interconnection agreements are generally short term, and we may be
unable to renew the interconnection agreements on acceptable terms or at all.
The state commissions, the Federal Communications Commission and the courts
oversee, in varying degrees, interconnection arrangements as well as the terms
and conditions under which we gain access to incumbent carrier copper lines and
transmission facilities. These government entities may modify the terms or
prices of our interconnection agreements and our access to incumbent carrier
copper lines and transmission facilities in ways that would be adverse to our
business. State regulatory commissions establish the price rates for DSL-capable
copper lines as well as other rates, terms and conditions of our dealings with
the incumbent carriers in ongoing public hearings. Participation in these
hearings will involve significant management time and expense. Incumbent
carriers may from time to time propose new rates, and the outcomes of hearings
and rulings could have a material and adverse effect on our business, prospects,
operating results and financial condition.
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WE DEPEND ON THIRD PARTIES, PARTICULARLY MCI WORLDCOM AND CISCO, FOR THE
MARKETING AND SALES OF OUR NETWORK SERVICES
We will rely significantly on indirect sales channels for the marketing and
sales of our network services. We will seek to establish relationships with
numerous service providers, including Internet Service Providers, interexchange
carriers, other competitive carriers and value-added resellers, to gain access
to customers. Our agreements to date with service providers are non-exclusive,
and we anticipate that future agreements will also be on a non-exclusive basis,
allowing service providers to resell services offered by our competitors. These
agreements are generally short term, and can be cancelled by the service
provider without significant financial consequence. We cannot control how these
service providers perform and cannot be certain that their performance will be
satisfactory to us or our customers. Many of these companies also compete with
us. If the number of customers we obtain through indirect sales channels is
significantly lower than our forecast for any reason, or if the service
providers with which we have contracted are unsuccessful in competing in their
own intensely competitive markets, these events would have a material and
adverse effect on our business, prospects, operating results and financial
condition.
We expect to rely particularly on the sales and marketing efforts of MCI
WorldCom and Cisco. While our agreement with MCI WorldCom calls for it to sell
100,000 DSL lines, the agreement also enables MCI WorldCom to terminate the
agreement under certain circumstances and to receive offsets and credits under
other circumstances. Therefore, MCI WorldCom might sell significantly fewer than
100,000 DSL lines, or we might receive significantly lower revenues than we
otherwise would.
THE MARKET IN WHICH WE OPERATE IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY, ESPECIALLY AGAINST ESTABLISHED INDUSTRY COMPETITORS WITH
SIGNIFICANTLY GREATER FINANCIAL RESOURCES
We will face competition from many competitors with significantly greater
financial resources, well-established brand names and large, existing installed
customer bases. We expect the level of competition to intensify in the future.
We expect significant competition from incumbent carriers, traditional and new
long distance carriers, cable modem service providers, Internet Service
Providers, wireless and satellite data service providers and other competitive
carriers. Incumbent carriers have existing metropolitan area networks and
circuit-switched local access networks. In addition, most incumbent carriers are
establishing their own Internet Service Provider businesses and are in some
stage of market trials and retail sales of DSL-based access services. Some
incumbent carriers have announced that they intend to aggressively market these
services to their residential customers at attractive prices. We believe that
incumbent carriers have the potential to quickly overcome many of the issues
that have delayed widespread deployment of DSL services in the past. In
addition, we may experience substantial customer turnover in the future. Many
providers of telecommunications and networking services experience high rates of
customer turnover.
Many of the leading traditional long distance carriers, including AT&T
Corporation, MCI WorldCom and Sprint, are expanding their capabilities to
support high-speed, end-to-end networking services. The newer long distance
carriers, including Williams Companies Inc., Qwest Communications International,
Inc. and Level 3 Communications, Inc., are building and managing high bandwidth,
nationwide packet networks and partnering with Internet Service Providers to
offer services directly to the public. Cable modem service providers, like @Home
Networks, are offering or preparing to offer high-speed Internet access over
hybrid fiber networks to consumers, and @Work positioned itself to do the same
for businesses. Several new companies are emerging as wireless, including
satellite-based, data service providers. Internet Service Providers, including
some with significant and even nationwide presences, provide Internet access to
residential and business customers, generally over the incumbent carriers'
circuit switched networks, although some have begun offering DSL-based access.
Certain competitive carriers, including Covad Communications Group, Inc. and
NorthPoint Communications,
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Inc., have begun offering DSL-based access services, and, like us, have
attracted strategic equity investors, marketing allies and product development
partners. Others are likely to do the same 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 our service offerings.
Some of the technologies used by these competitors for local access connections
include integrated services digital network (ISDN), DSL, wireless data and cable
modems. Some of the competitive factors in our 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. We believe that we compare unfavorably with many of our
competitors with regard to, among other things, brand recognition, existing
relationships with end users, available pricing discounts, central office
access, capital availability and exclusive contracts. Substantially all of our
competitors and potential competitors have substantially greater resources than
us. We may not be able to compete effectively in our target markets. Our failure
to compete effectively would have a material and adverse effect on our business,
prospects, operating results and financial condition. See
"Business--Competition."
OUR NETWORK SERVICES MAY NOT ACHIEVE SIGNIFICANT MARKET ACCEPTANCE BECAUSE OUR
PRICES ARE OFTEN HIGHER THAN THOSE CHARGED FOR COMPETING SERVICES
Our prices are in some cases higher than those that our competitors charge
for some of their services. Prices for digital communications services have
fallen historically, and we expect prices in the industry in general, and for
the services we offer now and plan to offer in the future, to continue to fall.
We may be required to reduce prices periodically to respond to competition and
to generate increased sales volume. Our prices may not permit our network
services to gain a desirable level of commercial acceptance, and we may be
unable to sustain any current or future pricing levels. Due to these factors, we
cannot accurately forecast our revenues or the rate at which we will add new
customers.
WE WILL NEED SIGNIFICANT ADDITIONAL FUNDS, WHICH WE MAY NOT BE ABLE TO OBTAIN
The expansion and development of our business will require significant
additional capital. We intend to seek substantial additional financing in the
future to fund the growth of our operations, including funding the significant
capital expenditures and working capital requirements necessary for us to
provide service in our targeted markets. We believe that our current capital
resources, including the proceeds of this offering, will be sufficient to fund
our aggregate capital expenditures and working capital requirements, including
operating losses, until June 2000. We will not have completed our network
rollout by this date and will need additional capital, whether or not our
estimate on how long current capital resources will last is accurate. In
addition, our actual funding requirement may differ materially if our
assumptions underlying this estimate turn out to be incorrect. Therefore, you
should consider our estimate in light of the following facts:
- we have no meaningful history of operations or revenues;
- our estimated funding requirements do not reflect any contingency amounts
and may increase, perhaps substantially, if we are unable to generate
revenues in the amount and within the time frame we expect or if we have
unexpected cost increases; and
- we face many challenges and risks, including those discussed elsewhere in
"Risk Factors."
We may be unable to obtain any future equity or debt financing on acceptable
terms or at all. Recently the financial markets have experienced extreme price
fluctuations. A market downturn or general market uncertainty may adversely
affect our ability to secure additional financing. The
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indenture that governs our senior discount notes restricts our ability to obtain
additional debt financing. Any future borrowing instruments, such as credit
facilities and lease agreements, are likely to contain similar or more
restrictive covenants and could require us to pledge assets as security for the
borrowings. If we are unable to obtain additional capital or are required to
obtain it on terms less satisfactory than what we desire, we will need to delay
deployment of our network services or take other actions that could adversely
affect our business, prospects, operating results and financial condition. If we
are unable to generate sufficient cash flow or obtain funds necessary to meet
required payments of our debt, then we will be in default on our debt
instruments. To date, our cash flow from operations has been insufficient to
cover our expenses and capital needs. Please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
OUR SERVICES ARE SUBJECT TO GOVERNMENT REGULATION, AND CHANGES IN CURRENT OR
FUTURE LAWS OR REGULATIONS COULD RESTRICT THE WAY WE OPERATE OUR BUSINESS
A significant portion of the services that we offer through our subsidiaries
are subject to regulation at the federal, state and/or local levels. Future
federal or state regulations and legislation may be less favorable to us than
current regulation and legislation and therefore have an adverse impact on our
business, prospects, operating results and financial condition. In addition, we
may expend significant financial and managerial resources to participate in
rule-setting proceedings at either the federal or state level, without achieving
a favorable result. The Federal Communications Commission
prescribes rules applicable to interstate communications, including rules
implementing the 1996 Telecommunications Act, a responsibility it shares with
the state regulatory commissions. In particular, we believe that incumbent
carriers will work aggressively to modify or restrict the operation of many
provisions of the 1996 Telecommunications Act. We expect incumbent carriers will
pursue litigation in courts, institute administrative proceedings with the
Federal Communications Commission and other regulatory agencies and lobby the
United States Congress, all in an effort to affect laws and regulations in a
manner favorable to the incumbent carriers and against the interest of
competitive carriers such as us. If the incumbent carriers succeed in any of
their efforts, if these laws and regulations change or if the administrative
implementation of laws develops in an adverse manner, these events could have a
material and adverse effect on our business, prospects, operating results and
financial condition. For more details about our regulatory situation, please see
"Business--Government Regulation."
OUR FAILURE TO MANAGE GROWTH COULD ADVERSELY AFFECT US
We have rapidly and significantly expanded our operations. We anticipate
further significant expansion of our operations in an effort to achieve our
network rollout and deployment objectives. Our expansion to date has strained
our management, financial controls, operations systems, personnel and other
resources. Any future rapid expansion would increase these strains. If our
marketing strategy is successful, we may experience difficulties responding to
customer demand for services and technical support in a timely manner and in
accordance with their expectations. As a result, rapid growth of our business
would make it difficult to implement successfully our strategy to provide
superior customer service. To manage any growth of our operations, we must:
- improve existing and implement new operational, financial and management
information controls, reporting systems and procedures;
- hire, train and manage additional qualified personnel;
- expand and upgrade our core technologies; and
- effectively manage multiple relationships with our customers, suppliers
and other third parties.
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We may not be able to install management information and control systems in
an efficient and timely manner, and our current or planned personnel, systems,
procedures and controls may not be adequate to support our future operations.
Failure to manage our future growth effectively could adversely affect the
expansion of our customer base and service offerings. Any failure to
successfully address these issues could materially and adversely affect our
business, prospects, operating results and financial condition.
OUR SUBSTANTIAL DEBT CREATES FINANCIAL AND OPERATING RISK
We are highly leveraged, and we intend to seek additional debt funding in
the future. As of December 31, 1998, we had approximately $158.3 million of
outstanding debt, and our debt made up 100% of our capitalization. Please see
"Capitalization." We are not generating any meaningful revenue to fund our
operations or to repay our debt. Our substantial leverage poses the risks that:
- we may be unable to repay our debt due to one or more events discussed in
"Risk Factors;"
- we may be unable to obtain additional financing;
- we must dedicate a substantial portion of our cash flow from operations to
servicing our debt once our debt requires us to make cash interest
payments, and any remaining cash flow may not be adequate to fund our
planned operations; and
- we may be more vulnerable during economic downturns, less able to
withstand competitive pressures and less flexible in responding to
changing business and economic conditions.
THE TELECOMMUNICATIONS INDUSTRY IS UNDERGOING RAPID TECHNOLOGICAL CHANGE, AND
NEW TECHNOLOGIES MAY BE SUPERIOR TO THE TECHNOLOGY WE USE
The telecommunications industry is subject to rapid and significant
technological changes, such as continuing developments in DSL technology and
alternative technologies for providing high-speed data communications. We cannot
predict the effect of technological changes on our business. We will rely in
part on third parties, including certain of our competitors and potential
competitors, for the development of and access to communications and networking
technology. We expect that new products and technologies applicable to our
market will emerge. New products and technologies may be superior and/or render
obsolete the products and technologies that we currently use. Our future success
will depend, in part, on our ability to anticipate and adapt to technological
changes and evolving industry standards. We may be unable to obtain access to
new technology on acceptable terms or at all, and we may be unable to adapt to
new technologies and offer services in a competitive manner. Our joint
development project with Cisco and our joint development project with MCI
WorldCom may not produce useful technologies or services for us. Further, new
technologies and products may not be compatible with our technologies and
business plan. We believe that the telecommunications industry must set
standards to allow for the compatibility of various products and technologies.
However, the industry may not set standards on a timely basis or at all. In
addition, many of the products and technologies that we intend to use in our
network services are relatively new and unproven and may be unreliable.
WE MAY BE UNABLE TO EFFECTIVELY EXPAND OUR NETWORK SERVICES AND PROVIDE HIGH
PERFORMANCE TO A SUBSTANTIAL NUMBER OF END USERS
Due to the limited deployment of our network services, we cannot guarantee
that our network will be able to connect and manage a substantial number of end
users at high transmission speeds. We may be unable to scale our network to
service a substantial number of end users while achieving high performance.
Further, our network may be unable to achieve and maintain competitive digital
transmission speeds. While digital transmission speeds of up to 7.1 Mbps are
possible on certain
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portions of our network, that speed is not available over a majority of our
network. Actual transmission speeds on our network will depend on a variety of
factors and many of these factors are beyond our control, including the type of
DSL technology deployed, the distance an end user is located from a central
office, the quality of the telephone lines, the presence of interfering
transmissions on nearby lines and other factors. As a result, we may not be able
to achieve and maintain digital transmission speeds that are attractive in the
market.
OUR SERVICES MAY SUFFER BECAUSE THE TELEPHONE LINES WE REQUIRE MAY BE
UNAVAILABLE OR IN POOR CONDITION
Our ability to provide DSL-based services to potential customers depends on
the quality, physical condition, availability and maintenance of telephone lines
within the control of the incumbent carriers. We believe that the current
condition of telephone lines in many cases will be inadequate to permit us to
fully implement our network services. In addition, the incumbent carriers may
not maintain the telephone lines in a condition that will allow us to implement
our network effectively. The telephone lines may not be of sufficient quality or
the incumbent carriers may claim they are not of sufficient quality to allow us
to fully implement or operate our network services. Further, some customers use
technologies other than copper lines to provide telephone services, and DSL
might not be available to these customers.
OUR SUCCESS DEPENDS ON OUR RETENTION OF CERTAIN KEY PERSONNEL AND ON THE
PERFORMANCE OF THOSE PERSONNEL
Our success depends on the performance of our officers and key employees,
especially our Chief Executive Officer. Members of our senior management team
have worked together for only a short period of time. We do not have "key
person" life insurance policies on any of our employees nor do we have
employment agreements for fixed terms with any of our employees. Any of our
employees, including any member of our senior management team, may terminate his
or her employment with us at any time. Given our early stage of development, we
depend on our ability to retain and motivate high quality personnel, especially
our management. Our future success also depends on our continuing ability to
identify, hire, train and retain highly qualified technical, sales, marketing
and customer service personnel. Moreover, the industry in which we compete has a
high level of employee mobility and aggressive recruiting of skilled personnel.
We may be unable to continue to employ our key personnel or to attract and
retain qualified personnel in the future. We face intense competition for
qualified personnel, particularly in software development, network engineering
and product management. Please see "Business--Employees" and "Management."
WE DEPEND ON THIRD PARTIES FOR EQUIPMENT, INSTALLATION AND PROVISION OF FIELD
SERVICE
We currently plan to purchase all of our equipment from many vendors and
outsource the majority of the installation and field service of our networks to
third parties. Our reliance on third party vendors involves a number of risks,
including the absence of guaranteed capacity and reduced control over delivery
schedules, quality assurance, production yields and costs. If any of our
suppliers reduces or interrupts its supply, or if any significant installer or
field service provider interrupts its service to us, this reduction or
interruption could disrupt our business. Although multiple manufacturers
currently produce or are developing equipment that will meet our current and
anticipated requirements, our suppliers may be unable to manufacture and deliver
the amount of equipment we order, or the available supply may be insufficient to
meet our demand. Currently, almost all of the DSL modem and DSL multiplexing
equipment we use for a single connection over a copper line must come from the
same vendor since there are no existing interoperability standards for the
equipment used in our higher speed services. If our suppliers or licensors enter
into competition with us, or if our competitors enter into exclusive or
restrictive arrangements with the suppliers or licensors, then these events may
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materially and adversely affect the availability and pricing of the equipment we
purchase and the technology we license.
A SYSTEM FAILURE OR BREACH OF NETWORK SECURITY COULD CAUSE DELAYS OR
INTERRUPTIONS OF SERVICE TO OUR CUSTOMERS
Our operations depend on our ability to avoid damages from fires,
earthquakes, floods, power losses, excessive sustained or peak user demand,
telecommunications failures, network software flaws, transmission cable cuts and
similar events. A natural disaster or other unanticipated problem at our owned
or leased facilities could interrupt our services. Additionally, if an incumbent
carrier, competitive carrier or other service provider fails to provide the
communications capacity we require, as a result of a natural disaster,
operational disruption or any other reason, then this failure could interrupt
our services.
Despite the implementation of security measures, our network may be
vulnerable to unauthorized access, computer viruses and other disruptive
problems. Corporate networks and Internet Service Providers 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 our customers, which might cause us to be liable to our customers,
and also might deter potential customers. Eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessation of service to our customers and our customers' end users.
INTERFERENCE OR CLAIMS OF INTERFERENCE COULD DELAY OUR ROLLOUT OR HARM OUR
SERVICES
All transport technologies deployed on copper telephone lines have the
potential to interfere with, or to be interfered with by, other transport
technologies on the copper telephone lines. We believe that our DSL
technologies, like other transport technologies, do not interfere with existing
voice services. We believe that a workable plan that takes into account all
technologies could be implemented in a scalable way across all incumbent
carriers using existing plant engineering principles. There are several
initiatives underway to establish national standards and principles for the
deployment of DSL technologies. We believe that our technologies can be deployed
consistently with these evolving standards. Nevertheless, incumbent carriers may
claim that the potential for interference permits them to restrict or delay our
deployment of DSL services. Interference could degrade the performance of our
services or make us unable to provide service on selected lines. The procedures
to resolve interference issues between competitive carriers and incumbent
carriers are still being developed, and these procedures may not be effective.
We may be unable to successfully negotiate interference resolution procedures
with incumbent carriers. Moreover, incumbent carriers may make claims regarding
interference or unilaterally take action to resolve interference issues to the
detriment of our services. State or federal regulators could also institute
responsive actions. Interference, or claims of interference, if widespread,
would adversely affect our speed of deployment, reputation, brand image, service
quality and customer satisfaction and retention.
WE DEPEND ON THIRD PARTIES FOR FIBER OPTIC TRANSPORT FACILITIES
We depend on the availability of fiber optic transmission facilities from
third parties to connect our equipment within and between metropolitan areas.
These third party fiber optic carriers include long distance carriers, incumbent
carriers and other competitive carriers. Many of these entities are, or may
become, our competitors. This approach includes a number of risks. For instance,
we may be unable to negotiate and renew favorable supply agreements. Further, we
depend on the timeliness of these companies to process our orders for customers
who seek to use our services. We have in the past experienced supply problems
with certain of our fiber optic suppliers, and they may not be able to meet our
needs on a timely basis in the future. Moreover, the fiber optic transport
providers whose networks
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we lease may be unable to obtain or maintain permits and rights-of-way necessary
to develop and operate existing and future networks.
UNCERTAIN FEDERAL AND STATE TAX AND OTHER SURCHARGES ON OUR SERVICES MAY
INCREASE OUR PAYMENT OBLIGATIONS
Telecommunications providers pay a variety of surcharges and fees on their
gross revenues from interstate and intrastate services. The division of our
services between interstate and intrastate services is a matter of
interpretation, and in the future the Federal Communications Commission or
relevant state commission authorities may contest this division. A change in the
characterization of the jurisdiction of our services could cause our payment
obligations to increase. In addition, pursuant to periodic revisions by state
and federal regulators of the applicable surcharges, we may be subject to
increases in the surcharges and fees currently paid.
OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE TO PROTECT OUR
PROPRIETARY RIGHTS, AND WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS
We rely on a combination of licenses, confidentiality agreements and other
contracts to establish and protect our technology and other intellectual
property rights. We have applied for trademarks and servicemarks on certain
terms and symbols that we believe are important for our business. We currently
have no patents or patent applications pending. The steps we have taken may be
inadequate to protect our technology or other intellectual property. Moreover,
our competitors may independently develop technologies that are substantially
equivalent or superior to ours. Third parties may assert infringement claims
against us and, in the event of an unfavorable ruling on any claim, we may be
unable to obtain a license or similar agreement to use technology we rely upon
to conduct our business. We also rely on unpatented trade secrets and know-how
to maintain our competitive positions, which we seek to protect, in part, by
confidentiality agreements with employees, consultants and others. However,
these agreements may be breached or terminated, and we may not have adequate
remedies for any breach. In addition, our competitors may otherwise learn or
discover our trade secrets. Our management personnel were previously employees
of other telecommunications companies. In many cases, these individuals are
conducting activities for us in areas similar to those in which they were
involved prior to joining us. As a result, we or our employees could be subject
to allegations of violation of trade secrets and other similar claims.
RISKS ASSOCIATED WITH POTENTIAL GENERAL ECONOMIC DOWNTURN
In the last few years the general health of the economy, particularly the
economy of California where we have conducted a significant portion of our
operations to date, has been relatively strong and growing, a consequence of
which has been increasing capital spending by individuals and growing companies
to keep pace with rapid technological advances. To the extent the general
economic health of the United States or of California declines from recent
historically high levels, or to the extent individuals or companies fear a
decline is imminent, these individuals and companies may reduce expenditures
such as those for our services. Any decline or concern about an imminent decline
could delay decisions among certain of our customers to roll out our services or
could delay decisions by prospective customers to make initial evaluations of
our services. Any delays would have a material and adverse effect on our
business, prospects, operating results and financial condition.
WE MAY BE UNABLE TO SATISFY, OR MAY BE ADVERSELY CONSTRAINED BY, THE COVENANTS
IN OUR EXISTING DEBT SECURITIES
The indenture for our senior discount notes imposes significant restrictions
on how we can conduct our business. For example, the restrictions prohibit or
limit our ability to incur additional debt, make dividend payments and engage in
certain business activities. The restrictions may materially and
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adversely affect our ability to finance future operations or capital needs or
conduct additional business activities. Any future senior debt that we may incur
will likely impose additional restrictions on us. If we fail to comply with any
existing or future restrictions, we could default under the terms of the
applicable debt and be unable to meet our debt obligations. If we default, the
holders of the applicable debt could demand that we pay the debt, including
interest, immediately. We may be unable to make the required payments or raise
sufficient funds from alternative sources to make the payments. Even if
additional financing is available in the event that we default, it may not be on
acceptable terms.
OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWN A SIGNIFICANT PERCENTAGE OF OUR
COMPANY, AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR COMPANY
Our executive officers and directors and principal stockholders together
will beneficially own % of the common stock after completion of this
offering, or % if the over-allotment option is exercised in full.
Accordingly, these stockholders will be able to determine the composition of our
Board of Directors, will retain the voting power to approve all matters
requiring stockholder approval and will continue to have significant influence
over our affairs. This concentration of ownership could have the effect of
delaying or preventing a change in our control or otherwise discouraging a
potential acquirer from attempting to obtain control of us, which in turn could
have a material and adverse effect on the market price of the common stock or
prevent our stockholders from realizing a premium over the market prices for
their shares of common stock. See "Principal Stockholders" for information about
the ownership of common stock by our executive officers, directors and principal
stockholders.
OUR FAILURE AND THE FAILURE OF THIRD PARTIES TO BE YEAR 2000 COMPLIANT COULD
NEGATIVELY IMPACT OUR BUSINESS
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs may recognize a date using "00" as the year 1900
rather than the year 2000. This, in turn, could result in major system failures
or miscalculations, and is generally referred to as the "Year 2000 issue." We
have formulated and, to a large extent, effected a plan to address our Year 2000
issues.
Our Year 2000 plan applies to two areas: internal business systems and
compliance by external customers and providers. We have completed our Year 2000
compliance testing for all of our internal systems and believe that they are
Year 2000 compliant. Because we are a young company, we believe we have been
able to build our business systems with the Year 2000 issue in mind in a more
effective manner than many older companies. Therefore, there have been few Year
2000 changes required to our existing systems and applications. We have
substantially completed a compliance check of our external customers and
providers, except for the incumbent carriers. Based on responses from these
third parties, other than the incumbent carriers, we believe that they will not
experience Year 2000 problems that would materially and adversely affect our
business. We have not been able to conduct a compliance check of incumbent
carriers nor assess the incumbent carriers' Year 2000 compliance. To the extent
that one or more incumbent carriers or other third parties experience Year 2000
problems, our network and services could be adversely affected. Furthermore, the
purchasing patterns of our customers may be affected by Year 2000 issues as
companies expend significant resources to correct their current systems for Year
2000 compliance. These expenditures may result in reduced funds available for
our services. Any of these developments could have a material and adverse effect
on our business, prospects, operating results and financial condition. We have
not fully determined the risks associated with the reasonably worst-case
scenario and have not formulated a contingency plan to address Year 2000 issues.
We do not expect to have a specific contingency plan in place in the future.
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IF WE ARE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, WE WOULD BECOME SUBJECT
TO SUBSTANTIAL REGULATION WHICH WOULD INTERFERE WITH OUR ABILITY TO CONDUCT OUR
BUSINESS ACCORDING TO OUR BUSINESS PLAN
As a result of this offering and our previous financings, we have
substantial cash, cash equivalents and short-term investments. We plan to
continue investing the excess proceeds of these financings in short-term
instruments consistent with prudent cash management and not primarily for the
purpose of achieving investment returns. Please see "Use of Proceeds."
Investment in securities primarily for the purpose of achieving investment
returns could result in our being treated as an "investment company" under the
Investment Company Act of 1940. The Investment Company Act requires the
registration of companies that are primarily in the business of investing,
reinvesting or trading securities or that fail to meet certain statistical tests
regarding their composition of assets and sources of income even though they
consider themselves not to be primarily engaged in investing, reinvesting or
trading securities.
We believe that we are primarily engaged in a business other than investing
in or trading securities and, therefore, are not an investment company within
the meaning of the Investment Company Act. If the Investment Company Act
required us to register as an investment company, we would become subject to
substantial regulation with respect to our capital structure, management,
operations, transactions with affiliated persons and other matters. Application
of the provisions of the Investment Company Act to us would materially and
adversely affect our business, prospects, operating results and financial
condition.
WE EXPECT OUR STOCK PRICE TO BE VOLATILE
The price at which our common stock will trade will depend upon many
factors, including our historical and anticipated quarterly and annual operating
results, variations between our actual results and analyst and investor
expectations, announcements by us or others and developments affecting our
business, investor perceptions of our company and comparable public companies,
changes in our industry and general market and economic conditions. Some of
these factors are beyond our control. You should be aware that the stock market
has from time to time experienced extreme price and volume fluctuations.
WE HAVE NOT PAID AND DO NOT INTEND TO PAY DIVIDENDS
We have not paid any dividends, and we do not intend to pay cash dividends
in the foreseeable future. Our current financing documents contain provisions
which restrict our ability to pay dividends.
THERE HAS BEEN NO PRIOR MARKET FOR THE COMMON STOCK
Before this offering, there has not been a public market for the common
stock. We will apply to the Nasdaq National Market System to list our common
stock, but we do not know whether active trading in the common stock will
develop and continue after the offering. We will determine the initial public
offering price for the common stock through negotiations with the underwriters.
You may not be able to resell your shares at or above the initial public
offering price. For a description of the factors that will be taken into account
to determine the offering price, please see "Underwriting."
ANTI-TAKEOVER PROVISIONS COULD NEGATIVELY IMPACT OUR STOCKHOLDERS
Some of the provisions that may be included in our certificate of
incorporation and bylaws may discourage, delay or prevent a merger or
acquisition at a premium price. These provisions include:
- authorizing the issuance of "blank check" preferred stock;
- providing for a classified Board of Directors with staggered, three-year
terms;
20
<PAGE>
- eliminating the ability of stockholders to call a special meeting of
stockholders;
- limiting the removal of directors by the stockholders to removal for
cause; and
- requiring a super-majority stockholder vote to effect certain amendments.
In addition, certain provisions of the Delaware General Corporation Law and our
stockholder rights plan may deter someone from acquiring or merging with us,
including a transaction that results in stockholders receiving a premium over
the market price for the shares of common stock held by them. Section 203 of the
Delaware General Corporation Law also imposes certain restrictions on mergers
and other business combinations between us and any holder of more than 15% and
less than 85% of our common stock. We intend to adopt a stockholder rights plan
prior to the completion of this offering. Our stockholder rights plan would
cause substantial dilution to any person or group that attempts to acquire our
company on terms not approved in advance by our Board of Directors. See
"Description of Capital Stock--Possible Anti-Takeover Matters."
The indenture governing our senior discount notes requires us to offer to
repurchase all senior discount notes for 101% of their principal amount or
accreted value, plus any accrued interest due, within 30 days after a change of
control. See "Description of Certain Indebtedness." We might not have sufficient
funds available at the time of any change of control to make any required
payment, as well as any payment that may be required pursuant to any other
outstanding indebtedness at the time, including our indebtedness to equipment
financing lenders. These covenants may also deter third parties from entering
into a change of control transaction with us. Furthermore, following the
occurrence of certain change-of-control events, we must offer to repurchase for
cash all of the outstanding warrants issued in connection with the senior
discount notes.
THE PRICE OF OUR COMMON STOCK MAY DECLINE DUE TO SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock in the public market following
this offering, or the appearance that a large number of shares is available for
sale, could adversely affect the market price for the common stock. The number
of shares of common stock available for sale in the public market will be
limited by lock-up agreements under which the holders of substantially all of
our outstanding shares of common stock and options and warrants to purchase
common stock will agree not to sell or otherwise dispose of any of their shares
for a period of 180 days after the date of this prospectus without the prior
written consent of Merrill Lynch and Salomon Smith Barney. However, Merrill
Lynch and Salomon Smith Barney may, in their sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements. In addition to the adverse effect a price decline could have on
holders of common stock, that decline would likely impede our ability to raise
capital through the issuance of additional shares of common stock or other
equity securities. See "Description of Capital Stock--Registration Rights" and
"Shares Eligible for Future Sale."
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION OF $___ PER SHARE
The initial public offering price is substantially higher than the net
tangible book value per share of the outstanding common stock immediately after
this offering. Accordingly, if you purchase common stock in this offering, you
will incur immediate and substantial dilution of $___ in the net tangible book
value per share of the common stock from the price you pay for the common stock
in this offering.
MANAGEMENT HAS BROAD DISCRETION TO USE THE PROCEEDS FROM THIS OFFERING
Our management will have broad discretion over the use of proceeds we raise
in this offering, and you must rely on the judgment of management in the
application of the proceeds. Please see "Use of Proceeds" for more information
related to our financing plan.
21
<PAGE>
USE OF PROCEEDS
We will use the aggregate net proceeds of this offering, which we estimate
at approximately $ million after deducting the underwriters' discount and
other estimated offering expenses, to fund the expenditures incurred in the
continuing deployment of network services in our existing markets, as well as
our planned rollout in additional markets. Additionally, we plan to use the net
proceeds from this offering for expenses associated with the continued
development of our sales and marketing activities, to fund operating losses, to
pay our debt obligations and for general corporate purposes. Pending use of such
net proceeds, we intend to invest the net proceeds in short-term, investment
grade securities to the extent permitted by the terms of the covenants governing
our existing debt and any statistical asset tests imposed by the Investment
Company Act of 1940.
The actual amounts we spend will vary significantly depending upon a number
of factors, including future revenue growth, if any, capital expenditures, the
amount of cash generated by our operations and other factors, many of which are
beyond our control. Additionally, we may modify the number, selection and timing
of our entry with respect to any or all of our targeted markets. Accordingly,
our management will retain broad discretion in the allocation of the net
proceeds. Please see "Risk Factors--We will need significant additional funds,
which we may not be able to obtain" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock, and we do not
anticipate paying any cash dividends in the foreseeable future. Payments of any
future dividends will be at the discretion of our Board of Directors after
taking into account various factors, such as our financial condition, operating
results, current and anticipated cash needs and plans for expansion.
22
<PAGE>
CAPITALIZATION
The following unaudited table sets forth our capitalization as of December
31, 1998:
- on an actual basis;
- pro forma to give effect to the issuance of Series C preferred stock and
warrants to MCI WorldCom's investment fund on March 4, 1999; and
- pro forma as adjusted to give effect to this offering, including
conversion of the existing Series A, Series B and Series C preferred stock
into common stock which will occur automatically upon the completion of
this offering.
Please read this table in conjunction with our consolidated financial
statements, the related notes to the financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1998
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments............................. $ 136,812 $ 166,812 $
--------- ----------- -----------
--------- ----------- -----------
Debt:
Bank note (1)............................................................... $ 805 $ 805 $ 805
13 1/2% senior discount notes due 2008...................................... 157,465 157,465 157,465
--------- ----------- -----------
Total debt................................................................ 158,270 158,270 158,270
--------- ----------- -----------
Mandatorily redeemable common stock warrants.................................. 6,567 6,567 6,567
--------- ----------- -----------
Stockholders' equity:
Series A convertible preferred stock, $0.001 par value; 12,900,000 shares
authorized actual and pro forma and no shares authorized pro forma as
adjusted; 12,855,094 shares issued and outstanding actual and pro forma
and no shares issued and outstanding pro forma as adjusted................ 13 13 --
Series B convertible preferred stock, $0.001 par value; 4,044,943 shares
authorized actual and pro forma and no shares authorized pro forma as
adjusted; 4,044,943 shares issued and outstanding actual and pro forma and
no shares issued and outstanding pro forma as adjusted.................... 4 4 --
Series C convertible preferred stock, $0.001 par value; no shares authorized
actual, 3,731,410 shares authorized pro forma and no shares authorized pro
forma as adjusted; no shares issued and outstanding actual, 3,731,410
shares issued and outstanding pro forma and no shares issued and
outstanding pro forma as adjusted......................................... -- 4 --
Common stock, $0.001 par value; 66,708,243 shares authorized actual,
70,439,653 shares authorized pro forma and shares authorized pro
forma as adjusted; 6,702,108 shares issued actual and pro forma and
shares issued pro forma as adjusted (2)........................... 7 7
Treasury stock, at cost; 365,096 shares....................................... (18) (18) (18)
Additional paid-in capital.................................................... 37,213 73,223
Warrants...................................................................... -- 1,300 1,300
Deferred compensation......................................................... (5,210) (5,210) (5,210)
Accumulated deficit........................................................... (38,756) (38,756) (38,756)
--------- ----------- -----------
Total stockholders' equity (deficit)...................................... (6,747) 30,567
--------- ----------- -----------
Total capitalization.................................................... $ 158,090 $ 195,404 $
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------------
(1) Consists of a $1.0 million note payable to Silicon Valley Bank which is
being amortized over a 36-month period that ends in April 2001.
(2) Based on the number of shares outstanding as of March 4, 1999. Includes
shares of common stock to be issued upon conversion of our preferred
stock and shares of common stock which are currently subject to
repurchase by us. Excludes shares of common stock issuable upon the
exercise of stock options outstanding as of March 4, 1999, with a weighted
average exercise price of $ per share, all of which are exercisable and
of which are vested, and shares of common stock issuable upon
the exercise of outstanding warrants, with a weighted average exercise price
of $ per share. See "Capitalization" and "Business--Legal Proceedings."
23
<PAGE>
DILUTION
Our pro forma net tangible book value at December 31, 1998 was $0.63 per
share. Pro forma net tangible book value per share represents the amount of our
total tangible assets less total liabilities, divided by the number of shares of
common stock outstanding after giving effect to the issuance of Series C
preferred stock to MCI WorldCom's investment fund and to the conversion of all
outstanding shares of preferred stock into 37,531,484 shares of common stock
upon the completion of this offering. Please see "Capitalization." After giving
effect to the sale of the shares of common stock in this offering,
assuming a public offering price of $ per share, the mid-point of the range
set forth on the front cover, less estimated underwriting discounts and
commissions and other expenses of this offering, our as adjusted pro forma net
tangible book value as of December 31, 1998 would have been $ per share.
This represents an immediate increase in net tangible book value per share of
$ to existing stockholders and immediate dilution in net tangible book
value of $ per share to new investors in this offering. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share...................... $
Pro forma net tangible book value per share at December 31,
1998..................................................... $ 0.63
Increase per share attributable to new investors...........
---------
As adjusted pro forma net tangible book value per share after
this offering..............................................
---------
Dilution per share to new investors (1)...................... $
---------
---------
</TABLE>
- ------------------------
(1) If the underwriters' over-allotment option is exercised in full, dilution
per share to new investors would be $ .
The following table summarizes the number of shares of common stock
purchased from us, assuming conversion of all outstanding shares of preferred
stock into common stock, the total consideration paid and the average price per
share paid by the existing stockholders and by new investors in this offering,
before deduction of estimated underwriting discounts and commissions and other
expenses of this offering. The calculations in this table with respect to the
shares to be purchased by new investors in this offering reflect an assumed
initial public offering price of $ per share, the mid-point of the range set
forth on the front cover.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................................... % $ % $
New investors............................................... $
-------------- --- ----------- ---
Total................................................... (1) 100% $ 100%
-------------- --- ----------- ---
-------------- --- ----------- ---
</TABLE>
- ------------------------
(1) Based on the number of shares outstanding as of March 4, 1999. Includes
shares of common stock to be issued upon conversion of our preferred
stock and shares of common stock which are currently subject to
repurchase by us. Excludes shares of common stock issuable upon the
exercise of stock options outstanding as of March 4, 1999, with a weighted
average exercise price of $ per share, all of which are exercisable and
of which are vested, and shares of common stock issuable upon
the exercise of outstanding warrants, with a weighted average exercise price
of $ per share. See "Capitalization" and "Business-- Legal
Proceedings."
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following statement of operations data for the periods from our
inception on February 27, 1997 to December 31, 1997 and for the year ended
December 31, 1998, and the balance sheet data as of December 31, 1997 and 1998
(actual) have been derived from our consolidated financial statements and the
related notes to the financial statements. The following selected consolidated
financial data should be read in conjunction with our consolidated financial
statements and the related notes to the financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
FEBRUARY 27, 1997
(INCEPTION) TO YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................................................. $ -- $ 528
Operating expenses:
Network and service costs.............................................. -- 4,695
Selling, marketing, general and administrative......................... 2,534 23,153
Depreciation and amortization.......................................... 1 1,081
------- --------
Total operating expenses............................................. 2,535 28,929
------- --------
Loss from operations..................................................... (2,535) (28,401)
Interest and other income (expense), net................................. 113 (7,933)
------- --------
Net loss................................................................. $ (2,422) $ (36,334)
------- --------
------- --------
Net loss per share (basic and diluted)................................... $ (1.34) $ (14.61)
------- --------
------- --------
Unaudited pro forma net loss per share (basic and diluted)(1)............ $ (1.05)
--------
--------
OTHER FINANCIAL DATA:
EBITDA (2)............................................................... $ (2,342) $ (26,628)
Adjusted EBITDA (3)...................................................... (2,342) (25,036)
Net cash used for operating activities................................... (1,560) (19,024)
Net cash used for investing activities................................... (1,345) (139,032)
Net cash provided by financing activities................................ 13,071 169,205
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
AS OF -----------------------------------------
DECEMBER 31, 1997 ACTUAL PRO FORMA (4) AS ADJUSTED (5)
------------------- --------- ------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments..................................... $ 10,166 $ 136,812 $ 166,812 $
Equipment and furniture, net...................... 1,621 11,510 11,510 11,510
Total assets...................................... 12,241 171,726 209,040
Total debt........................................ 568 158,270 158,270 158,270
Mandatorily redeemable common stock warrants...... -- 6,567 6,567 6,567
Total stockholders' equity (deficit).............. 10,346 (6,747) 30,567
</TABLE>
- ------------------------------
(1) Unaudited pro forma net loss per share gives effect to conversion of the
Series A and Series B preferred stock into common stock which will occur
upon the closing of this offering.
(2) EBITDA consists of the net loss excluding net interest, depreciation and
amortization of capital assets and deferred compensation expense. EBITDA is
presented to enhance an understanding of our operating results and is not
intended to represent cash flow or results of operations in accordance with
generally accepted accounting principles for the period indicated and may be
calculated differently than EBITDA for other companies.
(3) Total operating expenses for the year ended December 31, 1998 include
$1,592,000 of operating lease expense to GATX Capital Corporation. No
amounts were incurred to GATX for operating leases in 1997. Adjusted EBITDA
reflects EBITDA excluding the GATX operating lease expense.
(4) Gives effect to the issuance of Series C preferred stock and warrants on
March 3, 1999 for $30 million. See "Certain Relationships and Related
Transactions--Series C Purchase Agreement; Other Agreements with MCI
WorldCom."
(5) Adjusts the pro forma information to give effect to this offering.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading service provider of high-speed local access networking
solutions using DSL technology to businesses. We began offering commercial
services in San Diego in April 1998, and have subsequently begun service in nine
additional markets: San Francisco, San Jose, Oakland/East Bay, Chicago, Los
Angeles, Orange County, Boston, Sacramento and New York. We intend to continue
our network rollout into an additional 23 markets in 1999 and a further 17
markets by the end of 2000.
Since our inception in February 1997, our primary activities have consisted
of:
- obtaining required governmental authorizations;
- negotiating and executing interconnection agreements with incumbent
carriers;
- entering into strategic alliances;
- identifying collocation space and locations for our Connection Points,
Metro Service Centers and business offices;
- acquiring and deploying equipment and facilities;
- launching service trials;
- hiring management and other personnel;
- raising capital; and
- developing and integrating our operations support system and other back
office systems.
We have incurred operating losses, net losses and negative operating cash
flow for each month since our formation. As of December 31, 1998, we had an
accumulated deficit of $38.8 million. We currently intend to substantially
increase our operating expenses and capital expenditures in an effort to rapidly
expand our infrastructure and network services. We expect to incur substantial
operating losses, net losses and negative cash flow during the network build-out
and initial penetration of each new market we enter. These losses are expected
to continue for at least the next several years.
In March 1999, we entered into a strategic arrangement with MCI WorldCom. As
part of this strategic arrangement, MCI WorldCom's investment fund invested $30
million in us. The arrangement also designates us as MCI WorldCom's preferred
provider of business DSL lines in certain circumstances, and provides that MCI
WorldCom is committed to sell at least 100,000 of our DSL lines over a period of
five years, subject to penalties for failure to reach target commitments. In
turn, we have designated MCI WorldCom as our preferred provider of network
services in certain circumstances.
FACTORS AFFECTING OPERATIONS
REVENUE
The following factors affect our revenue:
- SERVICE OFFERING. We derive a majority of our operating revenue from DSL
access and wide area network services. For both local access and wide area
network connections, we bill our customers for monthly recurring charges
based on the data transfer speeds selected by the customer. We offer flat
rate plans for our services. In addition to monthly service fees, we bill
users for nonrecurring service activation and installation charges. We
also charge both monthly and nonrecurring charges to each customer for the
high-speed connection between our Metro Service Center and the customer's
router. To encourage potential customers to adopt our
26
<PAGE>
services, we sometimes offer reduced prices for an initial period of time.
We expect that, as a result of competitive forces, our prices will decline
over time.
- PENETRATION OF TARGET MARKETS. We base our target market assessment on the
number of local area networks in each market, which we believe is the best
indication of data intensive business density and potential customers for
our services. According to a leading data communications industry source,
the total number of business local area networks in the United States is
approximately 1.5 million, with an average of 40 users per local area
network. We believe that our initial ten markets contain 23% of all local
area networks in the United States. Our goal is to cover 60% of the local
area networks in the United States, which we believe is achievable by
building out a total of 50 markets. Initially, DSL is expected to reach
over 70% of the businesses and residences served from the central offices.
Within each metropolitan area, we expect to collocate in the appropriate
number of central offices to cover 75% of the total market opportunity.
- TURNOVER. To date, our customer turnover has been minimal. We expect this
to increase in the future as competition intensifies.
NETWORK AND SERVICE COSTS
Our network and service costs are generally comprised of the following:
- EQUIPMENT INSTALLATION CHARGES. In each market, we will require a number
of field service technicians to install customer premise equipment at end
user locations. We currently outsource most of this function.
- MONTHLY RECURRING AND NONRECURRING LINE AND SERVICE CHARGES. We pay
incumbent carriers a one-time installation and activation fee and a
monthly service fee for each copper line.
- METROPOLITAN AREA NETWORK TRANSPORT CHARGES. We incur charges for
transport between our Connection Points and our Metro Service Centers.
Currently, these charges are typically for DS-3 services from a
competitive carrier or incumbent carrier. These charges also include
customer connections to our network.
- NETWORK FACILITIES OPERATING EXPENSES. We incur various recurring costs at
our network locations. These costs include facility rent and utility
costs.
- WIDE AREA NETWORK CONNECTION CHARGES. We pay long distance carriers a
one-time installation and activation fee and a monthly service fee for
wide area network connections over a frame relay or Asynchronous Transfer
Mode network. We are currently leasing these services from long distance
carriers.
- COST OF CUSTOMER PREMISE EQUIPMENT. As part of our DSL product offering,
we provide the customer premise equipment and expense the cost of the
customer premise equipment for each customer line.
- EQUIPMENT OPERATING LEASE EXPENSES. We currently take advantage of
short-term operating leases to finance the acquisition of substantially
all of our network equipment, including DSL multiplexers, Asynchronous
Transfer Mode switches and routers. We may decide to purchase and to
capitalize some or all of this equipment in the future.
- LINE REPAIR AND SUPPORT COSTS. Similar to other telecommunications
providers, we estimate that a small percentage of our lines may require
repair or support. These costs will consist of field dispatch labor and a
portion of our Network Operations Center costs.
27
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Our selling, general and administrative expenses include 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, will increase as we
expand our network, and if our number of customers increases.
- SALES AND MARKETING COSTS. Our sales and marketing efforts focus on
attracting and retaining service providers, including national and
regional Internet Service Providers, national and regional systems and
network integrators, value-added resellers, competitive carriers and long
distance carriers, as well as large business customers.
- GENERAL AND ADMINISTRATIVE COSTS. As we expand our network, we expect the
number of employees located in specific markets to grow. Certain
functions, such as customer service, network operations, finance, billing
and site planning, are likely to remain centralized in order to achieve
economies of scale.
DEPRECIATION AND AMORTIZATION
Depreciation expense arising from our 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 ten years.
RESULTS OF OPERATIONS
REVENUE
We did not offer commercial services in 1997 and, as a result, did not
record any revenue in 1997. During the year ended December 31, 1998, we
continued the development of our business operations, commencing service in the
San Diego market in April, the San Francisco, the Oakland/East Bay and San Jose
markets in July, the Los Angeles and Orange County markets in September and the
Chicago market in October. We recorded revenue of $528,000 during this period,
which was primarily from DSL service and installation charges, net of discounts
given to customers.
NETWORK AND SERVICE COSTS
Since we did not offer commercial services in 1997, we did not record any
network or service costs in 1997. For the year ended December 31, 1998, we
recorded network and service costs of $4.7 million. We expect network and
service costs to increase significantly in future periods as we expand our
network into additional markets.
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE
From inception through December 31, 1997 selling, marketing, general and
administrative expenses were $2.5 million and consisted primarily of salaries
and legal and consulting fees incurred to establish a management team and
develop our business. For the year ended December 31, 1998, we recorded selling,
marketing, general and administrative expenses of $23.2 million. This increase
is attributable to a continued increase in staffing levels, increased marketing
efforts coinciding with the launch of commercial services and increased legal
fees associated with the development of additional markets. We expect selling,
marketing, general and administrative expenses to continue to increase
significantly as we expand our business.
28
<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation from network equipment is minimal since substantially all of
this equipment is currently leased. Depreciation and amortization was negligible
for the period from inception through December 31, 1997 and was $1.1 million for
the year ended December 31, 1998. The increase was due to the commencement of
our operations in 1998. We expect depreciation and amortization to increase
significantly in future periods as we increase capital expenditures to expand
our network.
OTHER INCOME AND EXPENSE
Other income and expense consists primarily of interest income from our cash
and short-term investments and interest expense associated with our debt. From
inception through December 31, 1997 net interest income was $113,000, which was
primarily attributable to the interest income earned from the proceeds raised in
our Series A preferred stock financing. For the year ended December 31, 1998, we
recorded net interest expense of $8.0 million, consisting of interest income of
$5.8 million generated from invested cash balances, offset by $13.8 million in
interest expense. The increase in the interest expense is substantially due to
the accretion of interest on the senior discount notes that were issued in May
1998.
INCOME TAXES
We generated net operating loss carryforwards of $2.1 million from inception
to December 31, 1997 and $35.0 million during the year ended December 31, 1998.
We expect significant consolidated losses for the foreseeable future which will
generate additional net operating loss carryforwards. However, our ability to
use net operating losses may be subject to annual limitations. In addition,
income taxes may be payable during this time due to operating income in certain
tax jurisdictions. In the future, if we achieve operating profits and the net
operating losses have been exhausted or have expired, we may experience
significant tax expense. We recognized no provision for taxes because we
operated at a loss throughout 1997 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
The development and expansion of our business requires significant capital
expenditures. The principal capital expenditures incurred during the build-out
phase of any market involve the procurement, design and construction of our
Connection Points, one or two Metro Service Centers and other elements of our
network design.
The number of targeted central offices in a market varies, as does the
average capital cost to build our Connection Points in a given market. Capital
expenditures, including payments for collocation fees, were $23.5 million for
the year ended December 31, 1998. We expect our capital expenditures to be
substantially higher in future periods, arising primarily from payment of
collocation fees and the purchase of infrastructure equipment necessary for the
development and expansion of our network.
Through December 31, 1998, we financed our operations primarily through
private placements of equity totaling $30.8 million, of which we received $30.3
million from our venture capital and institutional sponsors, the use of
operating equipment leases totaling $26.5 million, borrowings under a note
payable from Silicon Valley Bank of $1.0 million, and $144.0 million in net
proceeds raised from the issuance of the senior discount notes. As of December
31, 1998, we had an accumulated deficit of $38.8 million and cash, cash
equivalents and short-term investments of $136.8 million. In March 1999, we
received $30.0 million from MCI WorldCom's investment fund.
For the year ended December 31, 1998, the net cash used in our operating
activities was $19.0 million. This cash was used for a variety of operating
purposes, including salaries, consulting and legal expenses, network operations
and overhead expense. Our net cash used for investing activities for
29
<PAGE>
the year ended December 31, 1998 was $139.0 million and was used primarily for
purchases of short-term investments and equipment and payments of collocation
fees. Net cash provided by financing activities for the year ended December 31,
1998 was $169.2 million and primarily came from the issuance of the senior
discount notes and from the issuance of preferred stock.
We believe that the net proceeds from this offering, together with our
existing cash and short-term investments, existing and anticipated equipment
lease financings and future revenue generated from operations, will be
sufficient to fund our operating losses, capital expenditures, lease payments
and working capital requirements through June 2000. We expect our operating
losses and capital expenditures to increase substantially primarily due to our
network expansion. We expect that additional financing will be required in the
future. We may attempt to raise financing through some combination of commercial
bank borrowings, leasing, vendor financing or the private or public sale of
equity or debt securities. We have received a financing proposal from GATX
Capital Corporation for up to $30 million of additional lease financing, of
which $24 million is allocated for equipment and $6 million is allocated for
collocation fees. This proposal also contains a provision for another $20
million of available financing, for a total of $50 million, that would be
available upon the occurrence of certain events. Our senior discount notes
contain covenants that restrict the our ability to make certain payments,
including dividend payments, and incur additional debt. See "Dividend Policy."
Our capital requirements may vary based upon the timing and success of our
rollout and as a result of regulatory, technological and competitive
developments or if
- demand for our services or our anticipated cash flow from operations is
less or more than expected;
- our development plans or projections change or prove to be inaccurate;
- we engage in any acquisitions; or
- we accelerate deployment of our network services or otherwise alter the
schedule or targets of our rollout plan.
Equity or debt financing may not be available to us on favorable terms or at
all. See "Risk Factors--We will need significant additional funds, which we may
not be able to obtain."
IMPACT OF THE YEAR 2000 ISSUE
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs may recognize a date using "00" as the year 1900
rather than the year 2000. This, in turn, could result in major system failures
or miscalculations, and is generally referred to as the "Year 2000 issue." We
have formulated and, to a large extent, effected a plan to address our Year 2000
issues.
Our Year 2000 plan applies to two areas: internal business systems and
compliance by external customers and providers. We have completed our Year 2000
compliance testing for all of our internal systems and believe that they are
Year 2000 compliant. Because we are a young company, we believe we have been
able to build our business systems with the Year 2000 issue in mind in a more
effective manner than many older companies. Therefore, there have been few Year
2000 changes required to our existing systems and applications. We have
substantially completed a compliance check of our external customers and
providers, except for the incumbent carriers. Based on responses from these
third parties, other than the incumbent carriers, we believe that they will not
experience Year 2000 problems that would materially and adversely affect our
business. We have not been able to conduct a compliance check of incumbent
carriers nor assess the incumbent carriers' Year 2000 compliance. To the extent
that one or more incumbent carriers or other third parties experience Year 2000
problems, our network and services could be adversely affected. Furthermore, the
purchasing patterns of our
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customers may be affected by Year 2000 issues as companies expend significant
resources to correct their current systems for Year 2000 compliance. These
expenditures may result in reduced funds available for our services. Any of
these developments could have a material and adverse effect on our business,
prospects, operating results and financial condition. We have not fully
determined the risks associated with the reasonably worst-case scenario and have
not formulated a contingency plan to address Year 2000 issues. We do not expect
to have a specific contingency plan in place in the future.
FINANCIAL INFORMATION
The preceding discussion and analysis is based on our consolidated financial
statements and the related notes and should be read in conjunction with the
consolidated financial statements and the related notes included in this
prospectus.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. These forward-looking
statements address, among other things:
- our network rollout plans and strategies;
- development and management of our business;
- our ability to attract, retain and motivate qualified personnel;
- success of our strategic alliances;
- our ability to attract and retain customers;
- the extent of acceptance of our services;
- the market opportunity and trends in the markets for our services;
- our ability to upgrade our technologies;
- prices of telecommunication services;
- the nature of regulatory requirements that apply to us;
- our ability to obtain any required governmental authorizations;
- our future capital expenditures and needs;
- our ability to obtain financing on commercially reasonable terms;
- our ability to implement a Year 2000 readiness program;
- our ability to compete; and
- the extent and nature of competition.
These statements may be found in this section, in the front inside cover of
this prospectus, in the sections of this prospectus entitled "Summary," "Risk
Factors," "Use of Proceeds" and "Business" and in this prospectus generally.
We have based these forward-looking statements on our current expectations
and projections about future events. However, our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of risks facing us, including risks stated in "Risk Factors," or faulty
assumptions on our part. For example, assumptions that could cause actual
results to vary materially from future results include, but are not limited to:
- our ability to successfully market our services to current and new
customers;
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- our ability to generate customer demand for our services in our target
markets;
- the development of our target market and market opportunities;
- market pricing for our services and for competing services;
- the extent of increasing competition;
- our ability to acquire funds to expand our network;
- the ability of our equipment and service suppliers to meet our needs;
- trends in regulatory, legislative and judicial developments;
- our ability to manage growth of our operations; and
- our ability to access regions and enter into suitable interconnection
agreements with incumbent carriers.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
DESCRIPTION OF CERTAIN INDEBTEDNESS
In November 1997 and May 1998, we entered into 36-month lease lines for an
aggregate $26.5 million in lease financing with Sun Financial Group, Inc., now
GATX Capital Corporation, pursuant to which we lease office equipment,
telecommunications equipment, network equipment and furniture on an operating
lease basis. In connection with this leasing arrangement, we issued to GATX a
warrant to purchase 478,650 shares of common stock at a price of $2.225 per
share. This warrant is immediately exercisable. During February 1999, we
received a financing proposal from GATX for up to $30 million in additional
lease financing, of which $24 million is allocated for equipment and $6 million
is allocated for collocation fees. This new proposal also contains a provision
for another $20 million of available financing, for a total of $50 million, that
would be available upon the occurrence of certain events.
We also have outstanding senior discount notes, which we issued in May 1998.
These 13 1/2% notes were issued at a discount and raised net proceeds of
approximately $144.0 million. These notes are senior unsecured obligations that
mature with a principal amount of $290 million on May 15, 2008. The discount
amount is being accreted to interest expense for the first five years of the
notes; cash interest on these notes will not accrue prior to May 15, 2003, but
will do so after that date and will be payable semi-annually each year,
commencing November 15, 2003. These notes are redeemable at our option, in whole
or in part, at any time after May 15, 2003 and, prior to May 15, 2001, out of
the proceeds of certain equity offerings, at predetermined redemption prices
together with accrued and unpaid interest through the date of redemption. We
will not use the proceeds of this offering to redeem any of these notes. Upon a
change of control, each holder of these notes may require us to repurchase the
notes at 101% of the principal amount thereof, plus accrued and unpaid interest
to the date of purchase. These notes contain certain restrictive covenants,
including limitations on future indebtedness, restricted payments, transactions
with affiliates, liens, sale of stock of subsidiaries, dividends, mergers and
transfers of assets.
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BUSINESS
THE COMPANY
We are a leading service provider of high-speed local access networking
solutions using DSL technology to businesses. We have designed our network to
give our customers a high-speed "always on" local connection to the Internet and
to private local and wide area networks. We offer a variety of DSL technologies
that deliver data transfer rates ranging from 128 Kbps to 7.1 Mbps. For
customers that subscribe at the 7.1 Mbps rate, our network provides transfer
speeds faster than frame relay and T-1 circuits, and is approximately 125 times
the speed of the fastest dial-up modem and over 55 times the speed of integrated
services digital network (ISDN) lines. Through our packet-based network,
multiple users on a single connection are able to simultaneously access the
Internet and private networks. Beyond high-speed access, we also offer a growing
suite of features and applications that we can individually configure to each
user's needs. We believe our network solutions will increase remote office and
worker productivity and reduce the complexity of communications for businesses.
Since our inception in February 1997, we have made substantial progress in
implementing a scalable nationwide network. We began offering commercial
services in San Diego in April 1998, and have subsequently begun service in nine
additional markets: San Francisco, San Jose, Oakland/East Bay, Chicago, Los
Angeles, Orange County, Boston, Sacramento and New York. We intend to continue
our network rollout into an additional 23 markets in 1999 and a further 17
markets by the end of 2000. Upon completion of this network expansion, we
anticipate providing services in 50 of the nation's largest metropolitan areas,
which we believe contain 60% of the nation's local area networks. We have signed
interconnection agreements with Ameritech, Bell Atlantic, Bell South, GTE,
Pacific Bell and U S WEST, and we are currently pursuing interconnection
arrangements with two other incumbent carriers. As of January 31, 1999, we
provide service or have installed equipment in nearly 200 incumbent carrier
central offices. We have obtained competitive carrier authority or have been
permitted to operate as a competitive carrier in 21 states.
In March 1999, we entered into a strategic arrangement with MCI WorldCom. As
part of this strategic arrangement, MCI WorldCom's investment fund invested $30
million in us. The arrangement also designates us as MCI WorldCom's preferred
provider of business DSL lines in certain circumstances, and provides that MCI
WorldCom is committed to sell at least 100,000 of our DSL lines over a period of
five years, subject to penalties for failure to reach target commitments. In
turn, we have designated MCI WorldCom as our preferred provider of network
services in certain circumstances. MCI WorldCom will also work with us to
develop voice and data applications over a single DSL connection.
We also market our services through our direct sales force and through our
partnerships with recognized leaders in the networking industry, including Cisco
and a contemplated arrangement with Verio. Under our strategic partnership with
Cisco, Cisco agreed to jointly market and sell our networking solutions to its
customer base and will engage in joint development projects with us. As of
January 31, 1999, we had over 650 lines in service, and we are currently under
contract to supply over 9,000 additional DSL lines to our business and service
provider customers, including Cisco, Silicon Graphics, Inc., QUALCOMM
Incorporated, Wind River Systems and Broadcom Corporation.
Our senior management team has extensive experience in developing
next-generation networking businesses. Our President and Chief Executive
Officer, Catherine Hapka, was previously the founder, President and Chief
Operating Officer of !NTERPRISE Networking Services, U S WEST's data networking
business. Scott Chandler, our Chief Financial Officer, was previously President
and Chief Executive Officer of C-COR Electronics, Inc., a manufacturer of
broadband telecommunications equipment. James Greenberg, our Chief Network
Officer, directed the design, planning, operation and construction of Sprint
Corporation's data networks. Frank Tolve, our Chief Sales Officer, previously
served as Vice President, Sales Operations of Bay Networks. Our sponsors, which
include MCI
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WorldCom's investment fund, Kleiner Perkins Caufield & Byers, Enterprise
Partners, Brentwood Venture Capital, the Sprout Group and a subsidiary of Enron
Corporation, have to date invested approximately $60.3 million.
MARKET OPPORTUNITY
We believe that a substantial market opportunity exists as a result of the
convergence of six factors:
- the growing demand for high-speed access to the Internet and corporate
networks;
- the inherent limitations of dial-up modems as a connection to data
networks;
- the need for large companies to improve the productivity of their remote
offices and workers;
- the need for small and medium businesses to have an integrated
communication solution for their networking requirements;
- the increasing adoption of DSL and widespread use of packet-based
networks; and
- the 1996 Telecommunications Act.
GROWING DEMAND FOR HIGH-SPEED ACCESS TO THE INTERNET AND CORPORATE NETWORKS
The value of goods and services sold through the Internet will grow from
$2.6 billion in 1996 to $400 billion in 2002, according to analyst projections.
Today, business spending for connecting remote workers, branch offices and
corporate headquarters to each other and to customers, suppliers and partners --
either through the Internet or private networks -- is large and growing.
Industry analysts estimate that the U.S. market for remote Internet and local
area network access will grow from $5.9 billion in 1997 to $11.7 billion by
2002. Industry sources estimate that spending in the United States on
distributed networking and network services and applications will grow from
$54.2 billion in 1998 to $173 billion in 2002. Much of that growth is expected
to result from increased demand for e-mail, Web hosting services, e-commerce,
collaboration and real-time video services and applications. Industry sources
expect spending on distributed networking and network services and applications
to encompass 57% of a company's total annual information technology spending by
2002.
LIMITATIONS OF DIAL-UP MODEMS AND INTEGRATED SERVICES DIGITAL NETWORK (ISDN)
Because only five percent of buildings in the United States are currently
connected to high-speed fiber rings -- typically large buildings in metropolitan
areas or clusters of buildings in regional campus parks -- the vast majority of
workers who access data networks do so through slow dial-up modems connected to
the traditional circuit switched public telephone system. These traditional
dial-up modems are creating a bottleneck in data communications because the
data-carrying capacity of the fastest commercially available dial-up modem is
only 56 Kbps. The capacity of another alternative, an integrated services
digital network (ISDN) line, is only 128 Kbps. While integrated services digital
network (ISDN) technology provides improved capacity relative to dial-up modems,
the cost of an integrated services digital network (ISDN) solution is often
prohibitive.
NEEDS OF LARGE BUSINESSES FOR REMOTE OFFICE AND WORKER PRODUCTIVITY
Many large companies are supporting increasing numbers of remote offices and
workers. These companies face the challenge of finding a cost effective way to
make their remote workers as productive as those who have access to all of the
high performance communications and networking resources available to workers
located at corporate headquarters. A high-speed network solution that
encompasses access to the corporate local area network, the corporate telephone
system, the Internet, the corporate video conferencing system, customers,
suppliers and partners would substantially increase
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remote office and worker productivity. At present, large businesses are
incurring significant capital expenditures to purchase equipment to support
dial-up modems and integrated services digital network (ISDN) connections, and
paying for high cost technical support personnel only to implement networking
solutions that fail to optimize worker productivity.
NEEDS OF SMALL AND MEDIUM BUSINESSES FOR INTEGRATED COMMUNICATION SOLUTIONS
A significant number of small and medium businesses have no practical
alternative to dial-up modems or integrated services digital network (ISDN) for
their workers to access the Internet and remote local area networks. As a
result, these workers suffer productivity limitations associated with slow
transmission speeds. In addition, these businesses need to contend with the cost
and complexity of retaining multiple vendors for their communication needs:
incumbent carriers for local voice traffic; long distance carriers for long
distance voice traffic; Internet Service Providers for Internet access; and
equipment integrators for on-premises voice and network systems. We believe that
these businesses can benefit from working with a single service provider that
offers integrated communication solutions, using a single connection.
EMERGENCE OF DSL AND PACKET-BASED TECHNOLOGIES
DSL technology dramatically increases the data, voice and video carrying
capacity of standard copper telephone lines. Because DSL technology uses
existing copper telephone lines, a broad network deployment can be implemented
rapidly, and requires a lower initial fixed investment than some existing
alternative technologies, such as fiber, cable modems and satellite
communications systems. A significant portion of the build-out of a DSL-based
network is directly related to the demand of paying subscribers, resulting in a
success-based deployment of capital.
Packet-based networks often are more efficient than traditional
point-to-point networks, and allow end users to connect to any location that can
be assigned an Internet Protocol address. Traditional point-to-point networks,
including the traditional telephone network and private line networks, are less
efficient because they require a dedicated connection between two locations.
Packet-based networks allow multiple users to share connections between
locations.
1996 TELECOMMUNICATIONS ACT
The 1996 Telecommunications Act allows competitive carriers to leverage the
existing incumbent carrier infrastructure, as opposed to building a competing
infrastructure at significant cost. The 1996 Telecommunications Act requires all
incumbent carriers to allow competitive carriers to collocate their equipment
along with incumbent carrier equipment in incumbent carrier central offices,
which enables competitive carriers to access end users through existing
telephone line connections. The 1996 Telecommunications Act creates an incentive
for incumbent carriers that were formerly part of the Bell system to cooperate
with competitive carriers: these incumbent carriers cannot provide long distance
service until regulators determine that there is competition in the incumbent
carrier's local market.
MARKET IMPACT OF CONVERGENCE
We believe the convergence of these factors has had several fundamental
effects on the communications market. New carriers can:
- leverage the existing network infrastructure by obtaining local network
access connections, and offer efficient high-speed data, voice and video
networks;
- provide large businesses with productivity enhancing remote office and
worker networking solutions;
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- offer small and medium businesses integrated voice and data solutions that
reduce the complexity of using multiple vendors for communication
services; and
- build new networks that can provide efficient high-speed access over a
single connection to any Internet Protocol address on the Internet and/or
corporate network, along with features and applications that can be
configured to meet each user's needs.
THE RHYTHMS SOLUTIONS
We believe our network solutions effectively address many of the unmet
communications needs of today's businesses by offering an appealing combination
of quality, performance, price and service. Our network consists of:
- HIGH-SPEED, "ALWAYS ON" LOCAL CONNECTIONS. Our network delivers
high-speed, "always on" local access. Using DSL technology over standard
copper telephone lines, our network is capable of delivering data transfer
rates at speeds ranging from 128 Kbps to 7.1 Mbps. For customers that
subscribe at the 7.1 Mbps rate, the transfer rate is faster than frame
relay and T-1 circuits, and is approximately 125 times the rate of the
fastest dial-up modem and over 55 times the rate of an integrated services
digital network (ISDN) line. Moreover, unlike dial-up modems and
integrated services digital network (ISDN) lines, the DSL solution is
"always-on" -- it does not require users to dial-up to connect to the
Internet or their local area network for each use.
- METROPOLITAN AND WIDE AREA OVERLAY NETWORK. We have designed our network
so that we can effectively and efficiently manage data traffic within and
among the metropolitan areas in which we offer our services. We use
transport services provided by other carriers for local access to users,
metropolitan area network connections and for long distance backbone
capacity. This overlay network is designed to route and switch traffic
within each metropolitan area, keeping local traffic local and sending
only long distance traffic over the wide area network, thereby increasing
overall network capacity and reliability and minimizing our backbone
costs. We manage the network and monitor service levels on a nationwide
basis from our Network Operations Center in Denver.
- PRODUCTIVITY ENHANCING FEATURES AND APPLICATIONS. We offer a growing
suite of network-enabled features and applications that extend the
functionality of corporate communications and networking resources to
remote offices and workers. We also offer remote offices and workers, as
well as small and medium businesses high performance Internet access
solutions in conjunction with our service provider customers.
- SERVICE FLEXIBILITY. We have designed our network so that we are able,
over a single DSL connection, to individually configure each network
user's features and applications.
- TURNKEY SOLUTION. We offer turnkey network solutions for our customers by
providing each customer with a single point of contact for a complete
package of services, including network implementation, maintenance,
billing and the DSL modem. For large customers, we provide complete
project management, including design, implementation and results
reporting. In some cases, we also seamlessly link our network operations
systems to existing customer information systems to ensure maximum service
efficiency.
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BUSINESS STRATEGY
Our goal is to become the leading national service provider of high
performance networking solutions for remote offices and workers. We intend to
implement the following strategies to achieve our goal:
EXPLOIT EARLY MOVER ADVANTAGE
We intend to exploit our early market entrance to deploy our network and
establish strong relationships with business and service provider customers. As
of January 31, 1999, we provide service or had installed our network equipment
in nearly 200 central offices. Installation on this scale requires significant
time and resources; therefore, we believe our progress to date provides us a
significant time-to-market advantage over would-be competitors. We have gained
significant build-out experience, which we believe will streamline our further
expansion. We plan to construct our network rapidly so that we are an early
mover in our other target markets. We intend to exploit our early mover
advantage to gain significant market share in our target markets.
FOCUS ON PERFORMANCE-DRIVEN BUSINESS CUSTOMERS
We believe that the underserved segment of the business networking market
that demands high performance is currently relying on dial-up modems or
integrated services digital network (ISDN) for network access. Many large
businesses have remote offices and workers that are not able to take advantage
of the full array of communications and networking resources available to
workers at the main office. In addition to offering these businesses high-speed
access to the Internet and corporate networks, we intend to offer them
network-enabled features and applications that increase worker productivity.
Further, we believe that small and medium businesses are looking for an
integrated service provider to reduce their reliance on multiple vendors.
Accordingly, we intend to offer multiple networking services, including voice
and data services over a single DSL connection, to meet the needs of small and
medium businesses.
EXPAND NETWORK-ENABLED FEATURES AND APPLICATIONS
We seek to have our network become a platform that facilitates the delivery
of productivity-enhancing features and applications to businesses and their
employees. By collaborating with industry leaders such as MCI WorldCom and
Cisco, we intend to jointly develop features and applications that will meet the
needs of our customers. For example, as part of our strategic agreement with MCI
WorldCom, we have agreed to jointly develop voice and data applications over a
single DSL connection. In addition, we believe that the proliferation of
high-speed local access networks, such as our own, will encourage third parties
to create more bandwidth-intensive features and applications. One of our
objectives in providing these enhanced features and applications is to
strengthen customer loyalty and increase revenue per network user.
ESTABLISH STRONG DISTRIBUTION CHANNELS
We intend to build strong distribution channels. For large businesses, we
are building a direct sales force and are entering into strategic joint
marketing alliances. We have entered into a strategic alliance with MCI WorldCom
in which we have been designated its preferred provider of business DSL
connections for large, medium and small businesses. We have also entered into a
strategic alliance with Cisco, in which we will jointly market and sell our
networking solutions to large businesses. For small and medium businesses, we
will distribute our services through our service provider customers. Over time,
we will seek to develop additional strategic alliances, focusing on partners
that can both add value to our network and give us a meaningful distribution
channel.
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PROVIDE SUPERIOR CUSTOMER SERVICE
As part of our strategy to obtain and retain business and service provider
customers, we intend to provide superior service and customer care. We will
guarantee high-quality service by providing carrier-class networking solutions
and superior customer service. Our carrier-class networking solutions include
end-to-end proactive network monitoring and management through our Network
Operations Center, 24 hours a day, seven days a week. We also offer multiple
security features and a network that we can scale to meet demand. Our customer
service includes a personal and Web-based single point of contact, a complete
packaged solution including the DSL modem, installation, activation and network
management, and specific customer service objectives against which we measure
our performance. Our objective in providing outstanding customer service is to
provide a high level of customer satisfaction, achieve customer loyalty and
accelerate the adoption rate of our service.
STRATEGIC PARTNERSHIPS
MCI WORLDCOM
In March 1999, we entered into a strategic partnership with MCI WorldCom,
pursuant to which, among other things:
- MCI WORLDCOM INVESTMENT. MCI WorldCom's investment fund invested $30
million in us, in return for 3,731,410 shares of our Series C preferred
stock and warrants to purchase 600,000 shares of our common stock at $8.04
per share. As a holder of Series C preferred stock, the fund has the right
to elect one of our directors.
- PROVIDING DSL TO MCI WORLDCOM. We have been designated MCI WorldCom's
preferred provider of business DSL access services in areas where we deploy
our network, except for services to certain subsidiaries and in locations
where MCI WorldCom deploys its own DSL equipment. We have a right of first
refusal to match offers made to MCI WorldCom by other providers of DSL
services.
MCI WorldCom has committed to sell a minimum of 100,000 business quality
DSL lines, subject to penalties for failure to reach target commitments.
MCI WorldCom will have 60 months to place orders for these lines, starting
on the date when we have 1,250 collocations in commercial service in at
least 32 metropolitan statistical areas. As part of our agreement, we must
provide specified service levels and have available capacity.
- OBTAINING NETWORK SERVICES FROM MCI WORLDCOM. We have designated MCI
WorldCom as our preferred provider of network services, including
metropolitan area network services, long-haul backbone services and
Internet Protocol backbone services. MCI WorldCom has a right of first
refusal to provide all of these services to us.
- COLLABORATION. We will jointly develop voice and data applications over a
single DSL connection. We will also form a working group with MCI WorldCom
to develop and implement the systems and procedures necessary to jointly
deploy DSL service nationwide. We will collaborate with MCI WorldCom in
selecting technologies and vendors to support our network deployments.
CISCO SYSTEMS
In October 1998, we entered into a strategic partnership with Cisco, in
which Cisco agreed to work jointly with us to sell our services to its customers
including providing compensation to its sales representatives for selling our
services. In addition, Cisco has committed to a joint marketing program with us
to increase our market recognition among businesses. We are also under contract
with Cisco to manage and upgrade its remote access program for 8,500 teleworkers
nationwide.
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OTHER PARTNERS
In October 1998, we entered into a letter of intent contemplating a joint
marketing agreement with Verio to jointly fund an advertising and market
awareness program in the Chicago metropolitan area. In the future we intend to
pursue additional joint marketing relationships to strengthen our distribution
capabilities and enable us to penetrate our target markets more rapidly.
RHYTHMS NETWORK SERVICES, FEATURES AND APPLICATIONS
We offer our customers solutions that address many of their high performance
networking needs. Our local connection services use a variety of DSL
technologies to deliver high-speed, "always on" local access. We also aggregate
traffic within metropolitan areas and route or switch the traffic to our service
provider customers, or to a corporate local area network within the same
metropolitan area or another metropolitan area using our inter-network
connections. In addition to local connections and metropolitan and wide area
inter-network connections, we offer a growing suite of network-enabled features
and applications.
LOCAL CONNECTIONS
Our local connection services connect individual users or multiple users on
a local area network to our metropolitan or national network or to the Internet
using DSL technology over traditional telephone lines. Using DSL technology over
copper lines, our network is capable of data transfer rates ranging from 128
Kbps to 7.1 Mbps. Unlike dial-up modems and integrated services digital network
(ISDN) lines, the DSL solution is "always on" -- it does not require users to
dial-up to connect to the Internet or their local area network for each use.
We place DSL equipment both at the customer premises -- a residence or
business -- and in the central office that services that specific customer
premises. There are typically many incumbent carrier central offices in each
metropolitan area. We connect the DSL equipment in each central office to one of
our Metro Service Centers so that we can route or switch network traffic to
either a local destination, a national destination where we provide service or
the Internet.
For our local connection services, the speed and effectiveness of the DSL
connection will vary based on a number of factors, including the distance of the
end user from the central office and the condition of the copper line that
connects the end user to the central office. However, the specific number of
potential users for higher speeds will vary by central office and by region and
will be affected by line quality. In the future, we intend to examine adding a
variety of high-speed local access technologies as they are developed, including
emerging wireless technologies. The chart below compares the performance and
range for our local connection services as of February 1999:
<TABLE>
<CAPTION>
SPEED TO SPEED FROM RANGE(1)
END USER END USER (FEET) TECHNOLOGY(2)
- ----------- ----------- ----------- -------------
<C> <S> <C> <C>
144 Kbps 144 Kbps Unlimited IDSL(3)
256 Kbps 256 Kbps 18,000 SDSL
384 Kbps 384 Kbps 15,000 RADSL
512 Kbps 512 Kbps 14,000 RADSL
768 Kbps 768 Kbps 12,000 RADSL
1 Mbps 1 Mbps 12,000 RADSL
1.5 Mbps 1.5 Mbps 8,000 SDSL
3 Mbps 1 Mbps 10,700 RADSL
5 Mbps 1 Mbps 9,000 RADSL
7.1 Mbps 1 Mbps 7,800 RADSL
</TABLE>
- ------------------------
(1) Estimated maximum distance from the central office to the end user.
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(2) The technologies are described more fully in "--DSL Technologies" below.
(3) Speeds are 128 Kbps under certain circumstances.
METROPOLITAN AREA AND WIDE AREA INTER-NETWORK CONNECTIONS
For our business and service provider customers, we offer high-speed
connections both within and among metropolitan areas. In order to switch and
route traffic aggregated from each central office to its ultimate local or long
distance destination, we offer two interconnection services.
Our 1.544 Mbps service -- DS-1 -- is suitable for small business customers
or service providers. Our 45 Mbps service -- DS-3 -- is intended for large
business customers or service providers. The monthly service charge for both
services is greater if traffic aggregated in one metropolitan area is terminated
in another metropolitan area, and varies based on the speed of the local access
connection.
Our wide area network currently operates between each of the metropolitan
areas in which we provide service, and is currently a frame relay network which
we lease from a long distance carrier. In the future, we expect to add
Asynchronous Transfer Mode capability.
NETWORK-ENABLED SERVICES, FEATURES AND APPLICATIONS
We intend to use our high-speed local access connection to provide multiple
network services, features and applications. Instead of just providing a
high-speed access connection, we intend to offer many network-enabled features
and applications, which we are able to configure to meet each user's needs. We
believe our strategy to provide additional network services, features and
applications for each user on our network allows us to address a larger market
opportunity than the market opportunity represented by connection services
alone. Our strategy is to benefit from additional recurring monthly revenue by
providing multiple network features and applications.
The features and applications that we currently offer are outlined below.
- CORPORATE TELEPHONE SYSTEM EXTENSION. This feature extends the
functionality of the corporate telephone system directly into a
teleworker's home or, in the future, a company's branch office. This
feature supports common corporate telephone functions such as four digit
dialing, conference calling and speed dialing. Benefits to our business
customers include increased worker productivity, reduced second line
expenses for voice service and the ability to aggregate and control long
distance charges.
- COMPUTER BACKUP. The computer backup feature allows end users to
automatically backup data to a secure remote site. Computer backup
leverages our "always on," high-speed local access connection and allows
the backup to be done at the times most convenient for the end user. We
believe this feature is more cost effective than substitutes such as tape
drives and disk cartridge drives, and has the additional protection of
being stored off site. This application is provided by a third party,
@Backup, Inc.
- CONTENT CACHING. We offer content caching for our customers' end users
who access the Internet. This network feature operates in the background,
serving user requests for Web pages locally rather than obtaining the
content from the actual server across the Internet. Caching enables our
customers to retrieve content faster than would otherwise be possible. Our
caching solution requires no configuration setup by our customer. If the
cache fails in any way, it will be automatically bypassed and user
requests will be sent directly to the Internet.
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- SERVICE SELECTION. We have implemented a service selection feature within
our network that enables end users to access multiple destinations,
including the corporate local area network, the corporate telephone
system, the Internet, customers, suppliers and partners. Using this
feature, a connection to the Internet and the corporate local area network
can be established simultaneously by different users over the same DSL
access line. This feature alleviates the corporate network from servicing
Internet traffic to a teleworker.
- DYNAMIC HOST CONFIGURATION PROTOCOL FUNCTIONALITY. This feature relieves
network administrators from the burden of notifying each teleworker of
network configuration changes. Through the use of this protocol, once
teleworkers start up their computers, the customer's server automatically
downloads all of his or her network configuration parameters. If any
modifications to the configuration are necessary, they only need to be
modified once by the network administrator, and the network configuration
parameters will be automatically distributed to all of the organization's
teleworkers.
- TURNKEY INTERNET. This application allows small and medium businesses or
large business branch offices the ability to host Internet and intranet
Web sites. This application includes network equipment on the customer
premises that provides router, Web server, e-mail, file server, firewall
and Web-page caching. This premises-based Internet solution is combined
with our "always on" high-speed network connection and Internet services
from an Internet Service Provider customer.
In the future, we plan to continue to expand our network features and
appplications by working closely with leading hardware, software and networking
companies. We expect to focus on many applications, including combining voice
and data communications, increasing our directory and security capabilities, and
providing businesses with the ability to access their important applications
from remote locations. We have agreed to jointly develop directory and
voice-over Internet Protocol applications with Cisco. In addition, as part of
our strategic agreement with MCI WorldCom, we expect to jointly develop multiple
applications using DSL technology including voice and data applications over a
single DSL connection.
Using these network-enabled features and applications, we can assemble a
broad solution to meet our business customer needs. For example, for a
teleworker, we might combine high-speed access to the corporate network and the
Internet with computer backup and corporate telephone extension. For a small
business, we might offer a turnkey Internet solution by combining high-speed
access to the Internet through our Internet Service Provider customer, with
customer premise equipment that supports Web server, e-mail, file server,
firewall, Web-page caching and network backup.
TURNKEY SOLUTION
We offer a full service solution for the configuration, provisioning, and
installation of the local access connection at the end user location, for which
the customer pays a one-time charge. That charge covers the cost of installing
the DSL line, any required inside wiring, the DSL modem, attaching the DSL modem
to either a single computer, local area network or enterprise server,
installation of a single network interface card if required, and installing the
TCP/IP software if required. For our large business customers, we provide
complete project management, including design, implementation and results
reporting. In some cases we seamlessly link our network operations systems to
existing customer information systems through Web-based interfaces.
CUSTOMERS, SALES AND MARKETING
We offer our services to large, medium and small businesses. As of January
31, 1999, we served more than 75 business and 20 service provider customers. For
these business and service provider customers we have over 650 lines in service
and are under contract to supply over 9,000 additional DSL
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lines. Selected business customers include Cisco, Silicon Graphics and QUALCOMM.
In addition, our service provider customers include CTSNet, ConnectNet, Verio,
Epoch Networks, Inc. and Ingram Micro.
DIRECT SALES CHANNELS
We market our services to large businesses through a direct sales force. Our
target account profile is a large, information-intensive enterprise with
multiple locations and large numbers of distributed workers. Our sales force
seeks to deal directly with the Chief Information Officer and the
telecommunications manager responsible for remote access in the target account.
Sales teams are deployed in each of the metropolitan areas in which we offer our
services. As of January 31, 1999, we had 40 sales and technical personnel
supporting our direct sales efforts. We intend to increase the size of our sales
and technical support force to sell and support large businesses as we enter new
geographic markets.
Our relationship with large business customers can involve multiple phases.
A customer typically initially agrees to a first phase commitment for a specific
number of connections at a negotiated price and one year contract term.
Typically, three to six months into the first phase implementation, the customer
agrees to successive phases of implementation that could include additional
connections and upgrades in services, features and applications. In general, we
have experienced a six to nine month sales cycle prior to receiving significant
order volume from a business customer. We currently have two large business
customers that have committed to multi-phase implementation programs: Cisco and
Silicon Graphics. Collectively, these two customers account for over 90% of our
commitments to purchase our connections. Please see "Risk Factors--We cannot
predict our success because our business model is unproven."
INDIRECT SALES CHANNELS
We also market our services to small and medium businesses through indirect
channels, including Internet Service Providers, interexchange carriers,
competitive carriers, value-added resellers, and integrators. We offer each
service provider the ability to select those services that it would like to
bundle with its own service offerings to offer a total solution to its
customers. For example, Internet Service Providers typically combine our
high-speed connections with their Internet access services and resell the
combination to their existing and new customers. We address these markets
through sales and marketing personnel dedicated to each of these indirect
channels.
We supplement our sales effort to certain of these service providers by
offering marketing support services that may include training, proposal
development, lead generation, channel support materials, joint marketing funds,
Web promotion, joint participation in national and regional customer events and
press announcements. We also offer promotions and sales incentives from time to
time to our service providers. Additionally, we support our service providers by
acting as a network integrator by qualifying potential customers for service,
ordering connections, installing equipment on the customer premises, turning up
the service, monitoring the network, troubleshooting, making repairs and
invoicing the customer on a single bill.
Our agreements with our service provider customers vary widely. Generally,
our agreements have a one to three year term, and are based on negotiated prices
that decline with increasing levels of volume achievement. In many cases,
service providers have selected one or two, and perhaps three, DSL service
providers as preferred suppliers in each market. Our goal is to be selected as
the preferred supplier or one of the preferred suppliers in each metropolitan
area where we operate. When we are selected as a preferred supplier within a
given market, we may enter into joint marketing arrangements to promote our DSL
services. See "Risk Factors--We depend on third parties, particularly MCI
WorldCom and Cisco, for the marketing and sales of our network services."
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CUSTOMER SERVICE
We offer our business and service provider customers a single point of
contact for implementation, maintenance and billing. Our Network Operations
Center provides both proactive and customer initiated maintenance services 24
hours a day, seven days a week. We also provide a broad range of customer
service and Network Operations Center services through our Web interface.
- IMPLEMENTATION. Working with a business or service provider customer, our
customer service technicians and sales engineers will develop an
implementation plan for each customer. The plan will include qualifying
the customer for our service offerings, placing orders for the connection
facilities, coordinating the delivery of the connection, installation and
turn up.
- MAINTENANCE. Our Network Operations Center in Denver provides network
surveillance through standard Simple Network Management Protocol tools for
all equipment in our network. Because we have complete end-to-end
visibility of our network, we are able to proactively detect and correct
the majority of our customer's maintenance problems remotely. Our goal is
to proactively detect and repair 90% of our customer's maintenance
problems before our customer is aware of a problem. Customer initiated
maintenance and repair requests are managed and resolved primarily through
the Customer Service Center. We utilize a trouble ticket management system
to communicate customer maintenance problems from the customer service
center to the Network Operations Center engineers and the field services
engineers. Because our Network Operations Center is fully staffed 24 hours
a day, seven days a week, we believe our ability to provide superior
proactive maintenance is significantly enhanced.
- BILLING. Customer bills are currently issued on a monthly basis through an
internal billing system. Customer billing inquiries are managed by our
Customer Service Center. In the future, billing inquiries will also be
supported through our Web interface.
- CUSTOMER SUPPORT SYSTEMS. Our system architecture is designed to
facilitate rapid service responsiveness and reduce the cost of customer
support. We use an integrated set of standard, off-the-shelf systems to
support our business processes. We designed all business functions,
including sales, ordering, provisioning, maintenance and repair, billing,
accounting and decision support to use a single database, ensuring that
every function has accurate, up-to-date information. The use of
client-server tools and scalable Unix and Microsoft NT servers enables
automation within and between processes.
NETWORK ARCHITECTURE
NETWORK TECHNOLOGY
The key design features allowing us to be a business-class network are:
- CARRIER-CLASS NETWORK MANAGEMENT. Our network is designed to be
carrier-class throughout. For example, it has been designed with redundant
network electronics and transmission paths. We have the ability to
electronically view our entire network including the DSL modem located at
the end user's computer or located on our customer's local area network
from our Network Operations Center in Denver. We provide our business and
service provider customers with service level agreements that guarantee
specific levels of network performance. We have found that by offering
service level agreements, we are better able to convince businesses to
move their mission-critical applications onto our network.
- SCALABLE SYSTEMS. We use industry standard, off-the-shelf software to
support preordering, ordering, provisioning, billing, network monitoring
and trouble management. We have implemented these systems using a
distributed client-server systems architecture that operates using a
single, integrated database. This approach allows us to grow our customer
support and
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network management capabilities as customer demand increases by giving our
personnel faster, more accurate access to a fully integrated business
information system.
- NETWORK SECURITY. Non-dedicated access, such as dial-up modem or
integrated services digital network (ISDN) lines, or dedicated access to
the public Internet, represents security risks for business networks.
These security risks are mitigated through the use of virtual private
network technologies such as authentication, tunneling, encryption, and
through the use of permanent virtual circuits that define a logical
dedicated connection between the end user and the corporate network. Our
network enables businesses to fully employ these virtual private network
technologies by using their own equipment at the edges of our network, or
optionally purchasing virtual private networking services from us.
NETWORK COMPONENTS
Our network is an overlay network in that we lease existing transport
services from other service providers: local access copper lines from incumbent
carriers, metropolitan fiber from incumbent carriers or competitive carriers and
long-distance backbone fiber from long distance carriers. This overlay network
is designed to switch and route traffic within each metropolitan area, keeping
local traffic local and only sending non-local traffic over the wide area
network, thereby increasing overall network capacity and reliability and
reducing costs. The primary components of our network are customer endpoint
devices, local transport, our Connection Points, high-speed metropolitan area
network, our Metro Service Centers, our backbone and our Network Operations
Center.
- CUSTOMER ENDPOINT DEVICES. We currently offer DSL and private line local
access connections in our network. For DSL access, we include the customer
endpoint device -- the DSL modem -- as part of our complete turnkey
service offering. We configure and install these modems with the end
user's computer, or local area network or enterprise router along with any
required on-site wiring needed to connect the modem to the telephone line
leased from the incumbent carrier. Currently, almost all of the DSL modem
and DSL multiplexing equipment we use for a single connection over a
copper line must come from the same vendor since there are no existing
interoperability standards for the equipment used in our higher speed
services.
- LOCAL TRANSPORT. Our local transport connects customer end-point devices
to our network. For digital subscriber line access, the transport is a
DSL-capable copper loop leased by us from the incumbent carrier under
terms specified in our interconnection agreements. In many cases, DSL-
capable lines result from modification of voice grade lines to carry
digital signals, at times involving an additional one-time or monthly
charge relative to voice grade lines. For private line access, the
transport is leased copper or fiber trunks provided by the incumbent
carrier or a competitive carrier.
- CONNECTION POINTS. Through our interconnection agreements with the
incumbent carriers, we secure collocation space in central offices. In
each of these Connection Points, we connect the DSL-equipped copper loop
to our DSL multiplexing equipment. Each of our Connection Points is
designed to offer the same high reliability and availability standards as
the incumbent carrier's own central office space. We expect to place our
equipment in each of 30 to 90 central offices in any metropolitan area
that we enter. As of January 31, 1999, we had Connection Points in nearly
200 central offices. Although we expect that many Connection Points will
be physically located within the central office, we have placed and will
continue to place our Connection Points in locations immediately adjacent
to central offices, when collocation space within the central office is
not available.
- HIGH-SPEED METROPOLITAN AREA NETWORK. In each of our targeted
metropolitan area markets, we operate a private metropolitan area network.
The network consists of high-speed Asynchronous Transfer Mode
communications circuits that we lease from competitive carriers or
incumbent carriers to connect our Connection Points to the Metro Service
Center. The
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metropolitan area network operates at 45 Mbps -- DS-3 -- today, and can be
upgraded to 150 Mbps -- OC-3 -- and 600 Mbps -- OC-12 -- in the future. We
anticipate leasing a substantial portion of this capacity from MCI
WorldCom, as described in "--Strategic Partnerships."
- METRO SERVICE CENTERS. The Metro Service Center is a physical point of
presence within a metropolitan area where local access traffic is
aggregated from the Connection Points over our high-speed metropolitan
area network. Although we generally expect to have one Metro Service
Center in each of our targeted metropolitan areas, in larger metropolitan
areas, we may have two. The Metro Service Center houses our Asynchronous
Transfer Mode switches and Internet Protocol routers. We also place
applications servers in our Metro Service Centers to support network
enabled feature and applications. We design our Metro Service Centers for
high availability including battery backup power, redundant equipment and
active network monitoring.
- BACKBONE. Our backbone interconnects our Metro Service Centers so that
communications traffic can be transported among different metropolitan
areas. Currently, we lease a frame relay backbone from a long distance
carrier. We anticipate leasing a substantial portion of this capacity from
MCI WorldCom, as described in "--Strategic Partnerships." In the future,
we expect to add Asynchronous Transfer Mode capability.
- NETWORK OPERATIONS CENTER. Our entire network is managed from the Network
Operations Center located in Denver. From these centers, we provide
end-to-end network monitoring and management using advanced network
management tools 24 hours a day, seven days a week. This enhances our
ability to address performance or connection issues before they affect our
end user's experience. From the Network Operations Center, we monitor the
equipment and circuits in each Metro Service Center, each metropolitan
area network, each Connection Point, individual end user lines and modems.
Please see "Risk Factors--A system failure or breach of network security
could cause delays or interruptions of service to our customers."
We are pursuing a program of ongoing network development. Our engineering
efforts focus on the design and development of new technologies and services to
increase the speed, efficiency, reliability and security of our network and to
enable network features and applications developed by us or by third parties.
Please see "Risk Factors--We may be unable to effectively expand our network
services and provide high performance to a substantial number of end users."
DSL TECHNOLOGIES
We utilize various DSL equipment and technologies from different vendors.
The various DSL technologies allow us to offer a range of connection speeds.
Actual speeds are a function of the distance from the end user or local area
network to the central office and the quality of the copper line. We describe
the basic features and the market positioning of our primary DSL technologies
below.
RATE ADAPTIVE DIGITAL SUBSCRIBER LINE (RADSL)
RADSL technology allows each end user or local area network to utilize the
full digital capability of the underlying telephone line. Speeds reach up to 7.1
Mbps downstream and up to 1.1 Mbps upstream if the end user or local area
network is within 15,000 feet, or approximately 2.8 miles, from the central
office. We use this technology for end users or local area networks needing very
high access speeds. Our target customers for RADSL connections consist of small
and medium businesses and branch offices of large businesses needing T-1 or
higher speeds. We believe that these businesses often find the cost of dedicated
private line or frame relay services to be prohibitive. Our RADSL connection
competes favorably on a price/performance basis relative to traditional
fractional T-1 and frame relay services. The service also provides the highest
speed of any DSL service for bandwidth intensive applications.
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SYMMETRIC DIGITAL SUBSCRIBER LINE (SDSL)
Our SDSL technology allows end users and local area network to achieve up to
1.5 Mbps speeds both downstream and upstream. Depending on the quality of the
copper line, 1.5 Mbps can typically be achieved if the end user or local area
network is within 8,000 feet, or approximately 1.5 miles, from the central
office.
INTEGRATED DIGITAL SUBSCRIBER LINE (IDSL)
IDSL technology allows us to reach all end users or local area networks
within a central office serving area irrespective of the end user or local area
network distance from the central office. Our IDSL service operates at up to 144
Kbps in each direction. This service can use existing integrated services
digital network (ISDN) equipment at the end user site, and is targeted at the
integrated services digital network (ISDN) replacement market. For information
intensive users, we believe that IDSL compares favorably with integrated
services digital network (ISDN) on a price/performance basis when the monthly
flat rate IDSL charge is compared with the per minute integrated services
digital network (ISDN) charge. We also offer IDSL to end users that have lines
that do not consist of continuous copper, such as digital line carrier equipped
lines that are partially copper and partially fiber.
COMPETITION
We will face competition from many competitors with significantly greater
financial resources, well-established brand names and large, existing installed
customer bases. Moreover, we expect the level of competition to intensify in the
future. We expect significant competition from:
- INCUMBENT CARRIERS. Incumbent carriers, such as GTE and U S WEST, are
leasing wide area connections from long distance carriers, and have
existing metropolitan area networks and circuit switched local access
networks. Most incumbent carriers have announced deployment of commercial
DSL services in certain areas. In addition, most incumbent carriers are
combining their DSL service with their own Internet Service Provider
businesses. We believe that incumbent carriers have the potential to
quickly overcome many of the issues that have delayed widespread
deployment of DSL services in the past. If a Regional Bell Operating
Company is authorized to provide in-region long distance service in one or
more states, by fulfilling the market-opening provisions of the 1996
Telecommunications Act, the Regional Bell Operating Company may be able to
offer "one stop shopping" that would be competitive with our offerings.
The incumbent carriers 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 we may be unable
to secure collocation space.
- TRADITIONAL INTEREXCHANGE CARRIERS. Many of the leading traditional
interexchange carriers, such as AT&T, MCI WorldCom and Sprint, are
expanding their capabilities to support high-speed, end-to-end networking
services. Increasingly, their bundled services include high-speed local
access combined with metropolitan and wide area networks, and a full range
of Internet services and applications. We expect them to offer combined
data, voice and video services over these networks.
These carriers have deployed large scale networks, have large numbers of
existing business and residential customers and enjoy strong brand
recognition, and as a result represent significant competition. For
instance, they have extensive fiber networks in many metropolitan areas
that primarily provide high-speed data and voice communications to large
companies. They could deploy DSL services in combination with their current
fiber networks. They also have interconnection agreements with many of the
incumbent carriers and have secured collocation spaces from which they
could begin to offer competitive DSL services.
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- NEWER INTEREXCHANGE CARRIERS. The newer interexchange carriers, such as
Williams, Qwest Communications International and Level 3 Communications,
are building and managing high bandwidth, packet-based networks
nationwide. They are also building direct sales forces and partnering with
Internet Service Providers to offer services directly to business
customers. They 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, like @Home
Networks and its cable partners, are offering or preparing to offer
high-speed Internet access over hybrid fiber coaxial cable networks to
consumers. @Work has positioned itself to do the same for businesses.
Where deployed, these networks provide local access services similar to
our services, and in some cases at higher speeds. They typically offer
these services at lower prices than our services, in part by sharing the
bandwidth available on their cable networks among multiple end users.
- WIRELESS AND SATELLITE DATA SERVICE PROVIDERS. Several new companies are
emerging as wireless and satellite-based data service providers, over a
variety of frequency allocations. These include:
- WinStar Communications, Inc.,
- Teligent, Inc.,
- Teledesic LLC,
- Hughes Space Communications, and
- Iridium World Communications Ltd.
These companies use a variety of new and emerging technologies, such as
terrestrial wireless services, point-to-point and point-to-multipoint fixed
wireless services, satellite-based networking and high-speed wireless
digital communications.
- INTERNET SERVICE PROVIDERS. Internet Service Providers provide Internet
access to residential and business customers. These companies generally
provide such Internet access over the incumbent carriers' circuit switched
networks at integrated services digital network (ISDN) speeds or below.
However, some Internet Service Providers, including HarvardNet, Inc. in
Massachusetts, have begun offering DSL-based access using their own DSL
services, or DSL services offered by the incumbent carrier or other
DSL-based competitive carriers. Some Internet Service Providers have
significant and even nationwide marketing presences and combine these with
strategic or commercial alliances with DSL-based competitive carriers.
Some Internet Service Providers, such as Concentric Network Corporation,
Mindspring Enterprises, Inc., PSINet Inc. and Verio have significant and
even nationwide presences.
- COMPETITIVE CARRIERS. Certain competitive carriers, including Covad
Communications Group, Inc. and NorthPoint Communications, Inc., have begun
offering DSL-based data services. Other competitive carriers are likely to
do so in the future. The 1996 Telecommunications Act specifically grants
competitive carriers the right to negotiate interconnection agreements
with incumbent carriers, including interconnection agreements which may be
identical in all respects to our agreements.
Many of these competitors are offering, or may soon offer, technologies and
services that will directly compete with some or all of our service offerings.
Such technologies include integrated services digital network (ISDN), DSL,
wireless data and cable modems. Please see "Risk Factors--The market in which we
operate is highly competitive, and we may not be able to compete effectively,
especially against established industry competitors with significantly greater
financial resources." Some of the competitive factors we face include:
- transmission speed,
- reliability of service,
- breadth of service availability,
- price performance,
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- network security,
- ease of access and use,
- content bundling,
- customer support,
- brand recognition,
- operating experience,
- ability to scale,
- capital availability and
- exclusive contracts.
INTERCONNECTION AGREEMENTS WITH INCUMBENT CARRIERS
Interconnection agreements with incumbent carriers are critical to our
business. These agreements cover a number of aspects of our relationships with
incumbent carriers, including:
- the price we pay to lease and the access we have to the incumbent
carrier's copper lines;
- the special conditioning the incumbent carrier provides on certain of
these lines to enable the transmission of DSL signals;
- the price and terms for collocation of our equipment in the incumbent
carrier central offices;
- the price we pay and the access we have to the incumbent carrier's
transport facilities;
- the ability we have to access conduits and other rights of way the
incumbent carrier has to construct its own network facilities;
- the operational support systems and interfaces that we can use to place
orders and report and monitor the incumbent carrier's response to our
requests;
- the dispute resolution process we use with the incumbent carrier to
resolve disagreements on the terms of the interconnection contract; and
- the term of the interconnection agreement, its transferability to
successors, its liability limits and other general aspects of our
relationship with the incumbent carrier.
We have signed interconnection agreements with six different major incumbent
carriers covering 23
states and the District of Columbia. In many cases, incumbent carriers do not
agree to the provisions in interconnection agreements that we request, and we
have not consistently prevailed in obtaining all of the provisions we desire. We
may be unable to continue to sign interconnection agreements with incumbent
carriers. If we are unable to enter into, or experience delay in obtaining,
interconnection agreements, this inability or delay may materially and adversely
affect our business and financial prospects. The incumbent carriers are also
permitting competitive carriers to adopt previously signed interconnection
agreements.
Our interconnection agreements have a maximum term of three years, requiring
us to renegotiate the existing terms in the future. We may be unable to extend
our existing interconnection agreements or renegotiate new agreements on
favorable or any terms. In addition, our interconnection agreements are subject
to state commission, Federal Communications Commission and judicial oversight.
These bodies may modify the terms or prices of our interconnection agreements in
ways that would adversely affect our business and financial prospects.
GOVERNMENT REGULATION
A significant portion of the services that we offer, particularly through
our wholly owned subsidiaries, ACI Corp. and ACI Corp.--Virginia, may be subject
to regulation at the federal, state and/or local levels. Future federal or state
regulations and legislation may be less favorable to us than current regulation
and legislation and therefore have a material and adverse impact on our business
and financial prospects. In addition, we may expend significant financial and
managerial resources to
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participate in proceedings setting rules at either the federal or state level,
without achieving a favorable result.
FEDERAL LEGISLATION AND REGULATION
The 1996 Telecommunications Act, enacted on February 8, 1996, substantially
departs from prior legislation in the telecommunications industry by
establishing local exchange competition as a national policy. This act removes
state regulatory barriers to competition and preempts laws restricting
competition in the local exchange market.
The 1996 Telecommunications Act in some sections is self-executing, but in
addition, the Federal Communications Commission issues regulations that identify
specific requirements upon which we and our competitors rely in implementing the
changes it prescribes. The outcome of these various ongoing Federal
Communications Commission rulemaking proceedings or judicial appeals of such
proceedings could materially affect our business and financial prospects.
The Federal Communications Commission prescribes rules applicable to
interstate communications, including rules implementing the 1996
Telecommunications Act, a responsibility it shares with the state regulatory
commissions. The 1996 Telecommunications Act, and the Federal Communications
Commission's initial rules interpreting such act, encouraged increased local
competition. A federal appeals court for the Eighth Circuit reviewed some of the
initial rules, and overruled some of its provisions, including some rules on
pricing and nondiscrimination. In January, 1999, the United States Supreme Court
reversed elements of the Eighth Circuit's ruling, finding that the Federal
Communications Commission has broad authority to interpret the 1996
Telecommunications Act and issue rules for its implementation, specifically
including authority over pricing methodology. The Supreme Court upheld the
Federal Communications Commission's orders to the incumbent carriers to combine
unbundled elements for competitors, and to allow competitors to pick and choose
among provisions in existing interconnection agreements. The Supreme Court also
found that the Federal Communications Commission's interpretation of the rules
for establishing unbundled elements was not consistent with the 1996
Telecommunications Act, and required the Federal Communications Commission to
reconsider its delineation of unbundled elements. The Federal Communications
Commission's replacement decision on unbundled elements may adversely affect our
business. In addition, some incumbent carriers may take the position that they
have no obligation to provide unbundled elements, including copper loops, until
the Federal Communications Commission issues new rules, which could adversely
affect our business.
In November, 1998, the Federal Communications Commission ruled that DSL
services provided as dedicated access services in connection with interstate
services such as Internet access are interstate services subject to the Federal
Communications Commission's jurisdiction. This decision is currently subject to
reconsideration and appeal.
In addition, in the spring of 1998, four of the Regional Bell Operating
Companies petitioned the Federal Communications Commission to be relieved of
certain regulatory requirements in connection with their own DSL services,
including obligations to unbundle DSL loops, but not the obligation to unbundle
the loops we purchase for our DSL services, and to resell DSL services. In
October 1998, the Federal Communications Commission ruled that DSL services are
telecommunications services subject to the requirements of the 1996
Telecommunications Act to unbundle such services and offer them for resale. In
October 1998, the Federal Communications Commission also issued a Notice of
Proposed Rulemaking indicating its intention to clarify expanded rights of
competitive carriers for collocation, access to copper loops, and various other
issues of consequence to competitive carriers deploying DSL services. The
Federal Communications Commission also indicated its intention to allow
incumbent carriers to create separate affiliates for their DSL businesses that
would have to operate as competitive carriers and would be permitted to operate
free of the resale and unbundling obligations of the 1996 Telecommunications
Act. These decisions are currently subject to reconsideration and appeal. The
final outcome of these decisions, originally scheduled to be announced on
January 28, 1999, has been
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postponed by the Federal Communications Commission while it considers the impact
of the Supreme Court's ruling on the 1996 Telecommunications Act. The final
outcome of these petitions or other proceedings interpreting the requirements of
the 1996 Telecommunications Act may adversely affect our business.
STATE REGULATION
Some of our services, particularly those of our subsidiaries, ACI Corp. and
ACI Corp.--Virginia, may be classified as intrastate services subject to state
regulation. All of the states where we operate, 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 we are not typically subject to price or rate of
return regulation for tariffed intrastate services. Actions by state public
utility commissions could cause us to incur substantial legal and administrative
expenses.
Under the 1996 Telecommunications Act, if we so request, incumbent carriers
have a statutory duty to negotiate in good faith with us 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 we have made a request. We have
signed interconnection agreements with Ameritech, Bell Atlantic, Bell South,
GTE, Pacific Bell and U S WEST. We have signed agreements with Ameritech for
Illinois and Michigan and currently are negotiating interconnection agreements
for Ohio and Wisconsin. We have signed agreements with Bell Atlantic for the
District of Columbia, Maryland, Massachusetts, New Jersey, New York,
Pennsylvania and Virginia. We have signed agreements with Bell South for
Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, North Carolina, South
Carolina and Tennessee. We have signed an agreement with GTE for California and
are currently completing agreements for Florida, Minnesota, North Carolina,
Oregon, Texas, Virginia and Washington. We have signed an agreement with Pacific
Bell for California. We have signed agreements with U S WEST for Arizona,
Colorado, Minnesota, Oregon, and Washington and are currently negotiating an
agreement for Utah. In addition, we are currently negotiating with SBC
Communications Inc. for Kansas and Missouri and with Sprint for several states.
These interconnection agreements may not be on terms that are entirely
satisfactory to us.
During these negotiations, either the incumbent carrier or we may submit
disputes to the state regulatory commissions for mediation and, after the
expiration of the statutory negotiation period set forth in the 1996
Telecommunications Act, we may submit outstanding disputes to the states for
arbitration. We are currently arbitrating with SBC Communications Inc. in Texas
the terms of our interconnection agreement with Southwestern Bell for Texas. The
outcome of this arbitration may be unfavorable to us.
Under the 1996 Telecommunications Act, states have begun and, in a number of
cases, completed regulatory proceedings to determine the pricing of unbundled
network elements and services, and the results of these proceedings will
determine the price we pay for, and whether it is economically attractive for us
to use, these elements and services.
LOCAL GOVERNMENT REGULATION
Should we in the future decide to operate our own transport facilities over
public rights-of-way, we may be required to obtain various permits and
authorizations from municipalities in which we operate such facilities. Some
municipalities may seek to impose similar requirements on users of transmission
facilities, even though they do not own such facilities. If municipal
governments impose conditions on granting permits or other authorizations or if
they fail to act in granting such permits or other authorizations, our business
could be adversely affected.
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<PAGE>
EMPLOYEES
As of January 31, 1999, we had approximately 220 employees. We believe that
our future success will depend in part on our continued ability to attract, hire
and retain qualified personnel. Competition for such personnel is intense, and
we may be unable to identify, attract and retain such personnel in the future.
None of our employees are represented by a labor union or are the subject of a
collective bargaining agreement. We have never experienced a work stoppage and
believe that our employee relations are good.
PROPERTIES
Our headquarters are located in facilities consisting of approximately
80,000 square feet in Englewood, Colorado, which we occupy under leases that
expire in October 1999 and January 2004. These leases may be extended. We also
lease space for network equipment installations in a number of other locations.
LEGAL PROCEEDINGS
We are currently a party to an arbitration proceeding between us and SBC
Communications regarding the terms of interconnection with Southwestern Bell in
Texas. This arbitration, instituted December 11, 1998, is pending before the
Public Utility Commission of Texas. The dispute involves the terms and
conditions of issues related to DSL-based services and loops in connection with
our interconnection agreement with Southwestern Bell. We are seeking to compel
Southwestern Bell to include in our interconnection agreement language
comparable to that in our other interconnection agreements, which gives us the
ability to obtain copper telephone lines on which we provide our chosen variety
of DSL technologies.
We filed a complaint for declaratory relief on February 18, 1999 in San
Diego County Superior Court (North County) versus Mr. Thomas L. Lafleur. Mr.
Lafleur is a former employee who resigned and/or was terminated in 1998. After
he left, we sent him a check for the repurchase of his unvested shares, but he
has not yet cashed this check. This declaratory relief action is to determine
that his shares were unvested and properly repurchased.
In addition, we are subject to state commission, Federal Communications
Commission and court decisions as they relate to the interpretation and
implementation of the 1996 Telecommunications Act, the interpretation of
competitive carrier interconnection agreements in general and our
interconnection agreements in particular. In some cases, we may be deemed to be
bound by the results of ongoing proceedings of these bodies. We therefore may
participate in proceedings before these regulatory agencies or judicial bodies
that affect, and allow us to advance, our business plans.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of March 4, 1999, the names, ages and
positions of our executive officers and directors. Their respective backgrounds
are described below.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Catherine M. Hapka................................... 44 President, Chief Executive Officer and Director
Jeffrey Blumenfeld................................... 51 Vice President and General Counsel
Michael E. Calabrese................................. 33 Vice President, Sales Engineering
Scott C. Chandler.................................... 37 Chief Financial Officer
Eric H. Geis......................................... 52 Vice President of National Deployment
James A. Greenberg................................... 38 Chief Network Officer
David J. Shimp....................................... 53 Chief Marketing Officer
Frank J. Tolve, Jr................................... 53 Chief Sales Officer
Kevin R. Compton..................................... 40 Director
Keith B. Geeslin..................................... 45 Director
Ken L. Harrison...................................... 56 Director
Susan Mayer.......................................... 48 Director
William R. Stensrud.................................. 48 Director
John L. Walecka...................................... 39 Director
Edward J. Zander..................................... 52 Director
</TABLE>
All the officers identified above serve at the discretion of our Board of
Directors. 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 our President, Chief Executive Officer and a
director since June 1997. Prior to joining us, 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. 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. Prior to joining U S WEST,
Ms. Hapka held general management positions with General Electric and McKinsey &
Co., Inc.
JEFFREY BLUMENFELD has been our Vice President and General Counsel 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. 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 one of our officers. For
more information on
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Mr. Blumenfeld's relationship with us, please see "Certain Relationships and
Related Transactions-- Legal Services."
MICHAEL E. CALABRESE has been our Vice President, Sales Engineering since
August 1998. Prior to joining us, Mr. Calabrese served in various positions at
Cisco Systems, Inc. from August 1995 to August 1998, most recently as Account
Manager of the Data Equipment Group. In that capacity, Mr. Calabrese maintained
primary responsibility for managing Cisco's major accounts. From January 1993 to
August 1995, Mr. Calabrese held management positions at Sprint Communications.
First, as Manager, Project Engineering, Mr. Calabrese led Sprint Communication's
new product rollouts. Subsequently, as Manager, Network Planner, Mr. Calabrese
was responsible for the design and build-out of Sprint Communications Data
Networks.
SCOTT C. CHANDLER has served as our 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 and General Manager of U S WEST Cable and 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 and Channel
Support of !NTERPRISE Networking Services from January 1992 to December 1993.
ERIC H. GEIS has been our Vice President of National Deployment since
January 1, 1999. Prior to that, he served as our Vice President and General
Manager, Western Region beginning June 1997 and was a consultant to us 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 1990
and November 1995, Mr. Geis served as President and Chief Executive Officer of
Quintessential Solutions Inc., a provider of wide area network design, pricing
and optimization software applications for interexchange carriers, regional bell
operating companies, incumbent carriers, Internet Service Providers 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.
JAMES A. GREENBERG has been our Chief Network Officer 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 Operations and Engineering Group. In that capacity, Mr. Greenberg
directed the design, planning, operation and construction of Sprint's data
networks.
DAVID J. SHIMP has served as our Chief Marketing Officer since October 1998.
Prior to joining us, Mr. Shimp was a partner at LAI Ward Howell, Inc., a
professional services firm, where he implemented that firm's first systems group
and was a leader in the technology department during his tenure from January
1991 to October 1998. Previously, Mr. Shimp held management positions at
McKinsey & Co. and the Deerpath Group.
FRANK J. TOLVE, JR. has served as our Chief Sales Officer since December
1998. From November 1994 to September 1998, Mr. Tolve served as Vice President,
Sales Operations at Bay Networks. In that capacity, Mr. Tolve's responsibilities
included sales administration, channel strategy and worldwide
telesales/telemarketing. Mr. Tolve also served as Vice President, Sales
Operations for SynOptics Communications from November 1992 to November 1994.
KEVIN R. COMPTON has been a director 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
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Communication, Inc. and Corsair Communications, Inc., and is also a director of
several privately held companies. Mr. Compton was elected a director as the
nominee of KPCB, pursuant to the terms of a voting agreement.
KEITH B. GEESLIN has been a director 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 SDL, Inc., and is also a director
of several privately held companies, including Paradyne Corporation, a DSL
equipment manufacturer and supplier to us. Please see "Certain Relationships and
Related Transactions--Director Relationships." Mr. Geeslin was elected a
director as the nominee of The Sprout Group, pursuant to the terms of a voting
agreement.
KEN L. HARRISON has been a director 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 a director as
the nominee of Enron, pursuant to the terms of a voting agreement.
SUSAN MAYER has been a director since March 1999. Ms. Mayer is the President
of the MCI WorldCom Venture Fund and a Senior Vice President of MCI WorldCom
Inc. Previously, she was Senior Vice President of MCI Communications Corporation
from 1994 to 1998. From 1996 to 1997, Ms. Mayer was also President and Chief
Operating Officer of Sky MCI. From 1993 to 1994, Ms. Mayer was Vice President of
MCI Communications Corporation.
WILLIAM R. STENSRUD has been a director since our inception in February 1997
and also served as our President and Chief Executive Officer 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.
Please see "Certain Relationships and Related Transactions--Director
Relationships." Mr. Stensrud was elected a director as the nominee of Enterprise
Partners, pursuant to the terms of a voting agreement.
JOHN L. WALECKA has been a director since July 1997. Since 1984, Mr. Walecka
has been at Brentwood Venture Capital, a venture capital investment firm, and
has been a general partner since 1990. Mr. Walecka is a director of Documentum,
Inc. and Xylan Corporation, and is also a director of several privately held
companies. Please see "Certain Relationships and Related Transactions--Director
Relationships." Mr. Walecka was elected a director as the nominee of Brentwood
Venture Capital, pursuant to the terms of a voting agreement.
EDWARD J. ZANDER has been a director since March 1999. Since 1987, Mr.
Zander has held various management positions at Sun Microsystems, Inc., where he
currently serves as its Chief Operating Officer and Corporate Executive Officer,
a position he has held since January 1998. Mr. Zander is a director of
Documentum, Inc. and two privately held companies.
Members of the Board of Directors currently hold office and serve until our
next annual meeting of stockholders or until their respective successors have
been elected. The Board of Directors is currently comprised of six directors
and, prior to the completion of this offering, will be classified into three
classes of directors serving staggered three-year terms, with one class of
directors to be elected at each annual meeting of stockholders. The
classification of directors has the effect of making it more
54
<PAGE>
difficult to change the composition of the Board of Directors. See "Description
of Capital Stock-- Possible Anti-Takeover Matters."
All of our executive officers are appointed annually by and serve at the
discretion of the Board of Directors. All of our executive officers are at-will
employees.
COMMITTEES OF THE BOARD OF DIRECTORS
We have a standing compensation committee currently composed of Messrs.
Walecka, Harrison and Stensrud. The compensation committee reviews and acts on
matters relating to compensation levels and benefit plans for our executive
officers and key employees, including salary and stock options. The compensation
committee is also responsible for granting stock awards, stock options and stock
appreciation rights and other awards to be made under our existing incentive
compensation plans. We also have a standing audit committee composed of Messrs.
Compton and Geeslin. The audit committee assists in selecting our independent
auditors and in designating services to be performed by, and maintaining
effective communication with, those auditors.
DIRECTOR COMPENSATION
Directors do not receive compensation for services provided as a director or
for participation on any committee of the Board of Directors. All directors 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 certain information with respect to the
compensation awarded to, earned by or paid to our current Chief Executive
Officer and our four other most highly compensated executive officers (the
"Named Executive Officers") during 1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
--------------------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) YEAR SALARY BONUS OPTIONS(#) COMPENSATION
- -------------------------------------------------- ---- -------- ------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Catherine M. Hapka (1)............................ 1998 $339,583 $ 134,584 -- $--
President, Chief Executive Officer and Director 1997 163,654 50,000 2,920,754(2) --
365,094(3)
Michael E. Calabrese (4).......................... 1998 42,417 157,623(5) 300,000(2) --
Vice President, Sales Engineering 1997 -- -- -- --
James A. Greenberg (6)............................ 1998 145,000 31,538 40,000(2) --
Chief Network Officer 1997 63,205 16,615 456,368(2) 50,000 (7)
Gloria A. Farler (8).............................. 1998 137,500 29,906 20,000(2) --
Vice President, Marketing Support 1997 25,781 7,161 40,000(2)
Eric H. Geis (9).................................. 1998 136,000 29,580 -- --
Vice President of National Deployment 1997 96,519 18,417 110,000(2) --
</TABLE>
- ------------------------------
(1) Ms. Hapka has been employed by us 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 a right to purchase 365,094 shares of Series A preferred stock,
which she purchased in 1998.
(4) Mr. Calabrese has been employed by us since August 1998, and the amount
listed sets forth his compensation since such date.
(5) Includes a cash payment of $150,000 to cover a signing bonus and relocation
expenses.
(6) Mr. Greenberg has been employed by us since July 1997, and the amount listed
sets forth his compensation since such date.
(7) Represents a flat fee relocation payment.
(8) Ms. Farler had been employed by us since October 1997; she resigned her
position in February 1999.
(9) Mr. Geis has been employed by us since April 1997, and the amount listed
sets forth his compensation since such date.
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<PAGE>
OPTION GRANTS IN 1998
The following table sets forth information with respect to stock options
granted to each of the Named Executive Officers during 1998 pursuant to our 1997
Stock Option/Stock Issuance Plan. We did not grant any stock appreciation rights
to the Named Executive Officers during 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS (1) VALUE AT ASSUMED
------------------------------------------------------------ ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (3)
OPTIONS EMPLOYEES PRICE PER --------------------
NAME GRANTED IN 1998 (2) SHARE EXPIRATION DATE 5% 10%
- ------------------------------------- ----------- --------------- ----------- ----------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Catherine M. Hapka................... -- -- -- -- -- --
Michael E. Calabrese................. 300,000 10.7% $ 0.30 September 9, 2008 $ 56,601 $ 143,437
James A. Greenberg................... 40,000 1.4% 0.30 September 9, 2008 7,547 19,125
Gloria A. Farler (4)................. 20,000 0.7% 0.30 September 9, 2008 3,773 9,562
Eric H. Geis......................... -- -- -- -- -- --
</TABLE>
- ------------------------------
(1) Options granted are immediately exercisable for all the option shares, but
any shares purchased under such options will be subject to repurchase by us
at such shares' option exercise price until they vest. Please see "--1997
Stock Option/Stock Issuance Plan."
(2) We granted options to purchase 2,803,900 shares of common stock during 1998.
(3) Amount represents potential realizable value of option grants, assuming that
our common stock appreciates at the annual rate shown, compounded annually,
from the date of grant until expiration of the granted options. These
numbers are calculated based on Securities and Exchange Commission
requirements and do not reflect our projection or estimate of future stock
price growth. Actual gains, if any, on stock option exercises are dependent
on the future performance of our common stock.
(4) Ms. Farler resigned her position in February 1999.
FISCAL YEAR-END 1998 OPTION VALUES
The following table provides information with respect to each of the Named
Executive Officers, concerning the exercise of common and preferred stock
options during 1998 and unexercised options held by them at the end of 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT
SHARES DECEMBER 31, 1998 DECEMBER 31, 1998(1)
ACQUIRED ON VALUE -------------------------------- --------------------------
NAME EXERCISE(1)(2) REALIZED(3) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- -------------- ------------- ----------- ------------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Catherine M. Hapka........... 3,285,848(4) $ 73,019 -- -- -- --
Michael E. Calabrese......... -- -- 300,000 -- $1,440,000 --
James A. Greenberg........... 456,368(5) -- 40,000 -- 192,000 --
Gloria A. Farler (6)......... 36,000(7) -- 20,000 -- 96,000 --
Eric H. Geis................. 110,000(8) -- -- -- -- --
</TABLE>
- ------------------------------
(1) Amount based on the fair market value of our common stock on December 31,
1998 as determined by our Board of Directors, less the exercise price
payable for such shares.
(2) The shares of common stock were deposited in escrow with our corporate
secretary where they continue to vest in accordance with the applicable
vesting provisions. Please see "--1997 Stock Option/Stock Issuance Plan."
(3) Amount based on the fair market value, as determined by our Board of
Directors, of our common stock and Series A preferred stock on the exercise
date for such shares, less the exercise price paid for such shares.
(4) Ms. Hapka exercised all of these options in February 1998 for a net purchase
price of $146,038 for common stock and $292,075 for Series A preferred
stock. Ms. Hapka purchased the shares of Series A preferred stock at a $0.20
per share discount from market value, for an aggregate discount of $73,019.
(5) Mr. Greenberg exercised all of these options in January 1998 for a net
purchase price of $22,818.
(6) Ms. Farler resigned her position in February 1999.
(7) Ms. Farler exercised all of these options in March 1998 for a net purchase
price of $1,800.
(8) Mr. Geis exercised all of these options in January 1998 for a net purchase
price of $5,500.
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<PAGE>
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
None of our employees are employed for a specified term, and each employee's
employment with us is subject to termination at any time by either party for any
reason, with or without cause.
Ms. Hapka's employment agreement provides for a salary of $350,000 per year,
subject to periodic increases by the Board of Directors at its discretion. In
addition, it provides for a bonus potential of 50% of her base salary for her
second year of employment, which ends 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 2,920,754 shares of common stock at an exercise price of
$0.05 per share under the 1997 Stock Option/Stock Issuance Plan. Ms. Hapka
exercised such options in February 1998, subject to our right of repurchase
which lapses in accordance with the vesting schedule of the options. Please see
"-- 1997 Stock Option/Stock Issuance Plan." 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. We do not hold a right to
repurchase these shares of Series A preferred stock. 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.
Mr. Calabrese's employment agreement provides for an annual salary of
$130,000, subject to periodic increases by the Board of Directors at its
discretion. It provides for an annual bonus of up to 20% of his annual salary.
In addition, Mr. Calabrese received, as part of the acceptance of his
employment, a cash payment of $150,000, which also covered relocation expenses.
In the event Mr. Calabrese's employment is terminated involuntarily and without
cause during the first year of employment, which ends in August 1999, Mr.
Calabrese will be entitled to receive a payment equal to one year's base salary
payable in 12 monthly installments.
Mr. Greenberg's employment agreement provides for an annual salary of
$145,000, subject to periodic increases by the Board of Directors at its
discretion.
Mr. Geis' employment agreement provides for an annual salary of $136,000,
subject to periodic increases by the Board of Directors at its discretion. It
provides for an annual bonus of up to 25% of his base salary.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Board of Directors currently has a compensation committee that reviews
and approves the compensation and benefits to be provided to our executive
officers and other key employees. In addition, the compensation committee
administers the 1997 Stock Option/Stock Issuance Plan. The compensation
committee currently consists of Messrs. Harrison, Stensrud and Walecka.
1997 STOCK OPTION/STOCK ISSUANCE PLAN
As of January 31, 1999, we had reserved 9,727,942 shares of common stock for
issuance pursuant to our 1997 Stock Option/Stock Issuance Plan (the "1997 Stock
Plan"), which has been approved by our Board of Directors and stockholders. The
1997 Stock Plan provides for the granting to employees and 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, officers and directors and consultants of nonqualified stock options.
The 1997 Stock Plan also provides for the granting of restricted stock. As of
January 31, 1999, options to purchase an aggregate of 8,507,393 shares of common
stock had been granted, net of cancellations, and 1,220,549 shares of common
stock remained available for future grants. From January 1, 1998 through January
31, 1999, 4,695,190 options to purchase common stock were exercised, of which an
aggregate of 3,523,122 were exercised by the Named Executive Officers as a
group, an aggregate of 365,096 were exercised by our other executive
57
<PAGE>
officers as a group, and an aggregate of 806,972 were exercised by our
non-officer employees. To date, we have not granted any shares of restricted
stock under the 1997 Stock Plan.
The 1997 Stock Plan is administered by the compensation committee of our
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 at
the original purchase price that we hold that lapses in accordance with the
vesting schedule of the options. If an optionee exercises an option to purchase
shares in which such optionee has not acquired a vested interest in accordance
with the applicable vesting provisions, then the purchased shares are deposited
in escrow with our corporate secretary, where they continue to vest in
accordance with the applicable vesting provisions. We hold a right, exercisable
at any time during the sixty-day period following the date an optionee ceases
for any reason to remain in service, to repurchase at the exercise price for
such options all or, at our discretion and with the consent of the optionee, any
portion of such unvested shares.
If we merge with or into another corporation or sell all or substantially
all of our assets, all outstanding options shall be assumed or an equivalent
option substituted by the successor corporation. If a successor corporation
refuses to assume or substitute for the options, a portion of each outstanding
option shall be accelerated so that such portion becomes fully vested. Please
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 our common stock on the date of
grant. The exercise price of options to an optionee who owns more than 10% of
our 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 ten
years measured from the option grant date.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. In addition, our bylaws require us to
indemnify our directors and officers, and allow us to indemnify our other
employees and agents, to the fullest extent permitted by law. We have also
entered into agreements to indemnify our directors and certain executive
officers. We believe 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 where indemnification will be required or permitted. We are 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
our company pursuant to the foregoing provisions, we have been informed that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERIES A PURCHASE AGREEMENT
On July 3, 1997, we entered into a Series A preferred stock Purchase
Agreement with Enterprise Partners, Brentwood Venture Capital, Kleiner Perkins
Caufield & Byers, The Sprout Group and certain other investors (together, the
"Series A Purchasers"). In a series of three closings, the Series A Purchasers
purchased in the aggregate 12,280,000 shares of our Series A preferred stock for
an aggregate purchase price of $12.3 million, which will convert into 24,560,000
shares of common stock upon the closing of this offering. Also, pursuant to a
Subsequent Closing Purchase Agreement dated as of December 23, 1997, we sold an
additional 210,000 shares of our Series A preferred stock to certain other
investors (the "Additional Series A Purchasers") for an aggregate purchase price
of $210,000, which will convert into 420,000 shares of common stock upon the
closing of this offering. In connection with these sales, we entered into an
Investors' Rights Agreement and Addendum with the Series A Purchasers and the
Additional Series A Purchasers, which provided the Series A Purchasers and
Additional Series A Purchasers with certain demand and piggyback registration
rights, and certain rights of first offer in the event we propose to offer for
sale certain of our securities. The Investors' Rights Agreement and Addendum was
replaced by the Amended and Restated Investors' Rights Agreement which was
superseded by the 1999 Investors' Rights Agreement. Please see "--Investors'
Rights Agreement" and "Description of Capital Stock--Registration Rights."
In connection with an employment agreement between us and Catherine Hapka,
we issued 365,094 shares of Series A preferred stock at a purchase price of
$0.80 per share to Ms. Hapka, which will convert into 730,188 shares of common
stock upon the closing of this offering. Please see "Management--Employment
Agreements and Change in Control Arrangements."
SERIES B PURCHASE AGREEMENT
On March 12, 1998, we entered into a Series B preferred stock Purchase
Agreement with certain of the Series A Purchasers and Enron Communications
Group, Inc. (together, the "Series B Purchasers"). Under this agreement, the
Series B Purchasers acquired an aggregate of 4,044,943 shares of Series B
preferred stock for an aggregate purchase price of $18.0 million, which will
convert into 8,089,886 shares of common stock upon the closing of this offering.
In connection with the Series B preferred stock Purchase Agreement, we entered
into an Amended and Restated Investors' Rights Agreement with the Series A
Purchasers, the Additional Series A Purchasers and the Series B Purchasers on
March 12, 1998. The Amended and Restated Investors' Rights Agreement replaced
the Investors' Rights Agreement and Addendum from the Series A preferred stock
financing and was superseded by the 1999 Investors' Rights Agreement. Please see
"--Investors' Rights Agreement."
SERIES C PURCHASE AGREEMENT; OTHER AGREEMENTS WITH MCI WORLDCOM
On March 3, 1999, we entered into a Series C Preferred Stock and Warrant
Purchase Agreement with MCI WorldCom's investment fund, pursuant to which the
fund acquired, in the aggregate 3,731,410 shares of Series C preferred stock and
a warrant to purchase 600,000 shares of our common stock for an aggregate
purchase price of $30.0 million. In connection with this purchase agreement, we
entered into an Amended and Restated Investors' Rights Agreement, dated March 3,
1999 (the "1999 Investors' Rights Agreement"). The 1999 Investors' Rights
Agreement replaced the Amended and Restated Investors' Rights Agreement from the
Series B preferred stock financing. Please see "--Investors' Rights Agreement."
This investment was part of a broader strategic arrangement between us and MCI
WorldCom. As part of this strategic arrangement, we also entered into a
Framework Agreement with MCI WorldCom which designates us as MCI WorldCom's
preferred provider of business DSL lines in certain circumstances, and which
provides that MCI WorldCom is committed to sell at least 100,000 of our DSL
lines over a period of five years, subject to penalties for failure to
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reach target commitments. In turn, we have designated MCI WorldCom as our
preferred provider of network services.
INVESTORS' RIGHTS AGREEMENT
Pursuant to the terms of the 1999 Investors' Rights Agreement, the holders
of preferred stock acquired certain registration rights with respect to our
common stock. At any time after the earlier of (i) March 11, 2002 or (ii) six
months after the effective date of the first registration statement for a public
offering of our securities we file under the Securities Act:
- holders of 60% or more of the registrable securities, as defined in the
1999 Investors' Rights Agreement, may require us to register for public
sale no less than 20% of their shares then outstanding; or
- Enron may require us to register for public sale no less than 20% of our
shares it then holds; or
- MCI WorldCom's investment fund may require us to register for public sale
no less than 20% of our shares it then holds.
In addition, if certain competitors of MCI WorldCom acquire greater than 5%
of our common stock, then MCI WorldCom's investment fund may require us to
register for public sale all of its shares of our stock (the "Contingent Demand
for Registration"). Our Board of Directors may defer any of the above demands
for registration for a period up to 120 days. We are obligated to effect only:
- two such registrations pursuant to the request of holders of 60% or more
of the registrable securities,
- one such registration pursuant to the request of Enron,
- one such registration pursuant to the request of MCI WorldCom's investment
fund, and
- one Contingent Demand for Registration pursuant to the request of MCI
WorldCom's investment fund.
In addition, if we propose to register securities under the Securities Act
after this offering, with certain exceptions, then any of the parties to the
Amended and Restated Investors' Rights Agreement has a right to request that we
register such holder's registrable securities, subject to quantity limitations
determined by underwriters if the offering involves an underwriting. All
registration expenses incurred in connection with the registrations described
above and all piggyback registrations will be borne by us. The participating
stockholders will pay for underwriting discounts and commissions incurred in
connection with any such registrations. We have agreed to indemnify the parties
to the agreement against certain liabilities in connection with any registration
effected pursuant to the 1999 Investors' Rights Agreement, including Securities
Act liabilities.
OFFERING OF NOTES AND WARRANTS
On May 5, 1998, we closed a private placement of units consisting of $290
million aggregate principal amount at maturity of senior discount notes and
warrants to purchase 3,944,000 shares of our common stock. In October 1998, we
exchanged our senior discount notes for a like principal amount of 1998 Notes
that we registered under the Securities Act. Certain associates of Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJSC"), an initial purchaser in the
May 1998 offering, own an aggregate of 3,000,000 shares of Series A preferred
stock and 449,438 shares of Series B preferred stock, which represent in the
aggregate approximately 15.5% of our outstanding equity.
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, which
represent in the aggregate approximately 6.7% of our outstanding equity. All of
the shares owned by Sprout Capital VII, L.P. are subject to a voting trust
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and are held by an independent third party as trustee. The trustee will vote
such shares in its sole and absolute discretion as advised by an independent
adviser who is not affiliated with Sprout Capital VII, L.P. and DLJSC and
subject to the Amended and Restated Voting Agreement dated March 12, 1998.
Also, pursuant to the Amended and Restated 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.
DIRECTOR RELATIONSHIPS
William R. Stensrud, a member of our Board of Directors, also served as our
President and Chief Executive Officer from February 1997 through June 1997. Mr.
Stensrud and Mr. Geeslin, also a member of our Board of Directors, each also
serve as directors for Paradyne Corporation, one of our vendors. Additionally,
from June 1996 through December 1996, Mr. Stensrud served as President of
Paradyne Corporation. John L. Walecka, a member of our Board of Directors, also
serves as a director for Xylan Corporation, an indirect vendor to us. For the
period ended December 31, 1997 and for the year ended December 31, 1998, we made
purchases totaling approximately $419,000 and $13.0 million, respectively, from
Paradyne Corporation. We do not purchase any products directly from Xylan
Corporation; rather, our purchase of Xylan Corporation products is sourced
through Paradyne Corporation. We believe that our transactions with Paradyne
Corporation and Xylan Corporation were completed at rates similar to those
available from alternative vendors.
Susan Mayer, a member of our Board of Directors, also serves as President of
MCI WorldCom's investment fund and a Senior Vice President of MCI WorldCom, Inc.
In March 1999, we entered into a strategic arrangement with MCI WorldCom, Inc.
As part of this strategic arrangement, MCI WorldCom's investment fund invested
$30.0 million in us. Please see "Business--Strategic Partnerships."
LEGAL SERVICES
Jeffrey Blumenfeld, our Vice President and General Counsel, also serves as a
partner of Blumenfeld & Cohen, a law firm which performs legal services for us.
In connection with Mr. Blumenfeld's employment with us, we issued to him options
to purchase 365,096 shares of common stock at an exercise price of $0.05 per
share, which were exercised in January 1998. In addition, Mr. Blumenfeld and
certain other partners of Blumenfeld & Cohen purchased an aggregate of 140,000
shares of Series A preferred stock at $1.00 per share. For the period ended
December 31, 1997 and for the year ended December 31, 1998, we incurred expenses
for legal fees to Blumenfeld & Cohen of approximately $92,000 and $1.3 million,
respectively.
Pursuant to the terms of a written employment agreement with Mr. Blumenfeld,
we have agreed to employ him 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, Blumenfeld & Cohen has agreed to charge
us at a discount from its regular rates for legal services, including Mr.
Blumenfeld's time in excess of his minimum time commitment.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of March 4, 1999 with
respect to the beneficial ownership of our common stock and as adjusted to
reflect the sale of shares of common stock in this offering by:
- each person known by us to own beneficially more than five percent, in the
aggregate, of the outstanding shares of our common stock, assuming the
conversion of all preferred stock into common stock,
- our directors and our Named Executive Officers, and
- all executive officers and directors as a group.
Share ownership in each case includes shares issuable upon exercise of
outstanding options and warrants that are exercisable within 60 days of March 4,
1999 as described in the footnotes below. Percentage of ownership is calculated
pursuant to SEC Rule 13d-3(d)(1). Certain of the outstanding shares of our
capital stock are subject to a voting agreement. Unless otherwise indicated, the
address for each stockholder is c/o Rhythms NetConnections Inc., 6933 South
Revere Parkway, Englewood, Colorado 80112.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED
NUMBER OF ----------------------
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER (1) OWNED SHARES (1) OFFERING OFFERING
- -------------------------------------------------------------------------- ---------------- ----------- ---------
<S> <C> <C> <C>
Brentwood Venture Capital (2)............................................. 6,898,876 15.6%
Enterprise Partners (3)................................................... 8,700,346 19.7%
Kleiner Perkins Caufield & Byers (4)...................................... 6,898,876 15.6%
MCI WorldCom Investment Fund (5).......................................... 4,331,410 9.7%
The Sprout Group (6)...................................................... 6,898,876 15.6%
Enron Communications Group (7)............................................ 4,494,382 10.2%
Catherine M. Hapka (8).................................................... 3,850,942 8.7%
Michael E. Calabrese (9).................................................. 300,000 *
Eric H. Geis (10)......................................................... 125,000 *
James A. Greenberg (11)................................................... 596,368 1.4%
Gloria Farler (12)........................................................ 60,000 *
Kevin R. Compton (13)..................................................... -- --
Keith B. Geeslin (14)..................................................... -- --
Ken Harrison (15)......................................................... -- --
Susan Mayer (16).......................................................... -- --
William R. Stensrud (17).................................................. -- --
John L. Walecka (18)...................................................... -- --
Edward J. Zander.......................................................... -- --
All directors and executive officers as a group (16 persons) (19)......... 6,349,072 13.9%
</TABLE>
- ------------------------------
* Represents beneficial ownership of less than one percent of the outstanding
shares of our common stock.
(1) Except as indicated by footnote, we understand 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) Consists of shares beneficially owned 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.
(3) Consists of shares beneficially owned 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.
(4) Consists of shares beneficially owned 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.
(5) Includes 600,000 shares issuable upon exercise of a warrant exercisable
within 60 days of March 4, 1999.
(6) 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"). The address for each of the Sprout
Entities is 3000 Sand Hill
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Road, Building 3, Suite 170, Menlo Park, California 94025. Of these, Sprout
Capital VII, L.P. beneficially owns 6,001,304 shares. 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, as voting trustee. Please see
"Certain Relationships and Related Transactions--Offering of Senior
Discount Offering Notes and Warrants."
(7) These shares are subject to a voting trust agreement. See "Description of
Capital Stock--Board Representation Rights and Voting." The address for
Enron Communications Group, Inc. is 210 Southwest Morrison Street, Suite
400, Portland, Oregon 97204.
(8) Includes 200,000 shares issuable upon exercise of options exercisable
within 60 days of March 4, 1999. Also, consists of shares held by Ms.
Hapka's children, Christopher H. Safaya and Catherine A. Safaya, in the
amount of 4,444 shares each and shares held by Christopher H. Safaya 1999
Trust and Catherine A. Safaya 1999 Trust in the amount of 100,000 shares
each.
(9) Includes 150,000 shares issuable upon exercise of options exercisable
within 60 days of March 4, 1999.
(10) Includes 15,000 shares issuable upon exercise of options exercisable
within 60 days of March 4, 1999.
(11) Includes 140,000 shares issuable upon exercise of options exercisable
within 60 days of March 4, 1999.
(12) Ms. Farler resigned in February 1999. Includes 20,000 shares issuable upon
exercise of options exercisable within 60 days of March 4, 1999.
(13) 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.
(14) 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.
(15) 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.
(16) Excludes shares held by MCI WorldCom's investment fund. Ms. Mayer, as
President of MCI WorldCom's investment fund, may be deemed to have voting
and investment power over the shares held by MCI WorldCom's investment
fund. Ms. Mayer disclaims beneficial interest on such shares, except to
the extent of her interest in MCI WorldCom's investment fund.
(17) Excludes shares held by the 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) Includes 1,425,000 shares issuable upon exercise of options or warrants
exercisable within 60 days of March 4, 1999 and excludes shares held by
the Brentwood Entities, the Enterprise Entities, the KPCB Entities, MCI
WorldCom, the Sprout Entities and Enron Communications Group.
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DESCRIPTION OF CAPITAL STOCK
After this offering, we will be authorized to issue shares of common
stock, $0.001 par value per share, of which shares will be issued and
outstanding, and shares of undesignated preferred stock, $0.001 par
value per share, of which no shares will be issued and outstanding.
COMMON STOCK
As of January 31, 1999, there were 6,763,708 shares of common stock
outstanding and held of record by approximately 40 stockholders. The holders of
common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders. Subject to preferences that may
be applicable to any outstanding shares of preferred stock, holders of common
stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available. See "Dividend Policy." All
outstanding shares of common stock are fully paid and nonassessable.
PREFERRED STOCK
After this offering of common stock, the Board of Directors will have the
authority, without further action by the stockholders, to issue up to
shares of preferred stock in one or more series and to fix the rights,
priorities, preferences, qualifications, limitations and restrictions, including
dividend rights, conversion rights, voting rights, terms of redemption, terms of
sinking funds, liquidation preferences and the number of shares constituting any
series or the designation of such series, which could decrease the amount of
earnings and assets available for distribution to holders of common stock or
adversely affect the rights and powers, including voting rights, of the holders
of the common stock. The issuance of preferred stock could have the effect of
delaying or preventing a change in control or make removal of our management
more difficult. Additionally, the issuance of preferred stock may have the
effect of decreasing the market price of the common stock and may adversely
affect the voting and other rights of the holders of common stock. After this
offering, there will be no shares of preferred stock outstanding.
WARRANTS
In connection with the issuance of the senior discount notes in May 1998, we
issued warrants to purchase an aggregate of 3,944,000 shares of common stock
with an exercise price of $0.005 per share. These warrants become exercisable on
May 4, 1999 and automatically expire on May 15, 2008. Following the occurrence
of a "repurchase event" as defined in the warrant agreement governing these
warrants, we must make an offer to repurchase for cash all outstanding warrants
issued in connection with the senior discount notes.
In May 1998, we also issued to Sun Financial Group Inc., now GATX Capital
Corporation, a warrant to purchase 478,650 shares of common stock with an
exercise price of $2.225 per share. This warrant is immediately exercisable and
expires on the later of 10 years from the date of grant or five years after the
closing of this offering.
In connection with its $30 million equity investment in us in March 1999, we
issued to MCI WorldCom's investment fund a warrant to purchase up to 600,000
shares of common stock at an exercise price of $8.04 per share. This warrant is
immediately exercisable and expires on March 2, 2004.
REGISTRATION RIGHTS
Pursuant to the terms of the 1999 Investors' Rights Agreement, the holders
of preferred stock acquired certain registration rights with respect to our
common stock. At any time after the earlier of
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(i) March 11, 2002 or (ii) six months after the effective date of the first
registration statement for a public offering of our securities we file under the
Securities Act:
- holders of 60% or more of the registrable securities, as defined in the
1999 Investors' Rights Agreement, may require us to register for public
sale no less than 20% of their shares then outstanding; or
- Enron may require us to register for public sale no less than 20% of our
shares it then holds.
- MCI WorldCom's investment fund may require us to register for public sale
no less than 20% of our shares it then holds.
In addition, if certain competitors of MCI WorldCom acquire greater than 5%
of our common stock, then MCI WorldCom's investment fund may require us to
register for public sale all of its shares of our stock (the "Contingent Demand
for Registration"). Our Board of Directors may defer any of the above demands
for registration for a period up to 120 days. We are obligated to effect only:
- two such registrations pursuant to the request of holders of 60% or more
of the registrable securities,
- one such registration pursuant to the request of Enron,
- one such registration pursuant to the request of MCI WorldCom's investment
fund, and
- one Contingent Demand for Registration pursuant to the request of MCI
WorldCom's investment fund.
In addition, if we propose to register securities under the Securities Act
after this offering, with certain exceptions, then any of the parties to the
agreement has a right to request that we register such holder's registrable
securities, subject to quantity limitations determined by underwrtiers if the
offering involves an underwriting. All registration expenses incurred in
connection with the registrations described above and all piggyback
registrations will be borne by us. The participating stockholders 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 us to register all or a portion of our registrable securities on
Form S-3 (a "Form S-3 Registration") when we qualify to file on such form,
provided that the aggregate proceeds of each such registration is at least
$5,000,000 and subject to certain other conditions and limitations, including
our 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 stockholders
participating in the Form S-3 Registration. All registration rights will
terminate no later than after five years following this offering. We have agreed
to indemnify the stockholders against certain liabilities in connection with any
registration effected pursuant to the 1999 Investors' Rights Agreement,
including liabilities under the Securities Act. The holders of the warrants
issued in connection with the senior discount notes are entitled to piggyback
registration rights similar to those described above.
POSSIBLE ANTI-TAKEOVER MATTERS
CERTIFICATE OF INCORPORATION AND BYLAWS
Our certificate of incorporation authorizes our Board of Directors to
establish one or more series of undesignated preferred stock, the terms of which
can be determined by the Board of Directors at the time of issuance. See
"--Preferred Stock." Our certificate of incorporation also provides that all
stockholder action must be effected at a duly called meeting of stockholders and
not by a consent in writing. Our bylaws provide that our Board of Directors will
be classified into three classes of directors. Please see "Management--Directors
and Executive Officers." In addition, our bylaws do not permit our stockholders
to call a special meeting of stockholders; only our Chief Executive Officer,
President,
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Chairman of the Board or a majority of the Board of Directors are permitted to
call a special meeting of stockholders. Our bylaws also require that
stockholders give advance notice to our secretary of any nominations for
director or other business to be brought by stockholders at any stockholders'
meeting and require a supermajority vote of members of our Board of Directors
and/or stockholders to amend certain bylaw provisions. These provisions of the
certificate of incorporation and the bylaws could discourage potential
acquisition proposals and could delay or prevent a change in control of our
company. Such provisions may also have the effect of preventing changes in our
management.
DELAWARE ANTI-TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law
("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder -- defined as any person or entity that is the beneficial owner of
at least 15% of a corporation's voting stock -- for a period of three years
following the time that such stockholder became an interested stockholder,
unless:
- prior to such time, such corporation's board of directors approved either
the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of such corporation's voting stock outstanding at the time the
transaction commenced, excluding, for purposes of determining the number
of shares outstanding, those shares owned (x) by persons who are directors
and also officers and (y) by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- at or subsequent to such time, the business combination is approved by
such corporation's board of directors and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least two-thirds of the outstanding voting stock
that is not owned by the interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, lease, exchange, mortgage, transfer, pledge or other disposition
involving the interested stockholder and 10% or more of the assets of the
corporation;
- subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
RIGHTS PLAN
Prior to the closing of this offering, it is anticipated that our Board of
Directors will adopt a rights plan (the "Rights Agreement") pursuant to which
one right (a "Right") to purchase one one-thousandth of a share of a series of
preferred stock, par value $0.001 per share (the "Rights Plan preferred stock"),
would be issued as a dividend for each outstanding share of common stock. Each
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Right, when exercisable, would represent the right to purchase one
one-thousandth of a share of Rights Plan preferred stock at a specified price.
The Rights would become exercisable ten days after a person or group acquires
15% or more of the outstanding common stock or commences or announces a tender
or exchange offer which would result in such ownership.
If, after the Rights become exercisable, we were to be acquired through a
merger or other business combination transaction or 50% or more of our assets or
earning power were sold, each Right would permit the holder to purchase, for the
exercise price, common stock of the acquiring company having a market value of
twice the exercise price. In addition, if any person acquires 15% or more of the
outstanding common stock, each Right not owned by such person would permit the
purchase, for the exercise price, of common stock having a market value of twice
the exercise price.
The Rights would expire ten years after the adoption of the Rights
Agreement, unless earlier redeemed by us in accordance with the terms of the
Rights Agreement. The purchase price payable and the shares of Rights Plan
preferred stock issuable upon exercise of the Rights would be subject to
adjustment from time to time as specified in the Rights Agreement. In addition,
our Board of Directors would retain the authority to redeem, at $0.001 per
Right, and replace the Rights with new rights at any time, provided that no such
redemption could occur after a person or group acquires 15% or more of the
outstanding common stock.
Shares of Rights Plan preferred stock, when issued upon exercise of the
Rights, will be nonredeemable and will rank junior to all series of any other
class of preferred stock. Each share of Rights Plan preferred stock will be
entitled to a cumulative preferential quarterly dividend payment equal to the
greater of (1) $10 per share or (2) 1,000 times the dividend declared per share
of common stock. In the event of liquidation, the holders of shares of Rights
Plan preferred stock will be entitled to a preferential liquidation payment
equal to the greater of (a) $1,000 per share or (b) 1,000 times the payment made
per share of common stock. Each share of Rights Plan preferred stock will
entitle the holder to 1,000 votes, voting together with the common stock.
Finally, in the event of any merger, consolidation or other transaction in which
common stock is exchanged, each share of Rights Plan preferred stock will be
entitled to receive 1,000 times the amount received per share of common stock.
The foregoing rights would be subject to antidilution adjustments. The number of
shares constituting the series of Rights Plan preferred stock will be .
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is
.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be shares of our common
stock outstanding. There were also approximately shares covered by
vested options outstanding at January 31, 1999, which are not considered to be
outstanding shares. Of the outstanding shares, shares, including the
shares of common stock sold in this offering and shares issuable
upon exercise of vested options, will be immediately eligible for resale in the
public market without restriction under the Securities Act, except that any
shares purchased in this offering by our affiliates, as that term is defined in
Rule 144 under the Securities Act ("Rule 144"), may generally only be resold in
compliance with applicable provisions of Rule 144.
Our executive officers and directors and substantially all of our security
holders, have agreed pursuant to certain agreements that they will not, without
the prior written consent of Merrill Lynch and Salomon Smith Barney, offer, sell
or otherwise dispose of the shares of common stock beneficially owned by them
for a period of 180 days from the date of this prospectus. The shares subject to
the lock-up agreements include approximately of the shares of common
stock (including approximately shares issuable upon exercise of vested
options) that would otherwise have become immediately eligible for resale in the
public market upon completion of this offering.
Under Rule 144, a stockholder, including an affiliate, who has beneficially
owned his or her restricted securities (as that term is defined in Rule 144) for
at least one year from the later of the date such securities were acquired from
us or (if applicable) the date they were acquired from an affiliate is entitled
to sell, within any three-month period, a number of such shares that does not
exceed the greater of 1% of the then outstanding shares of common stock
(approximately immediately after this offering) or the average weekly
trading volume in the common stock during the four calendar weeks preceding the
date on which notice of such sale was filed under Rule 144, provided certain
requirements concerning availability of public information, manner of sale and
notice of sale are satisfied. In addition, under Rule 144(k), if a period of at
least two years has elapsed between the later of the date restricted securities
were acquired from us or, if applicable, the date they were acquired from our
affiliate, a stockholder who is not our affiliate at the time of sale and has
not been our affiliate for at least three months prior to the sale is entitled
to sell the shares immediately without compliance with the foregoing
requirements under Rule 144.
Securities issued in reliance on Rule 701 (such as shares of common stock
that may be acquired pursuant to the exercise of certain options granted prior
to this offering) are also restricted securities and may be sold by stockholders
other than our affiliate subject only to the manner of sale provisions of Rule
144 and by our affiliate under Rule 144 without compliance with its one-year
holding period requirement.
Prior to this offering, there has been no public market for the common
stock. No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price of
the common stock prevailing from time to time. We are unable to estimate the
number of shares that may be sold in the public market pursuant to Rule 144,
since this will depend on the market price of the common stock, the personal
circumstances of the sellers and other factors. Nevertheless, sales of
significant amounts of our common stock in the public market could adversely
affect the market price of the common stock and could impair our ability to
raise capital through an offering of our equity securities.
In addition, we have registered on the effective date of this offering a
total of 3,384,254 shares of common stock subject to outstanding options or
reserved for issuance under our stock incentive plans and intend to register an
additional such shares on the effective date of this offering. Further,
upon expiration of such lock-up agreements, holders of approximately
shares of common stock will be entitled to certain registration rights with
respect to such shares. If such holders, by exercising their registration
rights, cause a large number of shares to be registered and sold in the public
market, such sales could have a material adverse effect on the market price of
the common stock.
68
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon Smith Barney
Inc., Hambrecht & Quist and Thomas Weisel Partners LLC are acting as
representatives of the underwriters. Subject to the terms and conditions
contained in a purchase agreement, we have agreed to sell to each underwriter,
and each underwriter severally has agreed to purchase from us, the numbers of
shares of common stock set forth opposite its name below. The underwriters are
committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------------------- -----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................
Salomon Smith Barney Inc. ......................................
Hambrecht & Quist...............................................
Thomas Weisel Partners LLC......................................
-----------
Total.................................................
-----------
-----------
</TABLE>
The representatives have advised us that the underwriters propose to offer
the common stock to the public at the initial public offering price set forth on
the cover page of this prospectus and to certain dealers at such price less a
concession of not in excess of $ per share. The underwriters may allow, and
such dealers may reallow, a discount not in excess of $ per share to certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed. No such change shall reduce the amount
of proceeds to be received by us as set forth on the cover page of this
prospectus.
We have granted to the underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to additional
shares of common stock, at the price set forth on the cover page of this
prospectus, less the underwriting discount. To the extent that the underwriters
exercise such option, each of the underwriters will have a firm commitment to
purchase approximately the same percentage of such additional shares that the
number of shares of common stock to be purchased by it shown in the above table
represents as a percentage of the shares offered hereby. If purchased,
such additional shares will be sold by the underwriters on the same terms as
those on which the shares are being sold.
The purchase agreement contains covenants of indemnity among the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the purchase agreement.
69
<PAGE>
The following table shows the per share and total underwriting discount we
will pay to the underwriters. The amounts are shown assuming both no exercise
and full exercise of the underwriters' option to purchase additional
shares of common stock.
<TABLE>
<CAPTION>
TOTAL TOTAL
PER SHARE WITHOUT OPTION WITH OPTION
----------- -------------- --------------
<S> <C> <C> <C>
Public Offering Price............................
Underwriting Discount............................
Proceeds, before expenses, to Rhythms............
</TABLE>
We expect to incur expenses of approximately $1,250,000 in connection with
this offering.
The common stock is being offered by the underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain conditions by counsel to the underwriters and certain other conditions.
The underwriters reserve the right to withdraw, cancel or modify such offer and
to reject orders in whole or in part.
Each of our officers and directors and substantially all of the holders of
common stock have agreed with the representatives, for a period of 180 days
after the date of this prospectus (the "Lock-Up Period"), subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of common stock,
any options or warrants to purchase any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock owned as
of the date of this prospectus or thereafter acquired directly by such holders
or with respect to which they have or hereafter acquire the power of
disposition, without the prior written consent of Merrill Lynch and Salomon
Smith Barney. However, Merrill Lynch and Salomon Smith Barney may, in their sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. We have agreed that during the Lock-Up
Period, we will not, subject to certain exceptions, without the prior written
consent of Merrill Lynch and Salomon Smith Barney, issue, sell, contract to sell
or otherwise dispose of, any shares of common stock, any options or warrants to
purchase any shares of common stock or any securities convertible into,
exercisable for or exchangeable for shares of common stock, other than the sale
of our shares in this offering, the issuance of common stock upon the exercise
of outstanding options and warrants and our issuance of options and stock under
the 1997 Stock Plan. See "Shares Eligible for Future Sale."
The representatives have advised us that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the common stock
offered hereby will be determined through negotiations between us and the
representatives. Among the factors to be considered in such negotiations are
prevailing market conditions, our financial information, market valuations of
other companies that we and the representatives believe to be comparable to us,
estimates of our business potential, the present state of our development and
other factors deemed relevant.
Certain persons participating in this offering may engage in transactions,
including syndicate covering transactions or the imposition of penalty bids,
which may involve the purchase of common stock on the Nasdaq National Market or
otherwise. Such transactions may stabilize or maintain the market price of the
common stock at a level above that which might otherwise prevail in the open
market and, if commenced, may be discontinued at any time.
The representatives have advised us that, pursuant to Regulation M under the
Securities Act, certain persons participating in this offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, which may have the effect of
70
<PAGE>
stabilizing or maintaining the market price of the common stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the common stock on behalf of the underwriters for
the purpose of fixing or maintaining the price of the common stock. A "syndicate
covering transaction" is the bid for or the purchase of the common stock on
behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the representatives to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with this offering
if the common stock originally sold by such underwriter or syndicate member is
purchased by the representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
The representatives have advised us that such transactions may be effected on
the Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.
Merrill Lynch acted as an initial purchaser of our senior discount notes in
May 1998, for which they received usual and customary fees.
Thomas Weisel Partners LLC was formed in October 1998.
LEGAL MATTERS
Brobeck, Phleger & Harrison LLP ("BPH"), San Diego, California, will pass
upon the validity of the issuance of the shares of common stock offered hereby
for us. Baker & McKenzie, New York, New York, will pass upon certain legal
matters related to the issuance of the shares of common stock offered hereby for
the underwriters. The BPH investment fund and certain BPH attorneys hold in the
aggregate 30,000 shares of Series A preferred stock which will convert into
60,000 shares of common stock upon the closing of this offering.
EXPERTS
The financial statements of the Company as of December 31, 1997 and 1998,
for the period from February 27, 1997 through December 31, 1997 and for the year
ended December 31, 1998, included in this prospectus, have been included herein
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock. This prospectus does not
contain all of the information contained in the registration statement, and the
exhibits and schedules to the registration statement. For further information
with respect to us and our common stock, we refer you to the registration
statement, and the exhibits and schedules filed as part of the registration
statement. Statements in this prospectus concerning the contents of any contract
or any other document are not necessarily complete. If a contract or document
has been filed as an exhibit to the registration statement, we refer you to that
exhibit. Each statement in this prospectus relating to a contract or document
filed as an exhibit to the registration statement is qualified by the filed
exhibits.
IN ADDITION, WE FILE REPORTS, PROXY STATEMENTS AND OTHER INFORMATION WITH
THE SEC. YOU MAY READ AND COPY ANY DOCUMENT WE FILE, INCLUDING THE REGISTRATION
STATEMENT, AT THE SEC'S PUBLIC REFERENCE ROOMS IN WASHINGTON, D.C., NEW YORK,
NEW YORK AND CHICAGO, ILLINOIS. PLEASE CALL THE SEC AT 1-800-SEC-0330 FOR
FURTHER INFORMATION ON THE PUBLIC REFERENCE ROOMS. OUR SEC FILINGS ARE ALSO
AVAILABLE TO THE PUBLIC ON THE SEC'S WEBSITE AT HTTP://WWW.SEC.GOV.
71
<PAGE>
GLOSSARY OF TERMS
<TABLE>
<S> <C>
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., connection points and
Metro Service Centers. 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.
Central Office............... Incumbent carrier facility where subscriber lines are joined
to ILEC switching equipment.
Collocation.................. A location where a competitive carrier network interconnects
with the network of an incumbent carrier inside an incumbent
carrier's central office.
Competitive Carrier.......... Category of telephone service provider, or carrier, that
offers local exchange and other services similar to and in
competition with those of the incumbent carrier, as allowed
by recent changes in telecommunications law and regulation. A
competitive carrier may also provide other types of services
such as long distance telephone, data communications,
Internet access and video.
Copper Line or Loop.......... A pair of traditional copper telephone lines using electric
current to carry signals.
Digital...................... Describes a method of storing, processing and transmitting
information through the use of distinct electronic or optical
pulses that represent the binary digits 0 and 1. Digital
transmission and switching technologies employ a sequence of
these pulses to convey information, as opposed to the
continuously variable analog signal. The precise digital
numbers preclude distortion, such as graininess or "snow", in
the case of video transmission, or static or other background
distortion in the case of audio transmission.
Downstream................... Refers to the transmission speed of a connection between our
connection point and the end user.
DS-0......................... DIGITAL SERVICE 0. Standard telecommunications industry
digital signal format, which is distinguishable by bit rate
-- the number of binary digits transmitted per second. DS-0
service has a bit rate of 64 Kilobits per second.
DS-1......................... DIGITAL SERVICE 1. In the digital hierarchy, this signaling
standard defines a transmission speed of 1.544 Mbps.
DS-3......................... DIGITAL SERVICE 3. In the digital hierarchy, this signaling
standard defines a transmission speed of 44.736 Mbps,
equivalent to 28 T-1 channels. This term is often used
interchangeably with T-3.
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C>
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 incumbent carrier, competitive carrier or an
internet service provider -- and end user.
E-Commerce................... ELECTRONIC COMMERCE. An Internet service that supports
electronic transactions between customers and vendors to
purchase goods and services.
Encryption................... Applying a specific algorithm to data so as to alter the
data's appearance and prevent other devices from reading the
information. Decryption applies the algorithm in reverse to
restore the data to its original form.
Firewall..................... A computer device that separates a local area network from a
wide area network and prevents unauthorized access to the
local area network through the use of electronic security
mechanisms.
Frame Relay.................. A form of packet switching with variable length frames that
may be used with a variety of communications protocols.
Incumbent Carrier............ A company providing local exchange services on the date of
enactment of the Telecommunications Act of 1996. These
companies consist of the Regional Bell Operating Companies,
GTE and numerous independent telephone companies.
Interconnection Agreement.... A contract between an incumbent carrier and a competitive
carrier for the connection of a competitive carrier network
to the public switched telephone network, as well as
competitive carrier access to incumbent carrier unbundled
network elements, e.g., copper loops. This agreement sets out
some of the financial agreement and operational aspects of
such interconnection and access.
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.
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 or 128 Kbps for voice, data and video
transmission.
Internet Service Provider.... A company that provides direct access to the Internet.
Interexchange Carrier........ Usually referred to as a long-distance service provider.
There are many interexchange carriers, including AT&T, MCI
WorldCom, Sprint and Qwest.
Kbps......................... KILOBITS PER SECOND. 1,000 bits per second.
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C>
Long Distance Carrier........ A long distance carrier providing services between local
exchanges on an intrastate or interstate basis, also referred
to in the industry as an "interexchange carrier". A long
distance carrier may also be a long distance resale company.
Mbps......................... MEGABITS PER SECOND. Millions of bits per second.
Modem........................ An abbreviation of Modulator-Demodulator. An electronic
signal-conversion device used to convert digital signals from
a computer to analog form for transmission over the telephone
network. At the transmitting end, a modem working as a
modulator converts the computer's digital signals into analog
signals that can be transmitted over a telephone line. At the
receiving end, another modem working as a demodulator
converts analog signals back into digital signals and sends
them to the receiving computer.
Multiplexing................. An electronic or optical process that combines several lower
speed transmission signals into one higher speed signal.
Network...................... An integrated system composed of switching equipment and
transmission facilities designed to provide for the
direction, transport and recording of telecommunications
traffic.
OC-3......................... OPTICAL CARRIER 3. Standard telecommunications industry
digital single format, which is distinguishable by bit rate
-- the number of binary digits transmitted per second. OC-3
service has a bit rate of 155.5 Mbps.
OC-12........................ OPTICAL CARRIER 12. Standard telecommunications industry
digital single format, which is distinguishable by bit rate
-- the number of binary digits transmitted per second. OC-12
service has a bit rate of 622.8 Mbps.
Packets...................... Information represented as bytes grouped together through a
communication node with a common destination address and
other attribute information.
Resellers.................... Generally used to refer to a telecommunications provider who
does not own any switching or transmission facilities. In
reality, a large number of providers furnish services through
a combination of owned and resold facilities.
Router....................... A device that accepts the Internet Protocol from a local area
network or another wide area network device and
switches/routes Internet Protocol packets across a network
backbone. Routers also provide protocol conversion services
to transfer Internet Protocol packets over frame relay,
Asynchronous Transfer Mode, and other backbone network
services.
T-1.......................... This is a Bell System term for a digital transmission link
with a capacity of 1.544 Mbps.
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.
Upstream..................... Refers to the transmission speed of a connection between the
end user and our connection point.
</TABLE>
A-3
<PAGE>
RHYTHMS NETCONNECTIONS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-2
Financial Statements:
Consolidated Balance Sheets........................................................ F-3
Consolidated Statements of Operations.............................................. F-4
Consolidated Statements of Cash Flows.............................................. F-5
Consolidated Statement of Stockholders' Equity..................................... F-6
Notes to Consolidated 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 consolidated balance sheets and the related
consolidated statements of operations, of cash flows, and of stockholders'
equity present fairly, in all material respects, the financial position of
Rhythms NetConnections Inc. and subsidiaries at December 31, 1997 and 1998, and
the results of their operations and their cash flows for the period from
February 27, 1997 (inception) through December 31, 1997 and for the year ended
December 31, 1998 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 audits. We conducted our audits 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 audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
March 4, 1999
F-2
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 10,166,000 $ 21,315,000
Short-term investments.......................................................... -- 115,497,000
Accounts, loans and other receivables, net...................................... -- 2,376,000
Inventory....................................................................... -- 340,000
Prepaid expenses and other current assets....................................... 95,000 230,000
------------- --------------
Total current assets............................................................ 10,261,000 139,758,000
Equipment and furniture, net...................................................... 1,621,000 11,510,000
Collocation fees, net............................................................. 327,000 13,804,000
Deferred debt issue costs, net.................................................... -- 6,304,000
Other assets...................................................................... 32,000 350,000
------------- --------------
$ 12,241,000 $ 171,726,000
------------- --------------
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................... $ 126,000 $ 333,000
Accounts payable................................................................ 951,000 10,601,000
Accrued expenses and other current liabilities.................................. 376,000 2,855,000
------------- --------------
Total current liabilities..................................................... 1,453,000 13,789,000
Long-term debt.................................................................... 442,000 472,000
13.5% senior discount notes, net.................................................. -- 157,465,000
Other liabilities................................................................. -- 180,000
------------- --------------
Total liabilities............................................................. 1,895,000 171,906,000
------------- --------------
Commitments (note 10)
Mandatorily redeemable common stock warrants...................................... -- 6,567,000
------------- --------------
Stockholders' equity (deficit):
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 shares 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; 45,529,412 shares authorized in 1997, 66,708,243
shares in 1998; 2,068,518 shares issued in 1997, 6,702,108 shares in 1998..... 2,000 7,000
Treasury stock, at cost; 365,096 shares......................................... -- (18,000)
Additional paid-in capital...................................................... 14,012,000 37,213,000
Deferred compensation........................................................... (1,258,000) (5,210,000)
Accumulated deficit............................................................. (2,422,000) (38,756,000)
------------- --------------
Total stockholders' equity (deficit).......................................... 10,346,000 (6,747,000)
------------- --------------
$ 12,241,000 $ 171,726,000
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 27, 1997
(INCEPTION)
THROUGH YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Revenue:
Service and installation, net......................................... $ -- $ 528,000
------------------ -----------------
Operating Expenses:
Network and service costs............................................. -- 4,695,000
Selling and marketing................................................. 33,000 3,776,000
General and administrative............................................ 2,501,000 19,377,000
Depreciation and amortization......................................... 1,000 1,081,000
------------------ -----------------
Total operating expenses............................................ 2,535,000 28,929,000
------------------ -----------------
Loss from Operations.................................................... (2,535,000) (28,401,000)
------------------ -----------------
Other Income and Expense:
Interest income....................................................... 114,000 5,813,000
Interest expense (including amortized debt discount and issue
costs).............................................................. (1,000) (13,779,000)
Other................................................................. -- 33,000
------------------ -----------------
Net Loss................................................................ $ (2,422,000) $ (36,334,000)
------------------ -----------------
------------------ -----------------
Net Loss Per Share:
Basic................................................................. $ (1.34) $ (14.61)
------------------ -----------------
------------------ -----------------
Diluted............................................................... $ (1.34) $ (14.61)
------------------ -----------------
------------------ -----------------
Shares Used in Computing Net Loss Per Share:
Basic................................................................. 1,801,470 2,486,847
------------------ -----------------
------------------ -----------------
Diluted............................................................... 1,801,470 2,486,847
------------------ -----------------
------------------ -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 27, 1997
(INCEPTION)
THROUGH YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss................................................................. $ (2,422,000) $ (36,334,000)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation of equipment and furniture................................ 1,000 454,000
Amortization of collocation fees....................................... -- 85,000
Amortization of debt discount and deferred debt issue costs............ -- 13,882,000
Amortization of deferred compensation.................................. 192,000 725,000
Compensation expense from stock option issued to employee.............. 73,000 --
Loss on sale of equipment to leasing company........................... -- 387,000
Changes in assets and liabilities:
Increase in accounts, loans and other receivables, net............... -- (2,376,000)
Increase in inventory................................................ -- (340,000)
Increase in prepaid expenses and other current assets................ (95,000) (135,000)
Increase in other assets............................................. (32,000) (318,000)
Increase in accounts payable......................................... 388,000 2,287,000
Increase in accrued expenses and other current liabilities........... 335,000 2,479,000
Increase in other liabilities........................................ -- 180,000
------------------ -----------------
Net cash used for operating activities................................. (1,560,000) (19,024,000)
------------------ -----------------
Cash Flows from Investing Activities:
Purchases of short-term investments...................................... -- (451,870,000)
Maturities of short-term investments..................................... -- 336,373,000
Purchases of equipment and furniture..................................... (1,018,000) (9,973,000)
Payment of collocation fees.............................................. (327,000) (13,562,000)
------------------ -----------------
Net cash used for investing activities................................. (1,345,000) (139,032,000)
------------------ -----------------
Cash Flows from Financing Activities:
Proceeds from leasing company for equipment.............................. -- 6,606,000
Proceeds from issuance of 13.5% senior discount notes and warrants....... -- 150,365,000
Payment of debt issue costs on 13.5% senior discount notes............... -- (6,519,000)
Proceeds from borrowings on long-term debt............................... 568,000 432,000
Repayments on long-term debt............................................. -- (195,000)
Proceeds from issuance of common stock................................... 13,000 242,000
Proceeds from issuance of preferred stock................................ 12,490,000 18,292,000
Purchase of treasury stock............................................... -- (18,000)
------------------ -----------------
Net cash provided by financing activities.............................. 13,071,000 169,205,000
------------------ -----------------
Net increase in cash and cash equivalents.................................. 10,166,000 11,149,000
Cash and cash equivalents at beginning of period........................... -- 10,166,000
------------------ -----------------
Cash and cash equivalents at end of period................................. $ 10,166,000 $ 21,315,000
------------------ -----------------
------------------ -----------------
Supplemental schedule of cash flow information:
Cash paid for interest................................................... $ 3,000 $ 66,000
------------------ -----------------
------------------ -----------------
Supplemental schedule of non-cash financing activities:
Equipment purchases payable, to be financed through operating leases..... $ 604,000 $ --
------------------ -----------------
------------------ -----------------
Equipment and furniture purchases payable................................ $ -- $ 7,363,000
------------------ -----------------
------------------ -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
$0.001 PAR VALUE $0.001 PAR VALUE $0.001 PAR VALUE
------------------- ----------------- -----------------
# SHARES AMOUNT # SHARES AMOUNT # SHARES AMOUNT
---------- ------- --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to Founders (at
inception)............................ -- $ -- -- $-- 1,801,470 $2,000
Issuance of Series A preferred stock for
cash ($1.00 per share)................ 12,490,000 12,000 -- -- -- --
Issuance of common stock upon exercise
of options ($0.05 per share exercise
price)................................ -- -- -- -- 267,048 --
Grant of options to purchase Series A
preferred stock ($0.80 per share
exercise price)....................... -- -- -- -- -- --
Deferred compensation from grants of
options to purchase common stock...... -- -- -- -- -- --
Amortization of deferred compensation... -- -- -- -- -- --
Net loss for 1997....................... -- -- -- -- -- --
---------- ------- --------- ------ --------- ------
Balance at December 31, 1997............ 12,490,000 12,000 -- -- 2,068,518 2,000
Issuance of Series A preferred stock for
cash ($0.80 per share)................ 365,094 1,000 -- -- -- --
Issuance of Series B preferred stock for
cash ($4.45 per share)................ -- -- 4,044,943 4,000 -- --
Issuance of common stock upon exercise
of options ($0.05 to $0.30 per share
exercise price)....................... -- -- -- -- 4,633,590 5,000
Purchase of treasury stock for cash
($0.05 per share)..................... -- -- -- -- -- --
Deferred compensation from grants of
options to purchase common stock...... -- -- -- -- -- --
Amortization of deferred compensation... -- -- -- -- -- --
Reversal of deferred compensation from
cancellation of grants to purchase
common stock.......................... -- -- -- -- -- --
Net loss for 1998....................... -- -- -- -- -- --
---------- ------- --------- ------ --------- ------
Balance at December 31, 1998............ 12,855,094 $13,000 4,044,943 $4,000 6,702,108 $7,000
---------- ------- --------- ------ --------- ------
---------- ------- --------- ------ --------- ------
<CAPTION>
TREASURY STOCK TOTAL
AT COST ADDITIONAL STOCKHOLDERS'
------------------- PAID-IN DEFERRED ACCUMULATED EQUITY
# SHARES AMOUNT CAPITAL COMPENSATION DEFICIT (DEFICIT)
-------- -------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to Founders (at
inception)............................ -- $ -- $ -- $ -- $ -- $ 2,000
Issuance of Series A preferred stock for
cash ($1.00 per share)................ -- -- 12,477,000 -- -- 12,489,000
Issuance of common stock upon exercise
of options ($0.05 per share exercise
price)................................ -- -- 12,000 -- -- 12,000
Grant of options to purchase Series A
preferred stock ($0.80 per share
exercise price)....................... -- -- 73,000 -- -- 73,000
Deferred compensation from grants of
options to purchase common stock...... -- -- 1,450,000 (1,450,000) -- --
Amortization of deferred compensation... -- -- -- 192,000 -- 192,000
Net loss for 1997....................... -- -- -- -- (2,422,000 ) (2,422,000)
-------- -------- ----------- ------------ ------------ -------------
Balance at December 31, 1997............ -- -- 14,012,000 (1,258,000) (2,422,000 ) 10,346,000
Issuance of Series A preferred stock for
cash ($0.80 per share)................ -- -- 291,000 -- -- 292,000
Issuance of Series B preferred stock for
cash ($4.45 per share)................ -- -- 17,996,000 -- -- 18,000,000
Issuance of common stock upon exercise
of options ($0.05 to $0.30 per share
exercise price)....................... -- -- 237,000 -- -- 242,000
Purchase of treasury stock for cash
($0.05 per share)..................... 365,096 (18,000) -- -- -- (18,000)
Deferred compensation from grants of
options to purchase common stock...... -- -- 4,908,000 (4,908,000) -- --
Amortization of deferred compensation... -- -- -- 725,000 -- 725,000
Reversal of deferred compensation from
cancellation of grants to purchase
common stock.......................... -- -- (231,000) 231,000 -- --
Net loss for 1998....................... -- -- -- -- (36,334,000 ) (36,334,000)
-------- -------- ----------- ------------ ------------ -------------
Balance at December 31, 1998............ 365,096 $(18,000) $37,213,000 $(5,210,000) $(38,756,000) $(6,747,000)
-------- -------- ----------- ------------ ------------ -------------
-------- -------- ----------- ------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--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.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the transactions and balances of Rhythms NetConnections Inc.
and its wholly owned subsidiaries ACI Corp. and ACI Corp.--Virginia (since
February 1998). All material intercompany transactions and balances have been
eliminated.
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.
REVENUE RECOGNITION: Revenue is recorded in the period services are
provided to customers.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand,
money market funds, certificates of deposit, obligations of the U.S. Government
and its agencies and commercial paper with a maturity of 90 days or less at the
time of purchase.
SHORT-TERM INVESTMENTS. Short-term investments consist of obligations of
the U.S. Government and its agencies and commercial paper that have an original
maturity between 91 days and one year from the date of purchase. Management
determines the appropriate classification of marketable debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of the Company's
financial instruments as presented are reasonable estimates of those
instruments' fair values because of the short maturity of
F-7
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
those instruments or based on the current rates offered to the Company for debt
of the same remaining maturities.
INVENTORY: Inventory consists of communications equipment that will be
installed at customer locations. Inventory is accounted for on a FIFO basis at
the lower of cost or market.
EQUIPMENT AND FURNITURE: Equipment and furniture consists of purchased
equipment, furniture, computer software, and leasehold improvements. Equipment
and furniture is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
three to seven years or the lease term if shorter. When equipment and furniture
is retired, sold or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and gains and losses resulting from
such transactions are reflected in operations.
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 their 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 short-term investments. Cash in excess of operating
requirements is conservatively invested in money market funds, certificates of
deposit with high-quality financial institutions, obligations of the U.S.
Government and its agencies and commercial paper rated A-1, P-1 to minimize
risk.
Two customers comprise 14.9 percent and 7.5 percent of the Company's net
trade receivable balance at December 31, 1998 and 36.7 percent and 13.7 percent
of revenues for the year ended December 31, 1998.
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
F-8
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and Series
B preferred stock, upon the exercise of outstanding stock options and warrants
and shares issued subject to repurchase by the Company totaling 30,544,950 and
44,132,094 at December 31, 1997 and 1998, respectively, have been excluded from
the computation since their effect would be antidilutive.
STOCK-BASED COMPENSATION: The Company measures compensation expense for
their 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. Under the intrinsic value method of
accounting for stock-based compensation, when the exercise price of options
granted to employees is less than the fair value of the underlying stock on the
date of grant, compensation expense is to be recognized over the applicable
vesting period.
NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued. This statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. The Company will adopt SFAS No. 133 as required in 2000.
The Company expects that adoption will have no impact on their consolidated
financial statements.
RECLASSIFICATIONS: Certain 1997 balances have been reclassified to conform
to the 1998 presentation.
NOTE 3--SHORT-TERM INVESTMENTS
The Company's marketable debt securities are classified as held-to-maturity
and carried at amortized cost, which approximates fair value. Short-term
investments consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ --------------
<S> <C> <C>
Commercial Paper............................................... $ -- $ 33,170,000
U.S. Government Securities..................................... -- 82,327,000
------------ --------------
$ -- $ 115,497,000
------------ --------------
------------ --------------
</TABLE>
F-9
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--COMPOSITION OF CERTAIN BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
----------------- ------------------
<S> <C> <C>
Accounts, loans and other receivables, net:
Interest............................................. $ -- $ 2,135,000
Trade, net of allowance for doubtful accounts of
$50,000 in 1998.................................... -- 197,000
Employee expense advances and loans.................. -- 44,000
----------------- ------------------
$ -- $ 2,376,000
----------------- ------------------
----------------- ------------------
Equipment and furniture, net:
Operating equipment.................................. $ 1,241,000 $ 9,633,000
Office furniture..................................... 43,000 917,000
Leasehold improvements............................... 32,000 668,000
Computer software.................................... 173,000 456,000
Computer equipment................................... 133,000 274,000
Lab equipment........................................ -- 17,000
Accumulated depreciation............................. (1,000) (455,000)
----------------- ------------------
$ 1,621,000 $ 11,510,000
----------------- ------------------
----------------- ------------------
Accrued expenses and other current liabilities:
Accrued payroll...................................... $ 217,000 $ 1,524,000
Carrier services and other operating costs........... -- 991,000
Other................................................ 159,000 340,000
----------------- ------------------
$ 376,000 $ 2,855,000
----------------- ------------------
----------------- ------------------
</TABLE>
NOTE 5--DEBT
As of December 31, 1997 and 1998, the Company had a note payable of $568,000
and $805,000, respectively, to a financial institution. Terms of the note
payable include an interest rate of prime plus 0.25 percent (8.75 percent and
8.0 percent at December 31, 1997 and 1998, respectively) payable monthly on the
outstanding principal. The note is collateralized by assets of the Company and
is to be amortized over a 36-month repayment period. The $805,000 will be repaid
during the years 1999 through 2001 in the amounts of $333,000 each in 1999 and
2000 and $139,000 in 2001.
On May 5, 1998, the Company issued 13.5 percent senior discount notes due
2008 in the principal amount of $290,000,000 at maturity, combined with warrants
to purchase 3,944,000 shares of common stock. The notes were issued at a
discount; cash proceeds from the issuance of the notes and warrants were
$150,365,000. The Company additionally incurred approximately $6,519,000 in debt
issue costs. The notes will accrete in value through May 15, 2003 at a rate of
13.5 percent per annum, compounded semi-annually; no cash interest will be
payable prior to that date. Upon a change in control or upon certain asset
sales, the Company must offer to repurchase all or a portion of the outstanding
notes. In addition, the Company has the option to repurchase the notes upon
payment of a premium of accreted value at that point in time. The notes contain
covenants that restrict the Company's ability to make certain payments,
including dividend payments, and incur additional debt.
F-10
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--DEBT (CONTINUED)
The warrants issued in connection with the senior discount notes are
exercisable at a price of $0.005 per share. The warrants expire May 15, 2008.
The warrants may be required to be repurchased by the Company for cash upon the
occurrence of a repurchase event, such as a consolidation, merger, or sale of
assets to another entity, as defined in the provisions of the Warrant Agreement,
at a price to be determined by an independent financial expert selected by the
Company. In the event a repurchase event occurs, the difference between the
repurchase price and the carrying value of the warrants would be charged to
equity. The value ascribed to the warrants of $6,567,000 resulted in additional
debt discount, which, together with the debt issue costs are being amortized to
interest expense using the effective interest method over the period that the
notes are outstanding.
Effective November 20, 1998, the Company completed an exchange offer of the
13.5 percent senior discount notes that allowed for registration of such notes
under the Securities Act of 1933, as amended. $289,000,000 of the original issue
notes were tendered for exchange. The registered notes have substantially the
same terms and conditions as the unregistered notes, except that the registered
notes are not subject to the restrictions on resale or transfer that applied to
the unregistered notes.
During May 1998 the Company entered into a 36-month lease line that provides
for $24.5 million in equipment on an operating lease basis. In connection with
this lease agreement, the Company issued 478,650 warrants to purchase common
stock at a price of $2.23 per share, exercisable immediately.
NOTE 6--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 45,529,412
shares of common stock, both with a $0.001 par value per share.
Effective March 6, 1998, the Company amended its Certificate of
Incorporation to increase the number of authorized common shares to 45,819,300,
as adjusted for the November 1998 stock split, 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.
Effective April 28, 1998, the Company amended its Certificate of
Incorporation to increase the number of authorized common shares to 49,763,300,
as adjusted for the November 1998 stock split.
Effective November 4, 1998, the Company completed a two-for-one split of its
common stock. As a result of this stock split, the Company's number of
authorized shares (including common and preferred) increased to 83,653,186. The
accompanying consolidated financial statements have been restated for all
periods presented to reflect the stock split.
The Company's Series A and Series B preferred stock may be converted, at the
option of the holder, into the Company's common stock on a two-for-one basis,
subject to antidilution protection on a broad-based weighted-average basis. The
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 and the holders of the Series B preferred
stock are entitled to receive non-cumulative dividends of $0.356 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
F-11
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
Board of Directors. In the event of a liquidation of the Company, the holders of
the Series A and Series B preferred stock will be entitled, in preference to the
holders of common stock, to an amount equal to $1.00 per share and $4.45 per
share, respectively, plus all declared and unpaid dividends. The preferred
shares entitle holders to two votes per share, on an "as-converted" basis.
NOTE 7--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 9,727,942 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 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES FAIR VALUE EXERCISE PRICE
----------- ----------------- -----------------
<S> <C> <C> <C>
Granted..................................................... 4,834,762 $ 0.35 $ 0.05
Exercised................................................... (267,048) $ 0.35 $ 0.05
-----------
Outstanding at December 31, 1997........................ 4,567,714 $ 0.35 $ 0.05
Granted..................................................... 2,803,900 $ 3.15 $ 1.01
Exercised................................................... (4,633,590) $ 0.36 $ 0.05
Canceled.................................................... (113,624) $ 1.32 $ 0.27
-----------
Outstanding at December 31, 1998........................ 2,624,400 $ 3.28 $ 1.06
-----------
-----------
</TABLE>
The following summarizes the outstanding and exercisable options under the
Plan at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------- ----------- ------------- --------------- --------- ---------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
<S> <C> <C> <C> <C> <C>
------------------------------ --------------------------
$0.05 147,900 9.03 years $ 0.05 147,900 $ 0.05
$0.25 to $0.30 1,326,400 9.42 years $ 0.27 1,326,400 $ 0.27
$2.00 to $2.25 1,150,100 9.83 years $ 2.10 1,150,100 $ 2.10
</TABLE>
During 1997 and 1998, all options were granted to employees at less than
fair value on the date of grant, resulting in $1,450,000 and $4,908,000,
respectively, of deferred compensation recorded as a reduction of stockholders'
equity. These amounts are being amortized as a charge to general and
administrative expenses over the vesting periods of the applicable options; such
amortization totaled $192,000 and $725,000 for the periods ended December 31,
1997 and 1998, respectively.
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-12
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCK OPTIONS (CONTINUED)
Had compensation expense for the Company's 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
periods ended December 31, 1997 and 1998 would have been increased by $11,000
and $60,000 and $0.01 and $0.02 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 periods
ended December 31, 1997 and 1998, respectively: no dividend yield, risk free
interest rates of 5.3 percent and 4.9 percent, respectively, expected volatility
of nil, and expected term of four years for common options and six months for
the preferred option.
NOTE 8--INCOME TAXES
As of December 31, 1998, the Company had net operating loss carryforwards of
approximately $37,000,000, which are available to offset future taxable income
through 2018 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. The valuation allowance increased
by $13,905,000 during 1998, primarily as a result of the additional losses in
1998.
Components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 908,000 $ 14,724,000
Accrued vacation and other........................... 89,000 178,000
-------- -----------------
Gross deferred tax asset............................... 997,000 14,902,000
Valuation allowance.................................... (997,000) (14,902,000)
-------- -----------------
Net deferred income taxes.............................. $ -- $ --
-------- -----------------
-------- -----------------
</TABLE>
The provision for (benefit from) income taxes reconciles to the statutory
federal tax rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------- -------------------
<S> <C> <C>
Statutory federal tax rate............................. (34.0)% (34.0)%
State income tax, net of federal benefit............... (5.4) (5.4)
Other.................................................. (1.8) 0.9
Deferred tax asset valuation allowance................. 41.2 38.5
----- -----
-- % -- %
----- -----
----- -----
</TABLE>
NOTE 9--RELATED PARTY TRANSACTIONS
The Company's in-house counsel is also a partner in a law firm used
externally by the Company. During 1997 and 1998, the Company incurred legal fees
and expenses of approximately $92,000 and
F-13
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--RELATED PARTY TRANSACTIONS (CONTINUED)
$1,269,000, respectively, to the external firm, in addition to the salary paid
to the in-house counsel. At December 31, 1998, the Company had a balance payable
of $372,000 to this entity.
Two members of the Company's Board of Directors serve as directors to a
company that supplies equipment to the Company. The total purchases during 1997
and 1998 from the equipment supplier were approximately $419,000 and
$13,005,000, respectively. At December 31, 1998, the Company had a balance
payable of $2,451,000 to this entity.
NOTE 10--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 and 1998 totaled $46,000 and
$2,044,000, respectively. Future minimum rental payments under the leases are
$11,169,000 in 1999, $11,251,000 in 2000, $9,667,000 in 2001, $1,710,000 in
2002, and $1,190,000 in 2003.
NOTE 11--SUBSEQUENT EVENTS
Effective March 2, 1999, the Company amended its Certificate of
Incorporation to increase the number of authorized common shares to 70,439,653
and to authorize 3,731,410 shares of Series C Preferred Stock.
Effective March 4, 1999, the Company issued 3,731,410 shares of its Series C
preferred stock to MCI WorldCom's investment fund at a price of $8.04 per share
for total proceeds to the Company of $30,000,000. In connection with this
investment, MCI also received warrants to purchase up to 600,000 shares of
common stock at a price of $8.04 per share. The terms of the transaction also
provide for the Company and MCI WorldCom to enter into various business
relationships, including MCI WorldCom's commitment to sell 100,000 of the
Company's DSL lines over a period of five years, subject to penalties for
failure to reach target commitments.
During January and February 1999, the Company granted options to purchase
1,346,405 shares of common stock pursuant to the Plan. The grant of these
options will result in additional deferred compensation in 1999 and compensation
expense in 1999 and future years as the options vest.
F-14
<PAGE>
[MAPS OF SAN DIEGO, CA AND CHICAGO, IL SHOWING RHYTHMS DEPLOYMENT]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
[LOGO]
RHYTHMS NETCONNECTIONS INC.
COMMON STOCK
------------------
P R O S P E C T U S
------------------
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
HAMBRECHT & QUIST
THOMAS WEISEL PARTNERS
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the common stock being registered. All the amounts shown are estimates,
except for the registration fee and the NASD fee.
<TABLE>
<S> <C>
Registration fee................................................ $ 45,870
Nasdaq National Market fee...................................... 70,000
NASD fee........................................................ 17,000
Blue Sky fees and expenses...................................... 5,000
Printing and engraving expenses................................. 350,000
Legal fees and expenses......................................... 500,000
Accounting fees and expenses.................................... 200,000
Transfer Agent and Registrar fees............................... 10,000
Miscellaneous expenses.......................................... 52,130
---------
Total....................................................... $1,250,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law permits indemnification
of the Registrant's officers and directors 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 1 of the Registrant's Restated Bylaws provides that the
Registrant shall indemnify its directors and executive officers to the fullest
extent not prohibited by the Delaware General Corporation Law. The rights to
indemnity thereunder continue as to a person who has ceased to be a director,
officer, employee or agent and inure to the benefit of the heirs, executors and
administrators of the person. In addition, expenses incurred by a director or
executive officer in defending any civil, criminal, administrative or
investigative action, suit or proceeding by reason of the fact that he or she is
or was a director or officer of the Registrant (or was serving at the
Registrant's request as a director or officer of another corporation) shall be
paid by the Registrant in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he or she
is not entitled to be indemnified by the Registrant as authorized by the
relevant section of the Delaware General Corporation Law.
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
Article V, Section (A) of the Registrant's Restated Certificate of Incorporation
provides that a director of the Registrant 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 Registrant
or its stockholders, (ii) for acts or omissions not in good faith or acts or
omissions that 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.
II-1
<PAGE>
The Registrant 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
Registrant (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 Registrant or for settlements and expenses if the settlement is not approved
by the court. The indemnification agreements provide for the Registrant 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 Registrant 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 Registrant has purchased directors' and officers' liability insurance.
The Registrant intends to enter into additional indemnification agreements with
each of its directors and executive officers to effectuate these indemnity
provisions.
The underwriting agreement (Exhibit 1.1 hereto) contains provisions by which
the underwriters have agreed to indemnify the Registrant, each person, if any,
who controls the Registrant within the meaning of Section 15 of the Securities
Act, each director of the Registrant, and each officer of the Registrant who
signs this registration statement, with respect to information furnished in
writing by or on behalf of the underwriters for use in the registration
statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its incorporation in February 1997, the Registrant has issued and sold
unregistered securities as follows:
(1) An aggregate of 1,801,470 shares of common stock was issued in
private placements in February through June 1997 to Enterprise Partners in
connection with the Registrant's initial funding. The consideration received
for such shares was $901.
(2) An aggregate of 6,140,000 shares of Series A preferred stock (which
are currently convertible into 12,280,000 shares of common stock) was issued
in a private placement in July 1997 to Brentwood Venture Capital, Enterprise
Partners, Kleiner Perkins Caufield & Byers, the Sprout Group and certain
other purchasers pursuant to a Series A preferred stock Purchase Agreement.
The consideration received for such shares was $6,138,500.
(3) An aggregate of 6,350,000 shares of Series A preferred stock (which
are currently convertible into 12,700,000 shares of common stock) was issued
in a private placement in December 1997 to Brentwood Venture Capital,
Enterprise Partners, Kleiner Perkins Caufield & Byers, the Sprout Group and
certain other purchasers pursuant to a Series A preferred stock Purchase
Agreement and a Subsequent Closing Purchase Agreement. The consideration
received for such shares was $6,350,000.
(4) An aggregate of 365,094 shares of Series A preferred stock (which
are currently convertible into 730,188 shares of common stock) was issued in
a private placement in February 1998 to Catherine Hapka in connection with
the Series A preferred stock Purchase Agreement, the Subsequent Closing
Purchase Agreement and an employment agreement between the Company and Ms.
Hapka. The consideration received for such shares was $292,075.
(5) An aggregate of 4,044,943 shares of Series B preferred stock (which
are currently convertible into 8,089,866 shares of common stock) was issued
in a private placement in March 1998 to Brentwood Venture Capital,
Enterprise Partners, Kleiner Perkins Caufield & Byers, the
II-2
<PAGE>
Sprout Group and Enron Communications Group, Inc. The consideration received
for such shares was $18,000,000.
(6) In May 1998 the Registrant issued 290,000 units consisting of
13 1/2% senior discount notes due 2008 and warrants to purchase an aggregate
of 3,944,000 shares of common stock with exercise prices of $0.005 per share
to Merrill Lynch & Co. and Donaldson, Lufkin & Jenrette Securities
Corporation, as initial purchasers, for resale to qualified institutional
buyers. Merrill Lynch & Co. and Donaldson, Lufkin & Jenrette Securities
Corporation received commissions of $5,262,920 for acting as initial
purchasers in connection with this transaction.
(7) In May 1998 the Registrant issued to Sun Financial Group, Inc., now
GATX Capital Corporation, a warrant to purchase 478,650 shares of common
stock with an exercise price of $2.225 per share in connection with an
equipment lease financing.
(8) In March 1999 the Registrant issued to MCI WorldCom Venture Fund,
Inc. 3,731,410 shares of Series C preferred stock and a warrant to purchase
600,000 shares of common stock for an aggregate purchase price of $30.0
million.
(9) From August 1997 through January 31, 1999, the Registrant granted
stock options to purchase an aggregate of 8,507,393 shares of common stock
to employees and consultants with aggregate exercise prices ranging from
$0.05 to $4.00 per share pursuant to the Registrant's stock option plan. As
of January 31, 1999, 4,962,238 shares of common stock have been issued upon
exercise of options.
No underwriters were used in connection with these sales and issuances
except for the issuance of the senior discount notes and related warrants in (6)
above. The sales and issuances of these securities except for those in (6) above
were exempt from registration under the Securities Act pursuant to Rule 701
promulgated thereunder on the basis that these securities were offered and sold
either pursuant to a written compensatory benefit plan or pursuant to written
contracts relating to consideration, as provided by Rule 701, or pursuant to
Section 4(2) thereof on the basis that the transactions did not involve a public
offering. The sales and issuance in (6) above were exempt from registration
under the Securities Act pursuant to Section 4(2) and, in connection with the
resale by the initial purchasers of the securities described in (6) above, Rule
144A thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
1.1+ Form of Purchase Agreement.
3.1 Restated Certificate of Incorporation of the Registrant, as amended.
3.2+ Form of Restated Certificate of Incorporation of the Registrant to become effective immediately prior
to the Offering.
3.3 Bylaws of the Registrant, as amended.
3.4+ Form of Restated Bylaws of the Registrant to be effective upon completion of the Offering.
4.1+ Form of Certificate of common stock.
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 Registrant's 13 1/2% Senior Discount
Notes due 2008, Series A and form of the Registrant's 13 1/2% Senior Discount Notes due 2008, Series B.
4.3* Warrant Agreement, dated as of May 5, 1998, by and between the Registrant and State Street Bank and
Trust Company of California, N.A.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
4.4* 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.
4.5 Warrant to Purchase Shares of Common Stock, dated May 19, 1998, by and between the Registrant and Sun
Financial Group, Inc.
4.6 Common Stock Purchase Warrant, dated March 3, 1999, by and between the Registrant and MCI WorldCom
Venture Fund, Inc.
5.1+ Opinion of Brobeck, Phleger & Harrison LLP with respect to the common stock being registered.
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, as amended.
9.4 Voting Trust Agreement, dated March 3, 1999, by and between MCI WorldCom Venture Fund, Inc. and the
Registrant, as trustee.
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+ Enterprise Services Solution Agreement between Cisco Systems, Inc. and the Registrant, dated December
3, 1998
10.5 Series C Preferred Stock Purchase Agreement, dated March 3, 1999, by and among the Registrant and MCI
WorldCom Venture Fund, Inc.
10.6 Amended and Restated Investors' Rights Agreement, dated March 3, 1999, by and among the Registrant and
the Investors listed on Schedule A thereto.
10.7+ Agreement, dated March 3, 1999, by and between the Registrant and MCI WorldCom Venture Fund, Inc.
10.8* 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.
10.9+ Business Lease (Single Tenant) between the Registrant and BR Venture, LLC dated September 1998.
10.10* Employment Agreement between the Registrant and Catherine M. Hapka, dated June 10, 1997.
10.11* Employment Agreement between the Registrant and Jeffrey Blumenfeld, dated August 10, 1997.
10.12* Employment Agreement between the Registrant and James A. Greenberg, dated July 14, 1997.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.13* Employment Agreement between the Registrant and Rand A. Kennedy, dated August 22, 1997.
10.14* 1997 Stock Option/Stock Issuance Plan.
10.15+ 1999 Stock Incentive Plan.
10.16+ 1999 Stock Incentive Plan Form of Notice of Grant.
10.17+ 1999 Stock Incentive Plan Form of Stock Option Agreement.
10.18+ 1999 Stock Incentive Plan Form of Stock Issuance Agreement.
10.19+ 1999 Employee Stock Purchase Plan.
10.20* Form of Indemnification Agreement between the Registrant and each of its directors.
10.21* Form of Indemnification Agreement between the Registrant and each of its officers.
10.22* QuickStart Loan and Security Agreement, dated October 29, 1997, between the Registrant and Silicon
Valley Bank.
21.1* Subsidiaries of the Registrant.
23.1+ Consent of Brobeck, Phleger & Harrison LLP (filed with Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP.
24.1** Powers of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed with the Commission as an exhibit to the registration
statement on Form S-4 (File No. 333-59393) and incorporated herein by
reference.
** Previously filed.
+ To be filed by amendment.
(b) Financial Statement Schedules included separately in the registration
statement.
All other schedules are omitted because they are not required, are not
applicable or the information is included in the Financial Statements or notes
thereto.
ITEM 17. UNDERTAKINGS.
The undersigned hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, 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
Securities 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 Securities
Act and will be governed by the final adjudication of such issue.
II-5
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-6
<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 5th day of March 1999.
RHYTHMS NETCONNECTIONS INC.
By: /s/ SCOTT C. CHANDLER
-----------------------------------------
Scott C. Chandler
CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ President, Chief Executive March 5, 1999
Catherine M. Hapka Officer and Director
/s/ SCOTT C. CHANDLER
- ------------------------------ Chief Financial Officer March 5, 1999
Scott C. Chandler
*
- ------------------------------ Director March 5, 1999
Kevin R. Compton
*
- ------------------------------ Director March 5, 1999
Keith B. Geeslin
*
- ------------------------------ Director March 5, 1999
Ken L. Harrison
- ------------------------------ Director
Susan Mayer
*
- ------------------------------ Director March 5, 1999
William R. Stensrud
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Director March 5, 1999
John L. Walecka
- ------------------------------ Director
Edward J. Zander
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ SCOTT C. CHANDLER
-------------------------
Scott C. Chandler
ATTORNEY IN FACT
</TABLE>
II-8
<PAGE>
EXHIBIT 3.1
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 shares which the corporation is
authorized to issue is Ninety One Million One Hundred Sixteen Thousand Six
(91,116,006) shares. Seventy Million Four Hundred Thirty-Nine Thousand Six
<PAGE>
Hundred Fifty-Three (70,439,653) shares shall be Common Stock, $0.001 par
value per share and Twenty Million Six Hundred Seventy-Six Thousand Three
Hundred Fifty-Three (20,676,353) 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, (ii) the Series B Preferred
Stock, which series shall consist of 4,044,943 shares, and (iii) the Series C
Preferred Stock, which series shall consist of 3,731,410 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, Series B
Preferred Stock or Series C 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, Series B Preferred Stock and Series C 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, $0.356 per
share of Series B Preferred Stock per annum and $0.6432 per share of Series C
Preferred Stock per annum, or (ii) if greater, the amount per annum which
would be paid per share of Series A Preferred Stock, Series B Preferred Stock
and Series C 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 Preferred Stock), payable quarterly
when, as and if declared by the Board of Directors. Such dividends shall not
be cumulative. Dividends paid in a
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<PAGE>
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, Series B preferred stock and Series C preferred
stock of such other person, with rights, preferences, privileges and
restrictions substantially the same as the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, and the number of shares of
common stock, Series A preferred stock, Series B preferred stock and Series C
preferred stock distributed are in substantially the same relative
proportions as this corporation's then outstanding shares of Common Stock,
Series A Preferred Stock, Series B Preferred Stock and Series C 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, (X) all such Series B Preferred Stock shall be
distributed to the Series B Preferred Stock, and (Y) all such Series C
Preferred Stock shall be distributed to the Series C Preferred Stock and (ii)
in all other cases the holders of the Series A Preferred Stock, Series B
Preferred Stock and Series C 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, Series B
Preferred Stock and Series C 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, Series B Preferred Stock and Series C
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, Series B Preferred Stock
and Series C 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, $4.45 for each outstanding share of Series B Preferred
Stock and $8.04 for each outstanding share of Series C Preferred Stock
(hereafter referred to as the "Original Series A Issue Price", "Original
Series B Issue Price," and "Original Series C 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, Series B Preferred Stock
and Series C 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, Series B Preferred Stock and Series C 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 come into
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<PAGE>
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.
3. CONVERSION. The holders of the Series A Preferred
Stock, Series B Preferred Stock and Series C 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, each share of Series B Preferred Stock and each
share of Series C 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, Series B Preferred Stock or Series C 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, (B) the Original Series B Issue Price for each share of
Series B Preferred Stock and (C) the Original Series C Issue Price for each
share of Series C 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, the
initial Conversion Price per share for shares of Series B Preferred Stock
shall be the Original Series B Issue Price and the initial Conversion Price
per share for shares of Series C Preferred Stock shall be the Original Series
C Issue Price; provided, however, that the Conversion Price for the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall
be subject to adjustment as set forth in subsection 3(c).
ii) Each share of Series A Preferred Stock,
each share of Series B Preferred Stock and each share of Series C 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,
Series B Preferred Stock and Series C 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 is 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 Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock.
(b) MECHANICS OF CONVERSION. Before any holder of
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock shall be entitled to convert the same into shares 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
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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, Series B Preferred
Stock and/or Series C 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,
Series B Preferred Stock and/or Series C 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, Series B
Preferred Stock and/or Series C Preferred Stock shall not be deemed to have
converted such Series A Preferred Stock, SeriesB Preferred Stock and/or
Series C 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, Series B Preferred
Stock and Series C Preferred Stock shall be subject to adjustment from time
to time as follows:
i) A. Except as otherwise set forth in subsection
3(c)(i)(F) with respect to the Series C Preferred Stock, upon each issuance
by the corporation of any Additional Stock (as defined below), after the date
hereof, 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, Series B Preferred Stock or Series C Preferred
Stock shall be made in an
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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 date upon which any shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock were first issued (the
"Purchase Date" with respect to such series)) 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
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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, Series B Preferred
Stock and/or Series C 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, Series B Preferred Stock and/or Series C 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).
F. Upon each issuance by the corporation of any
Additional Stock (as defined below), after the Purchase Date for the Series C
Preferred Stock, without consideration or for a consideration per share less
than the Conversion Price for such Series C Preferred Stock in effect
immediately prior to the issuance of such Additional Stock, the Conversion
Price for such Series C Preferred Stock in effect immediately prior to each
such issuance shall forthwith (except as otherwise provided in this clause
(i)) be adjusted to a price (calculated to the nearest cent) equal to the
consideration per share for which such Additional Stock is issued; provided,
however, that at such time as such Conversion Price has been adjusted
pursuant to this subsection 3(c)(i)(F) to a price per share equal to the
Original Series B Issue Price (as adjusted for stock splits, stock dividends,
combinations and other recapitalizations) any further adjustment to such
Conversion Price shall be made pursuant to subsection 3(c)(i)(A) and the
provisions of this subsection 3(c)(i)(F) shall no longer apply. If such
Additional Stock is issued for no consideration, then the consideration per
share shall be deemed to be $0.001.
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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 applicable Purchase Date other than
A. Common Stock issued pursuant to a transaction
described in subsection 3(c)(iii) hereof, or
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, Series B Preferred Stock or Series C 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, Series B Preferred Stock and Series C 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, or
F. shares of Common Stock or Preferred Stock issued
or issuable (I) in a private placement pursuant to Rule 144A of the Securities
Act of 1933, as amended, or (II) upon exercise of warrants or rights granted to
purchasers in connection with such placement.
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, Series
B Preferred Stock and Series C 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).
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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,
Series B Preferred Stock and Series C 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.
(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, Series B Preferred Stock and Series C Preferred
Stock shall thereafter be entitled to receive upon conversion of the Series A
Preferred Stock, Series B Preferred Stock and Series C 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, Series B Preferred Stock and Series C 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, Series
B Preferred Stock and Series C 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,
Series B Preferred Stock and Series C 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, Series B Preferred Stock and/or
Series C 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, Series B
Preferred Stock and/or Series C 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, Series B
Preferred Stock and/or Series C 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
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furnish to each holder of Series A Preferred Stock, Series B Preferred Stock
and/or Series C 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, Series B Preferred Stock
or Series C 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,
Series B Preferred Stock or Series C Preferred Stock.
(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, Series B
Preferred Stock and Series C 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,
Series B Preferred Stock and Series C 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, Series
B Preferred Stock and Series C 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, Series B Preferred Stock and Series C 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 3 to be given to the holders of shares of Series A Preferred Stock,
Series B Preferred Stock or Series C 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,
the holder of each share of Series B Preferred Stock and the holder of each
share of Series C Preferred Stock shall have the right to one vote for each
share of Common Stock into which such share of Series A Preferred Stock, such
share of Series B Preferred Stock and/or such share of Series C 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
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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 "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"); (iii) so long as any shares of Series
C Preferred are outstanding, the holders of the then outstanding shares of
Series C Preferred Stock, by a majority vote voting as a separate class,
shall be entitled to elect one (1) director of the corporation (the "Series C
Director"); and (iv) 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 Series C Preferred
Stock then outstanding shall constitute a quorum of the Series C Preferred
Stock for the election or nomination of the Series C 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
solely by the holders of the Series C Preferred Stock shall be filled only by
vote of the Series C 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
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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
Series C 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 C 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.
5. PROTECTIVE PROVISIONS.
(a) SERIES C 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 C 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 C 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 C 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 and Series B Preferred Stock are altered; or
ii) authorize additional shares of Series C Preferred
Stock; or
iii) 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)); or
iv) take any action that would alter the right of the
holders of the then outstanding shares of Series C Preferred Stock to elect
one (1) director of the corporation pursuant to subitem (iii) of Article
IV(B)4(b); or
v) amend this Article IV(B)5(a).
(b) 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:
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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; or
ii) authorize additional shares of Series B Preferred
Stock; or
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)(b)(i), the corporation shall not be prohibited
from amending Article IV(B)(3)(c)); or
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(b).
(c) 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, Series B Preferred Stock and/or Series C
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 66-2/3% or more of the then outstanding shares of
Series A Preferred Stock, Series B Preferred Stock and Series C 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; or
ii) create any new class or series of stock or any
other securities convertible into equity securities of the corporation having
any preference over, or being on a parity with, the Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock with respect to voting,
dividends or upon liquidation; or
iii) authorize additional shares of Preferred Stock.
6. STATUS OF CONVERTED STOCK. In the event any shares of Series
A Preferred Stock, Series B Preferred Stock or Series C 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.
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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 Article IV(B)2 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.
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
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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.
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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IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
executed as of this 2nd day of March, 1999.
RHYTHMS NETCONNECTIONS INC.
By: /s/ Catherine Hapka
----------------------------
Catherine Hapka, President
[SIGNATURE PAGE TO CERTIFICATE OF AMENDMENT]
<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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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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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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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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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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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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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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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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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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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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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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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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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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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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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
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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.
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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.
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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
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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>
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 on March 1, 1999, 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 7 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 meetings 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 on the 1st day of March, 1999.
/s/ Catherine Hapka
--------------------------------
Catherine Hapka, President
<PAGE>
EXHIBIT 4.5
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION
OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE
APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE
PROVISIONS OF SECTION 7 OF THIS WARRANT.
RHYTHMS NETCONNECTIONS INC.
WARRANT TO PURCHASE SHARES
OF COMMON STOCK
THIS CERTIFIES THAT, for value received and subject to the provisions
and upon the terms and conditions hereinafter set forth, SUN FINANCIAL GROUP,
INC. and its assignees are entitled to subscribe for and purchase 239,325
shares of the fully paid and nonassessable Common Stock (as adjusted pursuant
to Section 4 hereof, the "Shares") of RHYTHMS NETCONNECTIONS INC., a Delaware
corporation (the "Company"), at a price per share of $4.45 (such prices and
such other prices as shall result, from time to time, from the adjustments
specified in Section 4 hereof is herein referred to as the "Exercise Price").
As used herein, (a) the term "Date of Grant" shall mean May 19, 1998, and
(b) the term "Other Warrants" shall mean any other warrants issued by the
Company in connection with the transaction with respect to which this Warrant
was issued, and any warrant issued upon transfer or partial exercise of this
Warrant. The term "Warrant" as used herein shall be deemed to include Other
Warrants unless the context clearly requires otherwise.
1. TERM. The purchase right represented by this Warrant is
exercisable, in whole or in part, at any time and from time to time from the
Date of Grant through the later of (i) ten (10) years after the Date of Grant
or (ii) five (5) years after the closing of the Company's initial public
offering of its Common Stock effected pursuant to a Registration Statement on
Form S-1 (or its successor) filed under the Securities Act of 1933, as
amended (the "Act").
2. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT. Subject to
Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the holder hereof, in whole or in part and from time to time, at
the election of the holder hereof, by (a) the surrender of this Warrant (with
the notice of exercise substantially in the form attached hereto as Exhibit A
duly completed and executed) at the principal office of the Company and by
the payment to the Company, by certified or cashier's check, or by wire
transfer to an account designated by the Company (a "Wire Transfer") of an
amount equal to the then applicable Exercise Price multiplied by the number
of Shares then being purchased, or (b) if in connection with a registered
public offering of the Company's securities, the surrender of this Warrant
(with the notice of exercise form attached hereto as Exhibit A-1 duly
completed and executed) at the principal office of the Company together with
notice of arrangements reasonably satisfactory to the Company for payment to
the Company either by certified or cashier's check or by Wire Transfer from
the proceeds of the sale of shares to be sold by the holder in such public
offering of an amount equal to the then applicable Exercise Price per share
multiplied by the number of Shares then being purchased or (c) exercise of
the right provided for in Section 10.3 hereof. The person or persons in
whose name(s) any certificate(s) representing the Shares shall be issuable
upon exercise of this Warrant shall be deemed to have become the holder(s) of
record of, and shall be treated for all purposes as the record holder(s) of,
the shares represented thereby (and such shares
<PAGE>
shall be deemed to have been issued) immediately prior to the close of
business on the date or dates upon which this Warrant is exercised. In the
event of any exercise of the rights represented by this Warrant, certificates
for the shares of stock so purchased shall be delivered to the holder hereof
as soon as possible and in any event within thirty (30) days after such
exercise and, unless this Warrant has been fully exercised or expired, a new
Warrant representing the portion of the Shares, if any, with respect to which
this Warrant shall not then have been exercised shall also be issued to the
holder hereof as soon as possible and in any event within such thirty-day
period.
3. STOCK FULLY PAID; RESERVATION OF SHARES. All Shares that may be
issued upon the exercise of the rights represented by this Warrant will, upon
issuance pursuant to the terms and conditions herein, be fully paid and
nonassessable, and free from adverse claims. During the period within which
the rights represented by this Warrant may be exercised, the Company will at
all times have authorized, and reserved for the purpose of the issue upon
exercise of the purchase rights evidenced by this Warrant, a sufficient
number of shares of its Common Stock to provide for the exercise of the
rights represented by this Warrant.
4. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The number and
kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
(a) RECLASSIFICATION OR MERGER. In case of any reclassification
or change of securities of the class issuable upon exercise of this Warrant
(other than a change in par value, or from par value to no par value, or from
no par value to par value, or as a result of a subdivision or combination),
or in case of any merger of the Company with or into another corporation
(other than a merger with another corporation in which the Company is the
acquiring and the surviving corporation and which does not result in any
reclassification or change of outstanding securities issuable upon exercise
of this Warrant), or in case of any sale of all or substantially all of the
assets of the Company, this Warrant shall thereafter entitle the holder to
receive upon exercise that number of shares of capital stock or other
property to which the holder would have been entitled as a result of such
reclassification, merger, change or sale had the Warrant been exercised
immediately prior thereto.
(b) SUBDIVISION OR COMBINATION OF SHARES. If the Company at any
time while this Warrant remains outstanding and unexpired shall subdivide or
combine its outstanding shares of Common Stock, the Exercise Price shall be
proportionately decreased in the case of a subdivision or increased in the
case of a combination, effective at the close of business on the date the
subdivision or combination becomes effective.
(c) STOCK DIVIDENDS AND OTHER DISTRIBUTIONS. If the Company at
any time while this Warrant is outstanding and unexpired shall (i) pay a
dividend with respect to Common Stock payable in Common Stock, or (ii) make
any other distribution of Common Stock with respect to Common Stock (except
any distribution specifically provided for in Sections 4(a) and 4(b)), then
the Exercise Price shall be adjusted, from and after the date of
determination of shareholders entitled to receive such dividend or
distribution, to that price determined by multiplying the Exercise Price in
effect immediately prior to such date of determination by a fraction (i) the
numerator of which shall be the total number of shares of Common Stock
outstanding immediately prior to such dividend or distribution, and (ii) the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such dividend or distribution.
(d) ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment in the
Exercise Price, the number of Shares purchasable hereunder shall be adjusted,
to the nearest whole share, to the product obtained by multiplying the number
of Shares purchasable immediately prior to such adjustment in the
2
<PAGE>
Exercise Price by a fraction, the numerator of which shall be the Exercise
Price immediately prior to such adjustment and the denominator of which shall
be the Exercise Price immediately thereafter.
(e) ANTIDILUTION RIGHTS. The Exercise Price shall also be subject
to adjustment from time to time as set forth in Appendix I hereto upon the
occurrence of certain events described therein. The provisions of Appendix I
are incorporated by reference herein with the same effect as if set forth in
full herein.
5. NOTICE OF ADJUSTMENTS. Whenever the Exercise Price or the number
of Shares purchasable hereunder shall be adjusted pursuant to Section 4
hereof, the Company shall make a certificate signed by its chief financial
officer setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated, and the Exercise Price and the number of Shares purchasable
hereunder after giving effect to such adjustment, and shall cause copies of
such certificate to be mailed (without regard to Section 13 hereof, by first
class mail, postage prepaid) to the holder of this Warrant at such holder's
last known address.
6. FRACTIONAL SHARES. No fractional shares of Common Stock will be
issued in connection with any exercise hereunder, but in lieu of such
fractional shares the Company shall make a cash payment therefor based on the
fair market value of the Common Stock on the date of exercise as reasonably
determined in good faith by the Company's Board of Directors.
7. COMPLIANCE WITH ACT; DISPOSITION OF WARRANT OR SHARES OF COMMON
STOCK.
(a) COMPLIANCE WITH ACT. The holder of this Warrant, by
acceptance hereof, agrees that this Warrant, and the Shares to be issued upon
exercise hereof are being acquired for investment and that such holder will
not offer, sell or otherwise dispose of this Warrant, or any Shares except
under circumstances which will not result in a violation of the Act or any
applicable state securities laws. Upon exercise of this Warrant, unless the
Shares being acquired are registered under the Act and any applicable state
securities laws or an exemption from such registration is available, the
holder hereof shall confirm in writing that the Shares so purchased are being
acquired for investment and not with a view toward distribution or resale in
violation of the Act and shall confirm such other matters related thereto as
may be reasonably requested by the Company. This Warrant and all Shares
issued upon exercise of this Warrant (unless registered under the Act and any
applicable state securities laws) shall be stamped or imprinted with a legend
in substantially the following form:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR
DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS
RELATED THERETO, (ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii)
RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES,
OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT
UNDER WHICH THESE SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY."
Said legend shall be removed by the Company, upon the request of a holder, at
such time as the restrictions on the transfer of the applicable security
shall have terminated. In addition, in connection with the issuance of this
Warrant, the holder specifically represents to the Company by acceptance of
this Warrant as follows:
3
<PAGE>
(1) The holder is aware of the Company's business affairs and financial
condition, and has acquired information about the Company sufficient to reach
an informed and knowledgeable decision to acquire this Warrant. The holder
is acquiring this Warrant for its own account for investment purposes only
and not with a view to, or for the resale in connection with, any
"distribution" thereof in violation of the Act.
(2) The holder understands that this Warrant has not been registered
under the Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of the
holder's investment intent as expressed herein.
(3) The holder further understands that this Warrant must be held
indefinitely unless subsequently registered under the Act and qualified under
any applicable state securities laws, or unless exemptions from registration
and qualification are otherwise available. The holder is aware of the
provisions of Rule 144, promulgated under the Act.
(b) DISPOSITION OF WARRANT OR SHARES. With respect to any
offer, sale or other disposition of this Warrant or any Shares acquired
pursuant to the exercise of this Warrant prior to registration of such
Warrant or Shares, the holder hereof agrees to give written notice to the
Company prior thereto, describing briefly the manner thereof, together with a
written opinion of such holder's counsel, or other evidence, if reasonably
requested by the Company, to the effect that such offer, sale or other
disposition may be effected without registration or qualification (under the
Act as then in effect or any federal or state securities law then in effect)
of this Warrant or the Shares and indicating whether or not under the Act
certificates for this Warrant or the Shares to be sold or otherwise disposed
of require any restrictive legend as to applicable restrictions on
transferability in order to ensure compliance with such law. Promptly upon
receiving such written notice and reasonably satisfactory opinion or other
evidence, if so requested, the Company, as promptly as practicable but no
later than fifteen (15) days after receipt of the written notice, shall
notify such holder that such holder may sell or otherwise dispose of this
Warrant or such Shares, all in accordance with the terms of the notice
delivered to the Company. If a determination has been made pursuant to this
Section 7(b) that the opinion of counsel for the holder or other evidence is
not reasonably satisfactory to the Company, the Company shall so notify the
holder promptly with details thereof after such determination has been made.
Notwithstanding the foregoing, this Warrant or such Shares may, as to such
federal laws, be offered, sold or otherwise disposed of in accordance with
Rule 144 or 144A under the Act, provided that the Company shall have been
furnished with such information as the Company may reasonably request to
provide a reasonable assurance that the provisions of Rule 144 or 144A have
been satisfied. Each certificate representing this Warrant or the Shares
thus transferre (except a transfer pursuant to Rule 144 or 144A) shall bear a
legend as to the applicable restrictions on transferability in order to
ensure compliance with such laws, unless in the aforesaid opinion of counsel
for the holder, such legend is not required in order to ensure compliance
with such laws. The Company may issue stop transfer instructions to its
transfer agent in connection with such restrictions.
(c) APPLICABILITY OF RESTRICTIONS. Neither any restrictions of
any legend described in this Warrant nor the requirements of Section 7(b)
above shall apply to any transfer or grant of a security interest in, this
Warrant (or the Common Stock obtainable upon exercise thereof) or any part
hereof (i) to a partner of the holder if the holder is a partnership, (ii) to
a partnership of which the holder is a partner, or (iii) to any affiliate of
the holder if the holder is a corporation; PROVIDED, HOWEVER, in any such
transfer, if applicable, the transferee shall on the Company's request agree
in writing to be bound by the terms of this Warrant as if an original
signatory hereto.
4
<PAGE>
8. RIGHTS AS SHAREHOLDERS; INFORMATION. No holder of this Warrant, as
such, shall be entitled to vote or receive dividends or other distributions
or be deemed the holder of Shares, nor shall anything contained herein be
construed to confer upon the holder of this Warrant, as such, any of the
rights of a shareholder of the Company or any right to vote for the election
of directors or upon any matter submitted to shareholders at any meeting
thereof, or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until this Warrant shall have been exercised
and the Shares purchasable upon the exercise hereof shall have become
deliverable, as provided herein. The holders of Warrants will not be
entitled to share in the assets of the Company in the event of a liquidation,
dissolution or the winding up of the Company. Notwithstanding the foregoing,
the Company will transmit to the holder of this Warrant such information,
documents and reports as are generally distributed to the holders of common
stock of the Company concurrently with the distribution thereof to the
shareholders.
9. REGISTRATION RIGHTS. The Company grants registration rights to the
holder of this Warrant for the Common Stock issuable upon exercise hereof,
comparable to the registration rights granted to holders under the Warrant
Registration Rights Agreement, dated as of May 5, 1998, among the Company and
the Initial Purchasers (as defined therein), with the following exception:
(1) the holder will have no shelf registration rights.
10. ADDITIONAL RIGHTS.
10.1 SECONDARY SALES. The Company agrees that it will not interfere
with the holder of this Warrant in obtaining liquidity if opportunities to
make secondary sales of the Company's securities become available. To this
end, the Company will promptly provide the holder of this Warrant with notice
of any offer (of which it has knowledge) to acquire from the Company's
security holders more than fifteen percent (15%) of the total voting power of
the Company and will not interfere with any attempt by the holder in
arranging the sale of this Warrant to the person or persons making such offer.
10.2 MERGERS. The Company shall provide the holder of this Warrant
with at least thirty (30) days' notice of the terms and conditions of any of
the following potential transactions: (i) the sale, lease, exchange,
conveyance or other disposition of all or substantially all of the Company's
property or business, or (ii) its merger into or consolidation with any other
corporation (other than a wholly-owned subsidiary of the Company), or any
transaction (including a merger or other reorganization) or series of related
transactions, in which more than 50% of the voting power of the Company is
disposed of. The Company will reasonably cooperate with the holder in
arranging the sale of this Warrant in connection with any such transaction.
10.3 RIGHT TO CONVERT WARRANT INTO STOCK: NET ISSUANCE.
(a) RIGHT TO CONVERT. In addition to and without limiting the
rights of the holder under the terms of this Warrant, the holder shall have
the right to convert this Warrant or any portion thereof (the "Conversion
Right") into shares of Common Stock as provided in this Section 10.3 at any
time or from time to time during the term of this Warrant. Upon exercise of
the Conversion Right with respect to a particular number of shares subject to
this Warrant (the "Converted Warrant Shares"), the Company shall deliver to
the holder (without payment by the holder of any exercise price or any cash
or other consideration) (X) that number of shares of fully paid and
nonassessable Common Stock equal to the quotient obtained by dividing the
value of this Warrant (or the specified portion hereof) on the Conversion
Date (as defined in subsection
5
<PAGE>
(b) hereof), which value shall be determined by subtracting (A) the aggregate
Exercise Price of the Converted Warrant Shares immediately prior to the
exercise of the Conversion Right from (B) the aggregate fair market value of
the Converted Warrant Shares issuable upon exercise of this Warrant (or the
specified portion hereof) on the Conversion Date (as herein defined) by (Y)
the fair market value of one share of Common Stock on the Conversion Date (as
herein defined).
Expressed as a formula, such conversion shall be computed as follows:
X = B - A
-----
Y
Where: X = the number of shares of Common Stock that may
be issued to holder
Y = the fair market value (FMV) of one share of
Common Stock
A = the aggregate Exercise Price (i.e., Converted
Warrant Shares x Exercise Price)
B = the aggregate FMV (i.e., FMV x Converted
Warrant Shares)
No fractional shares shall be issuable upon exercise of the Conversion
Right, and, if the number of shares to be issued determined in accordance
with the foregoing formula is other than a whole number, the Company shall
pay to the holder an amount in cash equal to the fair market value of the
resulting fractional share on the Conversion Date (as hereinafter defined).
For purposes of Section 9 of this Warrant, shares issued pursuant to the
Conversion Right shall be treated as if they were issued upon the exercise of
this Warrant.
(b) METHOD OF EXERCISE. The Conversion Right may be exercised by
the holder by the surrender of this Warrant at the principal office of the
Company together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right and indicating the number of shares
subject to this Warrant which are being surrendered (referred to in Section
10.3(a) hereof as the Converted Warrant Shares) in exercise of the Conversion
Right. Such conversion shall be effective upon receipt by the Company of
this Warrant together with the aforesaid written statement, or on such later
date as is specified therein (the "Conversion Date"), and, at the election of
the holder hereof, may be made contingent upon the closing of the sale of the
Company's Common Stock to the public in a public offering pursuant to a
Registration Statement under the Act (a "Public Offering"). Certificates for
the shares issuable upon exercise of the Conversion Right and, if applicable,
a new warrant evidencing the balance of the shares remaining subject to this
Warrant, shall be issued as of the Conversion Date and shall be delivered to
the holder within thirty (30) days following the Conversion Date.
(c) DETERMINATION OF FAIR MARKET VALUE. For purposes of this
Section 10.3, "fair market value" of a share of Common Stock as of a
particular date (the "Determination Date") shall mean:
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(i) If the Conversion Right is exercised in connection with
and contingent upon a Public Offering, and if the Company's Registration
Statement relating to such Public Offering ("Registration Statement") has
been declared effective by the SEC, then the initial "Price to Public"
specified in the final prospectus with respect to such offering.
(ii) If the Conversion Right is not exercised in connection
with and contingent upon a Public Offering, then as follows:
(A) If traded on a securities exchange, the fair market value of the
Common Stock shall be deemed to be the average of the closing prices of the
Common Stock on such exchange over the 30-day period ending five business
days prior to the Determination Date;
(B) If traded over-the-counter, the fair market value of the Common
Stock shall be deemed to be the average of the closing bid prices of the
Common Stock over the 30-day period ending five business days prior to the
Determination Date; and
(C) If there is no public market for the Common Stock, then fair
market value shall be determined by mutual agreement of the holder of this
Warrant and the Company.
10.4 EXERCISE PRIOR TO EXPIRATION. To the extent this Warrant is
not previously exercised as to all of the Shares subject hereto, and if the
fair market value of one share of the Common Stock is greater than the
Exercise Price then in effect, this Warrant shall be deemed automatically
exercised pursuant to Section 10.3 above (even if not surrendered)
immediately before its expiration. For purposes of such automatic exercise,
the fair market value of one share of the Series Preferred upon such
expiration shall be determined pursuant to Section 10.3(c). To the extent
this Warrant or any portion thereof is deemed automatically exercised
pursuant to this Section 10.4, the Company agrees to promptly notify the
holder hereof of the number of Shares, if any, the holder hereof is to
receive by reason of such automatic exercise.
11. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to the holder of this Warrant as follows:
(a) This Warrant has been duly authorized and executed by the
Company and is a valid and binding obligation of the Company enforceable in
accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and the rules of law or
principles at equity governing specific performance, injunctive relief and
other equitable remedies;
(b) The Shares have been duly authorized and reserved for issuance
by the Company and, when issued in accordance with the terms hereof will be
validly issued, fully paid and non-assessable;
(c) The rights, preferences, privileges and restrictions granted
to or imposed upon the classes and series of the Company's capital stock and
the holders thereof are as set forth in the Charter;
(d) The execution and delivery of this Warrant are not, and the
issuance of the Shares upon exercise of this Warrant in accordance with the
terms hereof will not be, inconsistent with the Company's Charter or by-laws,
do not and will not contravene any material law, governmental rule or
regulation, judgment or order applicable to the Company, and do not and will
not conflict with or contravene any
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<PAGE>
provision of, or constitute a default under, any material indenture,
mortgage, contract or other instrument of which the Company is a party or by
which it is bound or require the consent or approval of, the giving of notice
to, the registration or filing with or the taking of any action in respect of
or by, any Federal, state or local government authority or agency or other
person, except for the filing of notices pursuant to federal and state
securities laws, which filings will be effected by the time required thereby;
and
(e) There are no actions, suits, audits, investigations or
proceedings pending or, to the knowledge of the Company, threatened against
the Company in any court or before any governmental commission, board or
authority which, if adversely determined, will have a material adverse effect
on the ability of the Company to perform its obligations under this Warrant.
12. MODIFICATION AND WAIVER. This Warrant and any provision hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
13. NOTICES. Any notice, request, communication or other document
required or permitted to be given or delivered to the holder hereof or the
Company shall be delivered, or shall be sent by certified or registered mail,
postage prepaid, to each such holder at its address as shown on the books of
the Company or to the Company at the address indicated therefor on the
signature page of this Warrant.
14. BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon
any corporation succeeding the Company by merger, consolidation or
acquisition of all or substantially all of the Company's assets, and all of
the obligations of the Company relating to the Shares issuable upon the
exercise or conversion of this Warrant shall survive the exercise, conversion
and termination of this Warrant and all of the covenants and agreements of
the Company shall inure to the benefit of the successors and assigns of the
holder hereof.
15. LOST WARRANTS OR STOCK CERTIFICATES. The Company covenants to the
holder hereof that, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate and, in the case of any such loss, theft or destruction,
upon receipt of an indemnity reasonably satisfactory to the Company, or in
the case of any such mutilation upon surrender and cancellation of such
Warrant or stock certificate, the Company will make and deliver a new Warrant
or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed
or mutilated Warrant or stock certificate.
16. DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant. The language in this Warrant shall be
construed as to its fair meaning without regard to which party drafted this
Warrant.
17. GOVERNING LAW. This Warrant shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws
of the State of California.
18. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
representations and warranties of the Company and the holder hereof contained
herein shall survive the Date of Grant, the exercise or conversion of this
Warrant (or any part hereof) or the termination or expiration of rights
hereunder. All agreements of the Company and the holder hereof contained
herein shall survive indefinitely until, by their respective terms, they are
no longer operative.
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<PAGE>
19. REMEDIES. In case any one or more of the covenants and agreements
contained in this Warrant shall have been breached, the holders hereof (in
the case of a breach by the Company), or the Company (in the case of a breach
by a holder), may proceed to protect and enforce their or its rights either
by suit in equity and/or by action at law, including, but not limited to, an
action for damages as a result of any such breach and/or an action for
specific performance of any such covenant or agreement contained in this
Warrant.
20. NO IMPAIRMENT OF RIGHTS. The Company will not, by amendment of its
Charter or through any other means, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of
all such action as may be necessary or appropriate in order to protect the
rights of the holder of this Warrant against impairment.
21. SEVERABILITY. The invalidity or unenforceability of any provision
of this Warrant in any jurisdiction shall not affect the validity or
enforceability of such provision in any other jurisdiction, or affect any
other provision of this Warrant, which shall remain in full force and effect.
22. RECOVERY OF LITIGATION COSTS. If any legal action or other
proceeding is brought for the enforcement of this Warrant, or because of an
alleged dispute, breach, default, or misrepresentation in connection with any
of the provisions of this Warrant, the successful or prevailing party or
parties shall be entitled to recover reasonable attorneys' fees and other
costs incurred in that action or proceeding, in addition to any other relief
to which it or they may be entitled.
23. ENTIRE AGREEMENT; MODIFICATION. This Warrant constitutes the
entire agreement between the parties pertaining to the subject matter
contained in it and supersedes all prior and contemporaneous agreements,
representations, and undertakings of the parties, whether oral or written,
with respect to such subject matter.
RHYTHMS NETCONNECTIONS INC.
By /s/ Joseph D'Angelo
----------------------------
Title VP and GM Eastern Region
Address: 7337 South Revere Parkway
Suite 100
Englewood, CO 80112
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APPENDIX I
CERTAIN ADJUSTMENT PROVISIONS
-----------------------------
1. CAPITALIZED TERMS. Capitalized terms used in this Appendix I that
are not otherwise defined herein shall have the respective meanings assigned
to them in the Warrant, to which this Appendix I is attached, if therein
defined.
2. ADJUSTMENT OF EXERCISE PRICE UPON ISSUANCE OF ADDITIONAL STOCK.
The Exercise Price shall be subject to adjustment from time to time as
follows:
(a) Upon each issuance by the Company of any Additional
Stock, without consideration or for a consideration per share less than the
Exercise Price in effect immediately prior to the issuance of such Additional
Stock, the Exercise Price in effect immediately prior to each such issuance
shall forthwith (except as otherwise provided in this Section 2) be adjusted
to a price determined by multiplying the Exercise Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
(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 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) immediately prior to such issuance
plus the number of shares of Additional Stock which could be purchased were
the then Exercise Price used instead (calculated by dividing the total
consideration to be received by the Company in such issuance by the then
Exercise Price) and the denominator of which shall be the number of shares of
Common Stock outstanding (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 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) immediately
prior to such issuance plus the number of shares of such Additional Stock
issued in such issuance. For purposes of this Section 2, the number of
shares of Common Stock outstanding (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 he
exercise 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) shall include the aggregate number of shares of Common Stock actually
outstanding and the number of shares deemed to be outstanding as determined
below.
(b) No adjustment of the Exercise Price 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
one (1) year from the date of the event giving rise to the adjustment being
carried forward, or shall be made at the end of one (1) year from the date of
the event giving rise to the adjustment being carried forward. Except to the
limited extent provided for in subsections 2(d)(iii) and 2(d)(iv) below, no
adjustment of the Exercise Price pursuant to subsection 2(a) of this Appendix
I shall have the effect of increasing the Exercise Price above the Exercise
Price in effect immediately prior to such adjustment.
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(c) In the case of issuance by the Company of Additional 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 in good
faith by the Board of Directors of the Company irrespective of any accounting
treatment. In the case of the issuance of Additional 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 (whether before, on or after the
Grant 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 Section 2:
(i) The aggregate maximum number of shares of Common
Stock deliverable upon exercise (assuming 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 a manner consistent
with subsection 2(c) of this Appendix I), if any, received by the Company
upon issuance of such options or rights plus the minimum exercise price
provided in such options or rights (without taking into account potential
antidilution adjustments) for the Common Stock covered thereby.
(ii) The aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange for (assuming
satisfaction of any conditions to conversion or exchange, including without
limitation, the passage of time, but without taking into account potential
antidilution adjustments) convertible or exchangeable securities or upon
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 Company for any such securities and
related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional consideration, if
any, to be received by the Company (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 a manner consistent with subsection 2(c) of this
Appendix I).
(iii) In the event of any change in the number of shares
of Common Stock deliverable or in the consideration payable to the Company
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 antidilution provisions thereof, the Exercise
Price, to the extent in any way affected by or computed using such options,
rights or securities, shall be adjusted based upon 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.
(iv) Upon the expiration of any such options or rights,
the termination of any such options or rights to convert or exchange, or the
expiration of any options or rights related to such convertible or
exchangeable securities, the Exercise Price, 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
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<PAGE>
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.
(v) The number of shares of Common Stock deemed issued
and the consideration deemed paid therefor pursuant to subsections 2(d)(i)
and 2(d)(ii) of this Appendix I shall be appropriately adjusted to reflect
any change, termination or expiration of the type described in either
subsection 2(d)(iii) or 2(d)(iv) hereof.
(e) "Additional Stock" shall mean any shares of Common Stock
issued (or deemed to have been issued pursuant to subsection 2(d) of this
Appendix I) by this Company after the Grant Date other than:
(i) Shares of Common Stock issued pursuant to a
transaction described in Sections 4(a), 4(b) and 4(c) of the Warrant,
(ii) Shares of Common Stock issuable or issued to
employees, consultants or directors of the Company directly or pursuant to a
compensatory benefit plan (including a stock option plan or restricted stock
plan) approved by the Board of Directors of the Company,
(iii) Shares of Common Stock issued upon conversion of
Preferred Stock,
(iv) Shares of Common Stock issued or issuable (a) 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 (b) upon exercise of warrants or rights granted to under
writers in connection with such a public offering,
(v) 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 and are approved by the Board of Directors of the Company, or
(vi) 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 131/2% Senior Discount Notes due 2008 and
such Warrants, which Units were issued on or about May 5, 1998.
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EXHIBIT A
NOTICE OF EXERCISE
To: RHYTHMS NETCONNECTIONS INC. (the "Company")
1. The undersigned hereby:
/ / elects to purchase ____ shares of Common Stock of the Company
pursuant to the terms of the attached Warrant, and tenders
herewith payment of the purchase price of such shares in full, or
/ / elects to exercise its net issuance rights pursuant to
Section 10.3 of the attached Warrant with respect to ____ shares
of Common Stock.
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name or names as are specified
below:
_____________________________
(Name)
_____________________________
_____________________________
(Address)
3. The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares,
all except as in compliance with applicable securities laws.
_____________________________
(Signature)
__________________________
(Date)
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<PAGE>
EXHIBIT A-1
NOTICE OF EXERCISE
To: RHYTHMS NETCONNECTIONS INC. (the "Company")
1. Contingent upon and effective immediately prior to the closing (the
"Closing") of the Company's public offering contemplated by the Registration
Statement on Form S____, filed ____________, 19__, the
undersigned hereby:
/ / elects to purchase ____ shares of Common Stock of the Company (or
such lesser number of shares as may be sold on behalf of the
undersigned at the Closing) pursuant to the terms of the attached
Warrant, or
/ / elects to exercise its net issuance rights pursuant to
Section 10.3 of the attached Warrant with respect to ____ Shares
of Common Stock.
2. Please deliver to the custodian for the selling shareholders a stock
certificate representing such __________ shares.
3. The undersigned has instructed the custodian for the selling
shareholders to deliver to the Company $_____________ or, if less, the net
proceeds due the undersigned from the sale of shares in the aforesaid public
offering. If such net proceeds are less than the purchase price for such
shares, the undersigned agrees to deliver the difference to the Company prior to
the Closing.
_____________________________
(Signature)
__________________________
(Date)
<PAGE>
EXHIBIT B
CHARTER
<PAGE>
EXHIBIT 4.6
THE TRANSFER OF THIS WARRANT IS SUBJECT TO
RESTRICTIONS CONTAINED HEREIN. THIS WARRANT
HAS BEEN ISSUED IN RELIANCE UPON THE
REPRESENTATION OF THE HOLDER THAT IT HAS BEEN
ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH
A VIEW TOWARD THE RESALE OR OTHER DISTRIBUTION
THEREOF. NEITHER THIS WARRANT NOR THE SHARES
ISSUABLE UPON THE EXERCISE OF THIS WARRANT
HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR ANY STATE SECURITIES LAWS.
RHYTHMS NETCONNECTIONS INC.
Common Stock Purchase Warrant
To Subscribe for and Purchase March 3, 1999
600,000 Shares of Common Stock of
Rhythms NetConnections Inc.
THIS CERTIFIES that, for the purchase price of $8.04 per share, MCI
WorldCom Venture Fund, Inc. or its registered assigns (the "Holder") is entitled
to subscribe for and purchase from Rhythms NetConnections Inc., a Delaware
corporation (hereinafter called the "Company"), up to 600,000 shares (subject to
adjustment as hereinafter provided) of fully paid and non-assessable Common
Stock of the Company (the "Common Stock"), subject to the provisions and upon
the terms and conditions hereinafter set forth at the price of $8.04 per share
(such price as from time to time to be adjusted as provided herein is called the
"Warrant Price"), at or prior to 5:00 p.m. Pacific time on March 3, 2004 (the
"Exercise Period).
This Warrant and any Warrant subsequently issued upon exchange or
transfer hereof are hereinafter collectively called the "Warrant."
Section 1. EXERCISE OF WARRANT. The rights represented by this
Warrant may be exercised by the Holder, in whole or in part (but not as to
fractional shares) at any time or from time to time during the Exercise Period
by the completion of the purchase form attached hereto and by the surrender of
this Warrant (properly endorsed) at the office of the Company as it may
designate by notice in writing to the Holder hereof at the address of the Holder
appearing on the books of the Company, and by payment to the Company of the
Warrant Price in cash or by certified or official bank check, for each share
being purchased. (In addition, see Section 2 below for net issuance
provisions.) In the event of any exercise of the rights represented by this
Warrant, a certificate or certificates for the shares of Common Stock so
purchased, registered in the name of the Holder, or its nominee or other party
designated in the purchase form by the Holder hereof, shall be delivered to the
Holder within thirty (30) business days after the date on which the rights
represented by this Warrant shall have been so exercised; and, unless this
<PAGE>
Warrant has expired or has been exercised in full, a new Warrant representing
the number of shares (except a remaining fractional share), if any, with
respect to which this Warrant shall not then have been exercised shall also
be issued to the Holder within such time. The person in whose name any
certificate for shares of Common Stock is issued upon exercise of this
Warrant shall for all purposes be deemed to have become the holder of record
of such shares on the date on which this Warrant was surrendered and payment
of the Warrant Price is made, except that, if the date of such surrender and
payment is a date on which the stock transfer books of the Company are
closed, such person shall be deemed to have become the holder of such shares
at the close of business on the next succeeding date on which the stock
transfer books are open. No fractional shares shall be issued upon exercise
of this Warrant and no payment or adjustment shal be made upon any exercise
on account of any cash dividends on the Common Stock issued upon such
exercise. If any fractional interest in a share of Common Stock would,
except for the provision of this Section 1, be delivered upon such exercise,
the Company, in lieu of delivery of a fractional share thereof, shall pay to
the Holder an amount in cash equal to the current market price of such
fractional share as determined in good faith by the Board of Directors of the
Company.
Section 2. NET ISSUANCE.
(a) RIGHT TO CONVERT. In addition to and without limiting the
rights of the Holder under the terms of this Warrant, if the fair market
value of a share of Common Stock is greater than the Warrant Price, in lieu
of exercising this Warrant for cash the Holder shall have the right to
convert this Warrant or any portion thereof (the "Conversion Right") into
shares of Common Stock equal to the value of this Warrant or the portion
thereof being canceled as provided in this Section 2 at any time or from time
to time during the Exercise Period. Upon exercise of the Conversion Right
with respect to a particular number of shares subject to the Warrant (the
"Converted Warrant Shares"), the Company shall deliver to the Holder (without
payment by the Holder of any exercise price or any cash or other
consideration) that number of shares of fully paid and nonassessable Common
Stock computed using the following formula:
X = Y (A - B)
A
Where X = the number of shares of Common Stock to be delivered to the
holder
Y = the number of Converted Warrant Shares
A = the fair market value of one share of the Company's
Common Stock on the Conversion Date (as defined below)
B = the per share exercise price of the Warrant (as
adjusted to the Conversion Date)
The Conversion Right may only be exercised with respect to a whole number of
shares subject to the Warrant. No fractional shares shall be issuable upon
exercise of the Conversion Right, and if the number of shares to be issued
determined in accordance with the foregoing formula is other than a whole
number, the Company shall pay to the Holder an amount in cash equal to the
fair
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<PAGE>
market value of the resulting fractional share on the Conversion Date (as
defined below). Shares issued pursuant to the Conversion Right shall be
treated as if they were issued upon the exercise of the Warrant.
(b) METHOD OF EXERCISE. The Conversion Right may be exercised by
the Holder by the surrender of the Warrant at the principal office of the
Company together with a written statement specifying that the Holder thereby
intends to exercise the Conversion Right and indicating the total number of
shares under the Warrant that the Holder is exercising through the Conversion
Right. Such conversion shall be effective upon receipt by the Company of the
Warrant together with the aforesaid written statement, or on such later date
as is specified therein (the "Conversion Date"). Certificates for the shares
issuable upon exercise of the Conversion Right and, if applicable, a new
warrant evidencing the balance of the shares remaining subject to the
Warrant, shall be issued as of the Conversion Date and shall be delivered to
the Holder promptly following the Conversion Date.
(c) DETERMINATION OF FAIR MARKET VALUE. For purposes of this
Section 2, fair market value of a share of Common Stock on the Conversion
Date shall mean:
(i) If traded on a stock exchange, the fair market value of
the Common Stock shall be deemed to be the average of the closing selling
prices of the Common Stock on the stock exchange determined by the Board to
be the primary market for the Common Stock over the ten (10) trading day
period (or such shorter period immediately following the closing of an
initial public offering) ending on the date prior to the Conversion Date, as
such prices are officially quoted in the composite tape of transactions on
such exchange;
(ii) If traded over-the-counter, the fair market value of the
Common Stock shall be deemed to be the average of the closing bid prices (or,
if such information is available, the closing selling prices) of the Common
Stock over the ten (10) trading day period (or such shorter period
immediately following the closing of an initial public offering) ending on
the date prior to the Conversion Date, as such prices are reported by the
National Association of Securities Dealers through its NASDAQ system, any
successor system or any exchange on which it is listed, whichever is
applicable; or
(iii) If there is no public market for the Common Stock, then
the fair market value shall be determined by mutual agreement of the holder
of the Warrant and the Company, and if the holder and the Company are unable
to so agree, by an investment banker of national reputation selected by the
Company and reasonably acceptable to the holder of the Warrant.
Section 3. STOCK SPLITS, CONSOLIDATION, MERGER AND SALE. In the
event that before the issuance of the shares of Common Stock into which this
Warrant may be exercised the outstanding shares of Common Stock shall be
split, combined or consolidated, by dividend, reclassification or otherwise,
into a greater or lesser number of shares of Common Stock or any other class
or classes of stock, as appropriate, the Warrant Price in effect immediately
prior to such combination or consolidation and the number of shares
purchasable under this Warrant shall, concurrently with the effectiveness of
such combination or consolidation, be proportionately adjusted. If there
shall be effected any consolidation or merger of the Company
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<PAGE>
with another corporation, or a sale of all or substantially all of the
Company's assets to another corporation, and if the holders of Common Stock
shall be entitled pursuant to the terms of any such transaction to receive
stock, securities or assets with respect to or in exchange for Common Stock,
then, as a condition of such consolidation, merger or sale, lawful and
adequate provisions shall be made whereby the Holder of this Warrant shall
thereafter have the right to receive, upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore receivable upon the exercise of such Warrant, such
shares of stock, securities or assets as may be issuable or payable with
respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such Common Stock immediately
theretofore so receivable had such consolidation, merger or sale not taken
place, and in any such case appropriate provisions shall be made with respect
to the rights and interests of the Holder to the end that the provisions
hereof shall thereafter be applicable, as nearly as may be, in relation to
any shares of stock, securities or assets thereafter deliverable upon the
exercise of this Warrant.
(a) STOCK TO BE RESERVED. The Company will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose
of issue upon the exercise of this Warrant as herein provided, such number of
shares of Common Stock as shall then be issuable upon the exercise of this
Warrant.
(b) ISSUE TAX. The issuance of certificates for shares of Common
Stock upon exercise of this Warrant shall be made without charge to the
Holders of this Warrant for any issuance tax in respect thereof provided that
the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the Holder of this Warrant.
(c) CLOSING OF BOOKS. The Company will at no time close its
transfer books against the transfer of the shares of Common Stock issued or
issuable upon the exercise of this Warrant in any manner which interferes
with the timely exercise of this Warrant.
Section 4. NOTICES OF RECORD DATES. In the event of:
(a) any taking by the Company 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 or other distribution (other than cash
dividends out of earned surplus), or 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, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or
any transfer of all or substantially all the assets of the Company to or
consolidation or merger of the Company with or into any other corporation, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then and in each such event the Company will give notice to the Holder of
this Warrant specifying (i) the date on which any such record is to be taken
for the purpose of such dividend,
4
<PAGE>
distribution or right and stating the amount and character of such dividend,
distribution or right, and (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, and the time, if any
is to be fixed, as of which the holders of record of Common Stock will be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation
or winding-up. Such notice shall be given at least ten (10) days and not
more than ninety (90) days prior to the date therein specified, and such
notice shall state that the action in question or the record date is subject
to the effectiveness of a registration statement under the Securities Act of
1933, as amended (the "Securities Act") or to a favorable vote of
shareholders, if either is required.
Section 5. NO SHAREHOLDER RIGHTS OR LIABILITIES. This Warrant
shall not entitle the Holder hereof to any voting rights or other rights as a
shareholder of the Company. No provision hereof, in the absence of
affirmative action by the Holder hereof to purchase shares of Common Stock,
and no mere enumeration hereon of the rights or privileges of the Holder
hereof, shall give rise to any liability of such Holder for the Warrant Price
or as a shareholder of the Company, whether such liability is asserted by the
Company or by creditors of the Company.
Section 6. REPRESENTATIONS OF HOLDER. The Holder hereby represents
and acknowledges to the Company that:
(a) this Warrant, the Common Stock issuable upon exercise of this
Warrant and any securities issued with respect to any of them by way of a
stock dividend or stock split or in connection with a recapitalization,
merger, consolidation or other reorganization will be "restricted securities"
as such term is used in the rules and regulations under the Securities Act
and that such securities have not been and may not be registered under the
Securities Act or any state securities law, and that such securities must be
held indefinitely unless registration is effected or transfer can be made
pursuant to appropriate exemptions;
(b) the Holder has read, and fully understands, the terms of this
Warrant set forth on its face and the attachments hereto, including the
restrictions on transfer contained herein;
(c) the Holder is purchasing for investment for its own account
and not with a view to or for sale in connection with any distribution of
this Warrant or the Common Stock of the Company issuable upon exercise of
this Warrant and it has no intention of selling such securities in a public
distribution in violation of the federal securities laws or any applicable
state securities laws; provided that nothing contained herein will prevent
Holder from transferring such securities in compliance with the terms of this
Warrant and the applicable federal and state securities laws;
(d) the Holder is an "accredited investor" within the meaning of
paragraph (a) of Rule 501 of Regulation D promulgated by the Securities and
Exchange Commission and an "excluded purchaser" within the meaning of Section
25102(f) of the California Corporate Securities Law of 1968; and
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<PAGE>
(e) the Company may affix the following legend (in addition to any
other legend(s), if any, required by applicable state corporate and/or
securities laws) to certificates for shares of Common Stock (or other
securities) issued upon exercise of this Warrant ("Warrant Shares"):
"These securities have not been registered under the
Securities Act of 1933, as amended. 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."
Section 7. LIMITATIONS ON DISPOSITION.
(a) The Holder of this Warrant, by acceptance hereof, agrees to
comply in all respects with the provisions of this Section 7. Without in any
way limiting the representations set forth above, the Holder of this Warrant
agrees not to make any disposition of this Warrant or any Warrant Shares,
unless and until the transferee has agreed in writing for the benefit of the
Company to be bound by this Section 7 and the other provisions of this
Warrant as if such transferee were the original Holder hereof, provided and
to the extent such provisions are then applicable, and:
(i) There is then in effect a Registration Statement under
the Securities Act covering such proposed disposition and such disposition is
made in accordance with such Registration Statement; or
(ii) (A) the Holder 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 the
Company has given its prior written consent, and (B) if reasonably requested
by the Company, the Holder shall have furnished the Company with an opinion
of counsel, reasonably satisfactory to the Company, that such disposition
will not require registration of the Warrant and/or the Warrant 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, prior consent or opinion of counsel shall be
necessary for a transfer (A) by a Holder 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, or (B) to an "affiliate" of the Holder as that
term is defined in Rule 405 promulgated by the Securities and Exchange
Commission under the Securities Act, if the transferee agrees in writing to
be subject to the terms hereof to the same extent as if he were an original
Holder hereunder, and (ii) no transferee shall be required, as a condition to
any transfer of the Warrant or the Warrant Shares by the Holder, to agree to
be bound by this Section 7, if the transferee is acquiring the Warrant and/or
Warrant Shares pursuant to a Registration Statement under the Securities Act
or in a transaction made
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<PAGE>
pursuant to Rule 144. Each new certificate evidencing the Warrant and/or
Warrant Shares so transferred shall bear the appropriate restrictive legends
set forth in Section 6(f) above, except that such certificate shall not bear
such restrictive legend if, in the opinion of counsel for the Company, such
legend is not required in order to establish or assist in compliance with any
provisions of the Securities Act or any applicable state securities laws.
Section 8. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this
Warrant is lost, stolen, mutilated or destroyed, the Company may, on such
terms as to indemnity or otherwise as it may in its discretion reasonably
impose (which shall, in the case of a mutilated Warrant, include the
surrender thereof), issue a new Warrant of like denomination and tenor as the
Warrant so lost, stolen, mutilated or destroyed. Any such new Warrant shall
constitute an original contractual obligation of the Company, whether or not
the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any
time enforceable by anyone.
Section 9. PRESENTMENT. Prior to due presentment of this Warrant
together with a completed assignment form attached hereto for registration of
transfer, the Company may deem and treat the Holder as the absolute owner of
the Warrant, notwithstanding any notation of ownership or other writing
thereon, for the purpose of any exercise thereof and for all other purposes,
and the Company shall not be affected by any notice to the contrary.
Section 10. NOTICE. Notice or demand pursuant to this Warrant shall
be sufficiently given or made, if sent by first-class mail, postage prepaid,
addressed, if to the Holder of this Warrant, to the Holder at its last known
address as it shall appear in the records of the Company, and if to the
Company, at 6933 South Revere Parkway, Englewood, Colorado 80112, Attention:
Secretary. The Company may alter the address to which communications are to
be sent by giving notice of such change of address in conformity with the
provisions of this Section 10 for the giving of notice.
Section 11. GOVERNING LAW. The validity, interpretation and
performance of this Warrant shall be governed by the laws of the State of
Delaware without regard to principles of conflicts of laws.
Section 12. SUCCESSORS, ASSIGNS. Subject to the restrictions on
transfer by Holder set forth in Section 7 hereof, all the terms and
provisions of the Warrant shall be binding upon and inure to the benefit of
and be enforceable by the respective successors and assigns of the parties
hereto.
Section 13. AMENDMENT. This Warrant may be modified, amended or
terminated by a writing signed by the Company and the Holder.
Section 14. SEVERABILITY. Should any part but not the whole of this
Warrant for any reason be declared invalid, such decision shall not affect
the validity of any remaining portion, which remaining portion shall remain
in force and effect as if this Warrant had been executed with the invalid
portion thereof eliminated, and it is hereby declared the intention of the
parties hereto that they would have executed the remaining portion of this
Warrant without including therein any such part which may, for any reason, be
hereafter declared invalid.
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<PAGE>
Section 15. "MARKET STAND-OFF" AGREEMENT. Holder 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 Securities Act of 1933, as amended,
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:
(i) 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
(ii) all officers and directors of the Company and all other
persons with registration rights enter into similar agreements.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Common Stock of the Holder
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such period.
Section 16. NO IMPAIRMENT. The Company will not, by any voluntary
action, avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Company, but will at all
times in good faith assist in the carrying out of all the provisions of this
Warrant and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder of this Warrant
against impairment.
Section 17. NO RIGHT TO REDEEM. Except as explicitly provided
herein, this Warrant may not be called by the Company.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed and delivered on and as of the day and year first above written by one
of its officers thereunto duly authorized.
RHYTHMS NETCONNECTIONS INC.,
a Delaware corporation
Dated: March 3, 1999 /s/ Catherina Hapka
-----------------------------------
Catherine Hapka, President and
Chief Executive Officer
The undersigned Holder agrees and accepts this Warrant and
acknowledges that it has read and confirms each of the representations contained
in Section 6.
MCI WORLDCOM VENTURE FUND, INC.
By: /s/ Susan Mayer
---------------------------------
Its: President
--------------------------------
Address: 1801 Pennsylvania Avenue, N.W.
-----------------------------------
Washington, DC 20006
-----------------------------------
[SIGNATURE PAGE TO COMMON STOCK PURCHASE WARRANT]
<PAGE>
PURCHASE FORM
(To be executed by the Warrant Holder if he desires to exercise the Warrant in
whole or in part)
To: RHYTHMS NETCONNECTIONS INC.
The undersigned, whose Social Security or other identifying number is
_______________, hereby irrevocably elects the right of purchase represented by
the within Warrant for, and to purchase thereunder, ___________________________
shares of Common Stock provided for therein and tenders payment herewith to the
order of
RHYTHMS NETCONNECTIONS INC.
in the amount of
$____________
The undersigned requests that certificates for such shares be issued as follows:
Name:___________________________________________________________________________
Address:________________________________________________________________________
Deliver to:_____________________________________________________________________
Address:________________________________________________________________________
and, if said number of shares shall not be all the shares purchasable hereunder,
that a new Warrant for the balance remaining of the shares purchasable under the
within Warrant be registered in the name of, and delivered to, the undersigned
at the address stated below:
Address:__________________________________________________________________
__________________________________________________________________
Dated: ____________, 199__ Signature:__________________________________
(Signature must conform in all
respects to the name of the Warrant
Holder as specified on the face of
the Warrant, without alteration,
enlargement or any change
whatsoever)
<PAGE>
ASSIGNMENT
(To be executed by the Warrant Holder if he desires to effect a transfer of the
Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________________, whose Social Security or
other identification number is ________________________ [residing/located] at
____________________________ the attached Warrant, and appoints
_______________ residing at ____________________________ the undersigned's
attorney-in-fact to transfer said Warrant on the books of the Company, with
full power of substitution in the premises.
Dated: ______________, 199__.
In the presence of:
_____________________________________ _______________________________________
(Signature must conform in all respects
to the name of the Warrant Holder as
specified on the face of the Warrant,
without alteration, enlargement or any
change whatsoever).
<PAGE>
EXHIBIT 9.4
VOTING TRUST AGREEMENT
THIS VOTING TRUST AGREEMENT (this "Agreement"), dated as of March
3, 1999, by and between MCI WorldCom Venture Fund, 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 C Preferred Stock, $0.001 par value ("Series C 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 limited purpose of voting in elections on certain matters as described
herein all of the shares of Series C 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 limited purpose of voting on
certain 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
the 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.
<PAGE>
(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 C PREFERRED. Only with respect
to a proposal for a Corporate Transaction (defined below), and only to the
extent such Corporate Transaction is submitted for a stockholder vote, in
which the Series C Preferred Stock has class or series voting rights (a
"Stockholder Proposal"), the Trustee shall vote the Trustee Shares for or
against such Stockholder Proposal, in the same proportion as a majority of
the then outstanding shares of Series A Preferred Stock and Series B
Preferred Stock, voting as a single class (the "Series A and B 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 or (B) the
issuance of equity securities in connection with a corporate partnering or
similar transaction.
(ii) OTHER STOCKHOLDER MATTERS. With respect to any
other proposal submitted for stockholder vote, the Trustee shall vote the
Trustee Shares in the manner directed (whether for, against or to abstain) by
the Beneficiary hereunder for whom the Trustee Shares are held; including,
without limitation, NOTWITHSTANDING subsection (i) above, with respect to any
proposal submitted for stockholder vote in connection with the following:
1. any action that would materially and adversely
alter the rights, preferences or privileges of the
Series C 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 or B
Preferred Stock are altered; or
2. authorization of additional shares of Series C
Preferred Stock; or
3. any action that would alter the right of the
holders of the then outstanding shares of Series C
Preferred Stock to elect one (1) director of the
corporation pursuant to Article IV(B)4(b)(iii) of
the Restated Certificate of Incorporation; or
4. amendment of Article IV(B)5(a) of the Restated
Certificate of Incorporation.
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<PAGE>
(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 the Trustee and any other written
material addressing such proposal provided to stockholders or to the 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 the
Trustee. For all matters covered by Section 3(a)(ii) above, the Trustee
shall request instructions from such holders as soon as reasonably 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 the Trustee on the day prior to the deadline for
voting, the percentage of the Series A Preferred Stock and Series B 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 Series B Preferred Stock, voting as a single
class, and in the same percentage for, against and abstain as the vote of the
Series A Preferred Stock and Series B Preferred Stock voting as a single
class.
(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) THE 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.
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<PAGE>
(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 any Trustee, a successor shall be appointed by the
Beneficiary, which successor shall be 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, Series B
Preferred Stock and Series C 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 the 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 the
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) THE 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
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<PAGE>
(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 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 9 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 3, 2009; (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
5
<PAGE>
result of an Excluded Merger or Excluded Sale). Notwithstanding the
foregoing, this Agreement may (before a Qualified Public Offering has
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 3, 2009). 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 the 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. 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 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.
6
<PAGE>
9. INSPECTION OF RECORDS. The Trustee shall keep at 6933 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.
10. 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.
11. 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, (iii) the third business day after sending by first class
United States mail, postage prepaid, (iv) the time of successful 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.
7
<PAGE>
(y) If to the Trustee to: Rhythms NetConnections Inc.
6933 South Revere Parkway
Englewood, CO 80112-3931
FAX No.: (303) 476-4201
(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. 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 11(f) and understands its
effect.
(g) COMPENSATION OF THE TRUSTEE; PAYMENT OF COSTS. The Trustee
shall not be entitled to any compensation for its services as the 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
11(k). The Trustee will look solely to the Company for reimbursement of any
amounts incurred or expended by it in connection with its duties under this
Agreement, except as provided in Sections 5(f) and 11(k), and expressly
waives any rights which it might otherwise have to charge the trust corpus
for any costs, fees or expenses related to this Agreement, or to withhold any
amounts from or set off any amounts against the shares received by it 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 a majority in interest of the Shares and a Series A and B
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.
8
<PAGE>
(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]
9
<PAGE>
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/ Scott Chandler
---------------------------------
Title: CFO
------------------------------
"BENEFICIARY"
MCI WORLDCOM VENTURE FUND, INC.
By: /s/ Susan Mayer
---------------------------------
Title: President
------------------------------
AGREED TO:
"COMPANY"
RHYTHMS NETCONNECTIONS INC.
By: /s/ Catherine Hapka
---------------------------------
Title:
------------------------------
[SIGNATURE PAGE FOR VOTING TRUST AGREEMENT]
10
<PAGE>
Schedule A
BENEFICIARY
MCI WORLDCOM VENTURE FUND, INC.
1801 Pennsylvania Avenue, N.W.
Washington, DC 20006
11
<PAGE>
Exhibit A
VOTING TRUST CERTIFICATE
------------------------
12
<PAGE>
RHYTHMS NETCONNECTIONS INC.
A Delaware Corporation
Voting Trust Certificate
Certificate
No. ________ 3,731,410 shares of Series C Preferred Stock
This certifies that MCI WorldCom Venture Fund, Inc. (or its
predecessor in interest) has deposited for transfer in trust to the Trustee
of the Rhythms NetConnections Inc. Voting Trust Three Million Seven Hundred
Thirty-One Thousand Four Hundred Ten (3,731,410) shares of Series C Preferred
Stock, par value $0.001 per share, of Rhythms NetConnections Inc., a Delaware
corporation, under a Voting Trust Agreement, dated as of ________, 1999 by
and between MCI WorldCom Venture Fund, 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 ___ day of ________, 1999.
RHYTHMS NETCONNECTIONS INC., TRUSTEE
By:____________________________________
Title:_________________________________
13
<PAGE>
EXHIBIT 10.5
RHYTHMS NETCONNECTIONS INC.
SERIES C PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
March 3, 1999
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C> <C>
1. Purchase and Sale of Stock and Warrant. . . . . . . . . . . . . . . . . . . . 1
1.1 SALE AND ISSUANCE OF PREFERRED STOCK AND WARRANT.. . . . . . . . . . . . 1
1.2 CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Representations and Warranties of the Company.. . . . . . . . . . . . . . . . 1
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 STOCK, WARRANT AND COMMON STOCK. . . . . . . 3
2.6 CONSENTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.7 PRODUCT WARRANTY AND PRODUCT LIABILITY.. . . . . . . . . . . . . . . . . 4
2.8 LITIGATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.9 PROPRIETARY INFORMATION AGREEMENTS.. . . . . . . . . . . . . . . . . . . 4
2.10 INTELLECTUAL PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . 4
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.. . . . . . . . . . . . . . . . . . . 8
2.17 DISCLOSURE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.18 REGISTRATION RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.19 CORPORATE DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.20 TITLE TO PROPERTY AND ASSETS.. . . . . . . . . . . . . . . . . . . . . . 9
2.21 EMPLOYEE BENEFIT PLANS.. . . . . . . . . . . . . . . . . . . . . . . . . 9
2.22 FINANCIAL STATEMENTS.. . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.23 TAX RETURNS, PAYMENTS AND ELECTIONS. . . . . . . . . . . . . . . . . . . 9
2.24 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.25 MINUTE BOOKS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.26 LABOR AGREEMENTS AND ACTIONS.. . . . . . . . . . . . . . . . . . . . . . 10
2.27 INVENTORY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.28 NOTES AND ACCOUNTS RECEIVABLE. . . . . . . . . . . . . . . . . . . . . . 11
2.29 POWERS OF ATTORNEY.. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.30 GUARANTIES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3. Representations and Warranties of the Investor. . . . . . . . . . . . . . . . 11
3.1 AUTHORIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. . . . . . . . . . . . . . . . . . . . 11
3.3 DISCLOSURE OF INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 12
3.4 INVESTMENT EXPERIENCE. . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.5 ACCREDITED INVESTOR. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.6 RESTRICTED SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . 12
4. Covenants of the Investor.. . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.1 FURTHER LIMITATIONS ON DISPOSITION.. . . . . . . . . . . . . . . . . . . 12
<PAGE>
PAGE
----
4.2 LEGENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.3 CORPORATE SECURITIES LAW.. . . . . . . . . . . . . . . . . . . . . . . . 13
4.4 VOTING TRUST AGREEMENT.. . . . . . . . . . . . . . . . . . . . . . . . . 14
4.5 WAIVER OF "PIGGY-BACK" REGISTRATION RIGHTS.. . . . . . . . . . . . . . . 14
5. Conditions of Investor's Obligations at the Closing.. . . . . . . . . . . . . 14
5.1 REPRESENTATIONS AND WARRANTIES.. . . . . . . . . . . . . . . . . . . . . 14
5.2 PERFORMANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.3 COMPLIANCE CERTIFICATE.. . . . . . . . . . . . . . . . . . . . . . . . . 14
5.4 QUALIFICATIONS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.5 PROCEEDINGS AND DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . 15
5.6 OPINION OF COMPANY COUNSEL.. . . . . . . . . . . . . . . . . . . . . . . 15
5.7 BOARD OF DIRECTORS.. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.8 INVESTORS' RIGHTS AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . 15
5.9 HART-SCOTT-RODINO. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6. Conditions of the Company's Obligations at the Closing. . . . . . . . . . . . 15
6.1 REPRESENTATIONS AND WARRANTIES.. . . . . . . . . . . . . . . . . . . . . 15
6.2 QUALIFICATIONS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.3 PERFORMANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.4 INVESTORS' RIGHTS AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . 16
6.5 VOTING TRUST AGREEMENT.. . . . . . . . . . . . . . . . . . . . . . . . . 16
7. Indemnification.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.1 INDEMNITY BY COMPANY.. . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.2 INDEMNITY BY INVESTOR. . . . . . . . . . . . . . . . . . . . . . . . . . 17
8. Miscellaneous.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.1 SURVIVAL OF WARRANTIES.. . . . . . . . . . . . . . . . . . . . . . . . . 17
8.2 SUCCESSORS AND ASSIGNS.. . . . . . . . . . . . . . . . . . . . . . . . . 17
8.3 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.4 COUNTERPARTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.5 TITLES AND SUBTITLES.. . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.6 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.7 FINDER'S FEE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.8 EXPENSES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.9 AMENDMENTS AND WAIVERS.. . . . . . . . . . . . . . . . . . . . . . . . . 18
8.10 SEVERABILITY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.11 AGGREGATION OF STOCK.. . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.12 ENTIRE AGREEMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
SCHEDULE A - Schedule of Investors
SCHEDULE B - Schedule of Series A Preferred Holders
SCHEDULE C - Schedule of Series B Preferred Holders
SCHEDULE D - Schedule of Common Holders
EXHIBIT A - Restated Certificate of Incorporation
EXHIBIT B - Amended and Restated Investors' Right Agreement
EXHIBIT C - Voting Trust Agreement
EXHIBIT D - Form of Warrant
ii
<PAGE>
SERIES C PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
THIS SERIES C PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
(the "Agreement") is made as of the 3rd day of March 1999, by and between
Rhythms NetConnections Inc., a Delaware corporation (the "Company"), and MCI
WorldCom Venture Fund, Inc. (the "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK AND WARRANT.
1.1 SALE AND ISSUANCE OF PREFERRED STOCK AND WARRANT.
(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 AND WARRANT. Subject
to the terms and conditions of this Agreement, the Investor agrees to
purchase at the Closing (defined below) and the Company agrees to sell and
issue to such Investor at the Closing (i) that number of shares of the
Company's Series C Preferred Stock set forth opposite the Investor's name on
SCHEDULE A hereto; and (ii) a warrant, substantially in the form of EXHIBIT D
attached hereto (the "Warrant"), to purchase 600,000 shares of the Company's
Common Stock at an exercise price per share of $8.04 per share. The purchase
price of each share of Series C Preferred Stock shall be $8.04 per share and
the purchase price for each warrant to purchase one (1) share of Common Stock
shall be $0.001 per share.
1.2 CLOSING. The purchase and sale of the Series C
Preferred Stock shall take place at the offices of Brobeck, Phleger &
Harrison LLP, 550 West "C" Street, Suite 1200, San Diego California, at 11:00
a.m., on March 3, 1999, or at such other time and place as the Company and
the Investor mutually agree upon orally or in writing (which time and place
are designated as the "Closing"). At the Closing the Company shall deliver
to the Investor a certificate representing the Series C Preferred Stock and
the Warrant 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.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to the Investor that, except as set forth on a
Schedule of Exceptions furnished to the 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 enter into this Agreement and to carry on
its business as now conducted and as proposed to be conducted. The Company
is duly
<PAGE>
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. 20,676,353 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 which are currently convertible
into 25,710,188 shares of Common Stock, of which 4,044,943 have been
designated Series B Preferred Stock all of which are issued and outstanding
(as set forth on Schedule C) and which are currently convertible into
8,089,886 shares of Common Stock and 3,731,410 shares of which have been
designated Series C Preferred Stock all of which will be sold pursuant to
this Agreement. The rights, privileges and preferences of the Series C
Preferred Stock as of the Closing will be as stated in the Company's Restated
Certificate attached hereto as EXHIBIT A.
(ii) COMMON STOCK. 70,439,653 shares of common
stock ("Common Stock"), of which 7,119,208 shares are issued and outstanding
and are owned by the persons, and in the numbers specified in Schedule D
hereto, and of which 365,096 shares are held by the Company as treasury
stock. 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 Warrant to be issued
under this Agreement, (B) the conversion privileges of each of the Series A
Preferred Stock and the Series B Preferred Stock and the Series C Preferred
Stock to be issued under this Agreement, (C) 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, (D) the Company's reservation of 9,727,942 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, (E)
warrants to purchase up to 3,944,000 shares of Common Stock issued in
connection with the Company's sale and issuance of 290,000 units consisting
of 13-1/2% senior discount notes and warrants, all pursuant to that certain
Purchase Agreement dated April 28,1998 and (F) a warrant to purchase up to
478,650 shares of Common Stock issued in connection with a lease financing
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
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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 C
Preferred Stock and Warrant being sold hereunder and the Common Stock
issuable upon conversion of the Series C Preferred Stock and upon exercise of
the Warrant 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 STOCK, WARRANT AND COMMON
STOCK.
(a) The Series C Preferred Stock and Warrant which
are being purchased by the Investor 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 Investor 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 C Preferred Stock and/or upon exercise of the
Warrant 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, Series A
Preferred Stock and Series B 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.
2.6 CONSENTS. No consent, approval, order or authorization
of, or registration, qualification, designation, declaration or filing with,
any person or entity not a party hereto or 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 C Preferred Stock hereunder.
2.7 PRODUCT WARRANTY AND PRODUCT LIABILITY. Each product
manufactured, sold, leased, or delivered by the Company has been in material
conformity with all applicable contractual commitments and all express and
implied warranties, and the Company has no
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liability (and there is no basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand
against the Company giving rise to any liability) for replacement or repair
thereof or other damages in connection therewith. 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. The Company has no
material liability (and there is no basis for any present or future action,
suit, proceeding, hearing, investigation, charge, complaint, claim, or demand
against any of them giving rise to any liability) arising out of any injury
to individuals or property as a result of the ownership, possession, or use
of any product manufactured, sold, leased, or delivered by the Company.
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 Investor. 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 INTELLECTUAL PROPERTY. 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 interfered with, infringed upon, misappropriated, or otherwise come
into conflict with any patents, trademarks, service marks, trade names,
copyrights, trade secrets, information, proprietary rights, or processes of
third parties, nor has the Company 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, trade secrets, information, proprietary rights, processes, 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 or her 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
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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 law, contract, covenant or instrument under which any of
such employees is now subject to or 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. (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,
lien, indenture, mortgage, lease, or contract to which it is a party or by
which it is bound or 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, will not permit the
acceleration of the maturity of, 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, lien,
indenture, mortgage, lease, contract, statute, rule, or regulation, 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 individually in excess of $100,000 or, in case of
agreements, understandings, instruments, contracts, proposed transactions,
judgments, orders, writs or decrees to which the Company is a party or by
which it is bound are individually less than $100,000, in excess of $250,000
in the aggregate, 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 $100,000
or, in the case of indebtedness and/or liabilities individually less than
$100,000, in excess of $250,000 in the aggregate, (iii) made any loans or
advances to any person,
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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 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 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 $100,000 or, in
the case of expenses and/or liabilities individually less than $100,000, in
excess of $250,000 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.
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2.15 ENVIRONMENTAL AND SAFETY LAWS.
(i) The Company is not in violation of any federal, state,
local or foreign statute, regulation, ordinance or other provision having the
force or effect of law, any judicial or administrative order or
determination, any contractual obligation or any common law concerning public
health and safety, worker health and safety, or pollution or protection of
the environment, including without limitation any of those relating to the
presence, use, production, generation, handling, transportation, treatment,
storage, disposal, distribution, labeling, testing, processing, discharge,
release, threatened release, control, or cleanup of any hazardous materials,
substances or wastes, chemical substances or mixtures, pesticides,
pollutants, contaminants, toxic chemicals, petroleum products or byproducts,
asbestos, polychlorinated biphenyls, noise or radiation, each as amended and
as now or hereafter in effect (referred to herein collectively as the
"Environmental, Health, and Safety Requirements"), and no material
expenditures are or will be required in order to comply with the
Environmental, Health, and Safety Requirements.
(ii) The Company has obtained and complied with, and is in
compliance with, all permits, licenses and other authorizations that are
required pursuant to all Environmental, Health, and Safety Requirements for
the occupation of its facilities and the operation of its business.
(iii) The Company has not received any written or oral notice,
report or other information regarding any actual or alleged violation of
Environmental, Health, and Safety Requirements, or any liabilities or
potential liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise), including any investigatory, remedial or corrective obligations,
relating to Company or its facilities arising under the Environmental,
Health, and Safety Requirements.
(iv) None of the following exists at any property or facility
owned or operated by the Company: (1) underground storage tanks, (2)
asbestos-containing material in any form or condition, (3) materials or
equipment containing polychlorinated biphenyls, or (4) landfills, surface
impoundments, or disposal areas.
(v) The Company has not treated, stored, disposed of,
arranged for or permitted the disposal of, transported, handled, or released
any substance, including without limitation any hazardous substance, or owned
or operated any property or facility (and no such property or facility is
contaminated by any such substance) in a manner that has given or would give
rise to liabilities, including any liability for response costs, corrective
action costs, personal injury, property damage, natural resources damages or
attorney fees, pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), the Solid
Waste Disposal Act, as amended ("SWDA"), or any of the Environmental, Health,
and Safety Requirements.
(vi) Neither this Agreement nor the consummation of the
transaction that is the subject of this Agreement will result in any
obligations for site investigation or cleanup, or notification to or consent
of government agencies or third parties, pursuant to any of the so-called
"transaction-triggered" or "responsible property transfer" Environmental,
Health, and Safety Requirements.
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(vii) The Company has not, either expressly or by operation of
law, assumed or undertaken any liability, including without limitation any
obligation for corrective or remedial action, of any person or entity
relating to the Environmental, Health, and Safety Requirements.
(viii) No facts, events or conditions relating to the past or
present facilities, properties or operations of the Company will prevent,
hinder or limit continued compliance with the Environmental, Health, and
Safety Requirements, give rise to any investigatory, remedial or corrective
obligations pursuant to the Environmental, Health, and Safety Requirements,
or give rise to any other liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise) pursuant to the Environmental, Health, and Safety
Requirements, including without limitation any relating to onsite or offsite
releases or threatened releases of hazardous materials, substances or wastes,
personal injury, property damage or natural resources damage.
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 the Investor
with all the information which such Investor has requested for deciding
whether to purchase the Series C Preferred Stock and all information that is
material 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 necessary to
satisfy representations and warranties or conditions contained herein (the
form of which amendments has been approved by the Investor), the Certificate
of Incorporation and Bylaws of the Company as currently in effect are in the
form previously provided to the Investor.
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 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
Investor copies of its unaudited balance sheet and statement of operations at
September 30, 1998 and for the
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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 its 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.
2.24 INSURANCE. The Company has in full force and effect and
shall maintain 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 shall also maintain broad form comprehensive general liability
insurance in the minimum amount of $2,000,000 per year.
2.25 MINUTE BOOKS. The minute books of the Company provided
to the Investor 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.
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2.27 INVENTORY. All inventory of the Company consists of raw
materials and supplies, manufactured and purchased parts, goods in process,
and finished goods, all of which is merchantable and fit for the purpose for
which it was procured or manufactured, and none of which is slow-moving,
obsolete, damaged, or defective, subject only to the reserve for inventory
writedown set forth on the face of the Company's most recent balance sheet
(rather than in any notes thereto) as adjusted for the passage of time
through the Closing in accordance with the past custom and practice of the
Company.
2.28 NOTES AND ACCOUNTS RECEIVABLE. All notes and accounts
receivable of the Company are reflected properly on the Company's books and
records, are valid receivables subject to no setoffs or counterclaims, are
current and collectible, and will be collected in accordance with their terms
at their recorded amounts, subject only to the reserve for bad debts set
forth on the face of the Company's most recent balance sheet (rather than in
any notes thereto) as adjusted for the passage of time through the Closing in
accordance with the past custom and practice of the Company.
2.29 POWERS OF ATTORNEY. There are no outstanding powers
of attorney executed on behalf of the Company.
2.30 GUARANTIES. The Company is not a guarantor or
otherwise is liable for any liability or obligation (including indebtedness)
of any other person or entity other than its wholly owned subsidiaries.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor
hereby represents and warrants to the Company that:
3.1 AUTHORIZATION. The Investor has full power and
authority to enter into this Agreement, the Warrant, the Investors' Rights
Agreement and the Voting Trust Agreement and each such 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 and
the Warrant are made with the Investor in reliance upon such Investor's
representation to the Company that the Series C Preferred Stock and the
Warrant to be received by such Investor and the Common Stock issuable upon
conversion and/or exercise 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. The 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. The Investor has full power and
authority to enter into this Agreement.
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3.3 DISCLOSURE OF INFORMATION. The 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 C Preferred Stock and
the Warrant. 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 Investor to rely thereon.
3.4 INVESTMENT EXPERIENCE. The 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 C Preferred Stock and the Warrant. If other than an individual, it
has not been organized for the purpose of acquiring the Series C Preferred
Stock or the Warrant.
3.5 ACCREDITED INVESTOR. The Investor is an "accredited
investor" within the meaning of SEC Rule 501 of Regulation D, as presently in
effect.
3.6 QUALIFIED INSTITUTIONAL BUYER. The Investor is a
"qualified institutional buyer" within the meaning of SEC Rule 144A, as
presently in effect.
3.7 RESTRICTED SECURITIES. It understands that the
Securities 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, 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, the 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 and Section 7, 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
(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.
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(b) Notwithstanding the provisions of paragraph (a)
above, (i) no such Registration Statement or opinion of counsel shall be
necessary for a transfer (A) 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, or (B) to an "affiliate" of the Investor as
that term is defined in Rule 405 promulgated by the Securities and Exchange
Commission under the Act, 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 the 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
and/or exercise 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.
4.4 VOTING TRUST AGREEMENT. In the event that the Company
has not had a registration statement for a public offering of Common Stock
with an effective date within six months of the Closing, then the Investor
shall at such time enter into and execute a voting trust agreement, in
substantially the form attached hereto as EXHIBIT C.
4.5 WAIVER OF "PIGGY-BACK" REGISTRATION RIGHTS. The
Investor hereby waives, solely with respect to the Company's filing, within
six months of the Closing, of a registration statement under the Act in
connection with an initial public offering of its Common Stock, any
"piggy-back" registration rights it may have under Section 1.3 of the
Investors' Rights
12
<PAGE>
Agreement; PROVIDED, HOWEVER, that such waiver shall only be deemed effective
if the Company shall obtain a similar waiver of such rights on behalf of all
other holders of Registrable Securities (as defined in the Investors' Rights
Agreement) under the Investors' Rights Agreement.
5. CONDITIONS OF INVESTOR'S OBLIGATIONS AT THE CLOSING. With
respect to the Closing, the obligations of the 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 the Investor unless such Investor consents 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 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 the 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 C Preferred Stock and the Warrant and the underlying Common
Stock to the Investor 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 C 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 the Investor, and the 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. The 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 Investor.
5.7 BOARD OF DIRECTORS. The Board of Directors of the
Company as of the Closing shall consist of Catherine Hapka, Kevin Compton,
Keith Geeslin, Ken Harrison, William Stensrud, John Walecka and Susan Mayer.
13
<PAGE>
5.8 INVESTORS' RIGHTS AGREEMENT. The Company and the
Investor shall have entered into the Investors' Rights Agreement in the form
attached as EXHIBIT B.
5.9 HART-SCOTT-RODINO. All applicable waiting periods (and
any extensions thereof) under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, shall have expired or otherwise been terminated and
the parties shall have received all other required authorizations, consents,
and approvals of governments and governmental agencies.
6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSING. The
obligations of the Company to the Investor under this Agreement are subject
to the fulfillment on or before the Closing of each of the following
conditions by the 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 C Preferred Stock and the Warrant and the
Common Stock issuable upon the conversion and/or exercise 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. The 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 the
Investor shall have entered into the Investors' Rights Agreement in the form
attached as EXHIBIT B.
6.5 VOTING TRUST AGREEMENT. The Company and the Investor
shall have entered into the Voting Trust Agreement in the form attached as
EXHIBIT C.
7. INDEMNIFICATION.
7.1 INDEMNITY BY COMPANY. Company shall indemnify and hold
Investor harmless from and against any and all liability (including, without
limitation, strict liability), loss, damage, or deficiency (including,
without limitation, reasonable attorneys' fees and associated costs)
resulting from any misrepresentation, breach of warranty, or nonfulfillment
of any agreement on the part of Company under this Agreement or under any
certificate or other instrument furnished or to be furnished by Company
hereunder, and from the ownership, management, operations, and interests of
Company prior to Closing, and from any act or omission of Company, or its
agents, employees, and independent contractors in respect of periods prior to
the Closing. To be entitled to such indemnification, Investor must give
Company written notice of the assertion by a third party, to which Investor
has knowledge, of
14
<PAGE>
any claim with respect to which Investor might bring a claim for
indemnification hereunder, and in all events must have supplied such notice
to Company within the applicable period for defense of such claim by Company.
Upon Company's agreement to indemnify Investor hereunder, Company shall have
the right, at Company's own expense, to defend and litigate any such third
party claim. In no event shall Company be liable for the acts or omissions
of prior owners, operators, or managers of the Investor or their agents,
independent contractors, or employees, including, without limitation, any
liability arising out of or in connection with claims which occurred prior to
the Closing.
7.2 INDEMNITY BY INVESTOR. Investor shall indemnify and
hold Company harmless from and against any and all liability (including,
without limitation, strict liability), loss, damage or deficiency (including,
without limitation, reasonable attorneys' fees and associated costs)
resulting from any misrepresentation, breach of warranty, or nonfulfillment
under any agreement on the part of Investor under this Agreement or under any
certificate or other instrument furnished by Investor or to be furnished by
Investor hereunder, and from any act or omission of Investor, or its agents,
employees, and independent contractors in respect of periods prior to the
Closing. To be entitled to such indemnification, Company must give Investor
written notice of the assertion by a third party, to which Company has
knowledge, of any claim with respect to which Company might bring a claim for
indemnification hereunder, and in all events must have provided such notice
within the applicable period for defense of such claim by Investor. Upon
Investor's agreement to indemnify Company hereunder, Investor shall have the
right, at Investor's own expense, to defend and litigate any such third party
claim. In no event shall Investor be liable for the acts or omissions of
prior owners, operators, or managers of the Company or their agents,
independent contractors, or employees, including, without limitation, any
liability arising out of or in connection with claims which occurred prior to
the Closing.
8. MISCELLANEOUS.
8.1 SURVIVAL OF WARRANTIES. The warranties, representations
and covenants of the Company and the Investor 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 Investor or the Company.
8.2 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 and/or exercise 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.
8.3 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.
15
<PAGE>
8.4 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
8.5 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.
8.6 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.
8.7 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. The 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 the
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.
8.8 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 attorneys' fees, costs and
necessary disbursements in addition to any other relief to which such party
may be entitled.
8.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may
be amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders
of a majority of the Common Stock issued or issuable upon conversion of the
Series C 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 and/or exercisable), each future holder of all such securities,
and the Company.
8.10 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.
16
<PAGE>
8.11 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.
8.12 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.
17
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
RHYTHMS NETCONNECTIONS INC.
By: /s/ Catherine Hapka
----------------------------------
Catherine Hapka, President
Address: 6933 South Revere Parkway
Englewood, CO 80112-3931
INVESTOR:
MCI WORLDCOM VENTURE FUND, INC.
By: /s/ Susan Mayer
---------------------------------
Its: President
--------------------------------
Address: 1801 Pennsylvania Avenue, N.W.
----------------------------------
Washington, DC 20006
----------------------------------
[SIGNATURE TO STOCK PURCHASE AGREEMENT]
<PAGE>
SCHEDULE A
Schedule of Investor
<TABLE>
<CAPTION>
AGGREGATE NUMBER OF SERIES C NUMBER OF
SHARE WARRANT AGGREGATE PURCHASE PREFERRED SHARES WARRANT SHARES
PURCHASE PURCHASE PRICE PAID TO BE ISSUED TO BE ISSUED AT
INVESTOR PRICE PRICE AT CLOSING AT CLOSING CLOSING
-------- ----- ----- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
MCI WorldCom Venture $30,000,000 $600 $30,000,600 3,731,410 600,000
Fund, Inc.
TOTALS $30,000,000 $600 $30,000,600 3,731,410 600,000
----------- ---- ----------- --------- -------
----------- ---- ----------- --------- -------
</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 Series B Preferred Holders
<TABLE>
<CAPTION>
Number of Shares
<S> <C>
Enron Communications Group, Inc. 2,247,191
Enterprise Partners III, L.P. 413,483
Enterprise Partners III Associates, L.P. 35,955
Kleiner Perkins Caufield & Byers VIII 414,202
KPCB VIII Founders Fund 24,000
KPCB Information Sciences Zaibatsu 11,236
Fund II
Brentwood Associates VII, L.P. 431,461
Brentwood Affiliates Fund, L.P. 17,977
DLJ Capital Corporation 8,989
DLJ First ESC L.L.C. 44,944
Sprout Capital VII, L.P. 390,966
The Sprout CEO Fund, L.P 4,539
TOTAL 4,044,943
---------
---------
</TABLE>
<PAGE>
SCHEDULE D
Schedule of Common Holders
<TABLE>
<CAPTION>
Number of Shares
<S> <C>
Enterprise Partners III, L.P. 1,104,902
Enterprise Partners III Associates, L.P. 96,078
Enterprise Partners IV, L.P. 600,490
Employees of the Company who have
exercised stock options 5,157,738
---------
TOTAL 6,959,208
---------
---------
</TABLE>
<PAGE>
EXHIBIT A
---------
RESTATED CERTIFICATE OF INCORPORATION
<PAGE>
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 shares which the corporation is
authorized to issue is Ninety One Million One Hundred Sixteen Thousand Six
(91,116,006) shares. Seventy Million Four Hundred Thirty-Nine Thousand Six
<PAGE>
Hundred Fifty-Three (70,439,653) shares shall be Common Stock, $0.001 par
value per share and Twenty Million Six Hundred Seventy-Six Thousand Three
Hundred Fifty-Three (20,676,353) 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, (ii) the Series B Preferred
Stock, which series shall consist of 4,044,943 shares, and (iii) the Series C
Preferred Stock, which series shall consist of 3,731,410 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, Series B
Preferred Stock or Series C 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, Series B Preferred Stock and Series C 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, $0.356 per
share of Series B Preferred Stock per annum and $0.6432 per share of Series C
Preferred Stock per annum, or (ii) if greater, the amount per annum which
would be paid per share of Series A Preferred Stock, Series B Preferred Stock
and Series C 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 Preferred Stock), payable quarterly
when, as and if declared by the Board of Directors. Such dividends shall not
be cumulative. Dividends paid in a
-2-
<PAGE>
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, Series B preferred stock and Series C preferred
stock of such other person, with rights, preferences, privileges and
restrictions substantially the same as the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, and the number of shares of
common stock, Series A preferred stock, Series B preferred stock and Series C
preferred stock distributed are in substantially the same relative
proportions as this corporation's then outstanding shares of Common Stock,
Series A Preferred Stock, Series B Preferred Stock and Series C 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, (X) all such Series B Preferred Stock shall be
distributed to the Series B Preferred Stock, and (Y) all such Series C
Preferred Stock shall be distributed to the Series C Preferred Stock and (ii)
in all other cases the holders of the Series A Preferred Stock, Series B
Preferred Stock and Series C 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, Series B
Preferred Stock and Series C 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, Series B Preferred Stock and Series C
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, Series B Preferred Stock
and Series C 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, $4.45 for each outstanding share of Series B Preferred
Stock and $8.04 for each outstanding share of Series C Preferred Stock
(hereafter referred to as the "Original Series A Issue Price", "Original
Series B Issue Price," and "Original Series C 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, Series B Preferred Stock
and Series C 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, Series B Preferred Stock and Series C 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 come into
-3-
<PAGE>
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.
3. CONVERSION. The holders of the Series A Preferred
Stock, Series B Preferred Stock and Series C 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, each share of Series B Preferred Stock and each
share of Series C 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, Series B Preferred Stock or Series C 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, (B) the Original Series B Issue Price for each share of
Series B Preferred Stock and (C) the Original Series C Issue Price for each
share of Series C 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, the
initial Conversion Price per share for shares of Series B Preferred Stock
shall be the Original Series B Issue Price and the initial Conversion Price
per share for shares of Series C Preferred Stock shall be the Original Series
C Issue Price; provided, however, that the Conversion Price for the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall
be subject to adjustment as set forth in subsection 3(c).
ii) Each share of Series A Preferred Stock,
each share of Series B Preferred Stock and each share of Series C 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,
Series B Preferred Stock and Series C 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 is 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 Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock.
(b) MECHANICS OF CONVERSION. Before any holder of
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock shall be entitled to convert the same into shares 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
-4-
<PAGE>
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, Series B Preferred
Stock and/or Series C 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,
Series B Preferred Stock and/or Series C 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, Series B
Preferred Stock and/or Series C Preferred Stock shall not be deemed to have
converted such Series A Preferred Stock, SeriesB Preferred Stock and/or
Series C 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, Series B Preferred
Stock and Series C Preferred Stock shall be subject to adjustment from time
to time as follows:
i) A. Except as otherwise set forth in subsection
3(c)(i)(F) with respect to the Series C Preferred Stock, upon each issuance
by the corporation of any Additional Stock (as defined below), after the date
hereof, 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, Series B Preferred Stock or Series C Preferred
Stock shall be made in an
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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 date upon which any shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock were first issued (the
"Purchase Date" with respect to such series)) 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
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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, Series B Preferred
Stock and/or Series C 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, Series B Preferred Stock and/or Series C 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).
F. Upon each issuance by the corporation of any
Additional Stock (as defined below), after the Purchase Date for the Series C
Preferred Stock, without consideration or for a consideration per share less
than the Conversion Price for such Series C Preferred Stock in effect
immediately prior to the issuance of such Additional Stock, the Conversion
Price for such Series C Preferred Stock in effect immediately prior to each
such issuance shall forthwith (except as otherwise provided in this clause
(i)) be adjusted to a price (calculated to the nearest cent) equal to the
consideration per share for which such Additional Stock is issued; provided,
however, that at such time as such Conversion Price has been adjusted
pursuant to this subsection 3(c)(i)(F) to a price per share equal to the
Original Series B Issue Price (as adjusted for stock splits, stock dividends,
combinations and other recapitalizations) any further adjustment to such
Conversion Price shall be made pursuant to subsection 3(c)(i)(A) and the
provisions of this subsection 3(c)(i)(F) shall no longer apply. If such
Additional Stock is issued for no consideration, then the consideration per
share shall be deemed to be $0.001.
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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 applicable Purchase Date other than
A. Common Stock issued pursuant to a transaction
described in subsection 3(c)(iii) hereof, or
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, Series B Preferred Stock or Series C 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, Series B Preferred Stock and Series C 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, or
F. shares of Common Stock or Preferred Stock issued
or issuable (I) in a private placement pursuant to Rule 144A of the Securities
Act of 1933, as amended, or (II) upon exercise of warrants or rights granted to
purchasers in connection with such placement.
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, Series
B Preferred Stock and Series C 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).
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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,
Series B Preferred Stock and Series C 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.
(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, Series B Preferred Stock and Series C Preferred
Stock shall thereafter be entitled to receive upon conversion of the Series A
Preferred Stock, Series B Preferred Stock and Series C 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, Series B Preferred Stock and Series C 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, Series
B Preferred Stock and Series C 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,
Series B Preferred Stock and Series C 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, Series B Preferred Stock and/or
Series C 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, Series B
Preferred Stock and/or Series C 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, Series B
Preferred Stock and/or Series C 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
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furnish to each holder of Series A Preferred Stock, Series B Preferred Stock
and/or Series C 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, Series B Preferred Stock
or Series C 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,
Series B Preferred Stock or Series C Preferred Stock.
(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, Series B
Preferred Stock and Series C 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,
Series B Preferred Stock and Series C 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, Series
B Preferred Stock and Series C 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, Series B Preferred Stock and Series C 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 3 to be given to the holders of shares of Series A Preferred Stock,
Series B Preferred Stock or Series C 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,
the holder of each share of Series B Preferred Stock and the holder of each
share of Series C Preferred Stock shall have the right to one vote for each
share of Common Stock into which such share of Series A Preferred Stock, such
share of Series B Preferred Stock and/or such share of Series C 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
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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 "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"); (iii) so long as any shares of Series
C Preferred are outstanding, the holders of the then outstanding shares of
Series C Preferred Stock, by a majority vote voting as a separate class,
shall be entitled to elect one (1) director of the corporation (the "Series C
Director"); and (iv) 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 Series C Preferred
Stock then outstanding shall constitute a quorum of the Series C Preferred
Stock for the election or nomination of the Series C 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
solely by the holders of the Series C Preferred Stock shall be filled only by
vote of the Series C 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
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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
Series C 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 C 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.
5. PROTECTIVE PROVISIONS.
(a) SERIES C 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 C 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 C 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 C 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 and Series B Preferred Stock are altered; or
ii) authorize additional shares of Series C Preferred
Stock; or
iii) 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)); or
iv) take any action that would alter the right of the
holders of the then outstanding shares of Series C Preferred Stock to elect
one (1) director of the corporation pursuant to subitem (iii) of Article
IV(B)4(b); or
v) amend this Article IV(B)5(a).
(b) 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:
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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; or
ii) authorize additional shares of Series B Preferred
Stock; or
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)(b)(i), the corporation shall not be prohibited
from amending Article IV(B)(3)(c)); or
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(b).
(c) 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, Series B Preferred Stock and/or Series C
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 66-2/3% or more of the then outstanding shares of
Series A Preferred Stock, Series B Preferred Stock and Series C 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; or
ii) create any new class or series of stock or any
other securities convertible into equity securities of the corporation having
any preference over, or being on a parity with, the Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock with respect to voting,
dividends or upon liquidation; or
iii) authorize additional shares of Preferred Stock.
6. STATUS OF CONVERTED STOCK. In the event any shares of Series
A Preferred Stock, Series B Preferred Stock or Series C 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.
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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 Article IV(B)2 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.
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
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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.
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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IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
executed as of this 2nd day of March, 1999.
RHYTHMS NETCONNECTIONS INC.
By:
----------------------------
Catherine Hapka, President
[SIGNATURE PAGE TO CERTIFICATE OF AMENDMENT]
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EXHIBIT B
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AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
B-1
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RHYTHMS NETCONNECTIONS INC.
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
March 3, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
1. Registration Rights.. . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 REQUEST FOR REGISTRATION.. . . . . . . . . . . . . . . . . . . . . 2
1.3 COMPANY REGISTRATION.. . . . . . . . . . . . . . . . . . . . . . . 6
1.4 OBLIGATIONS OF THE COMPANY.. . . . . . . . . . . . . . . . . . . . 6
1.5 FURNISH INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 7
1.6 EXPENSES OF DEMAND REGISTRATION. . . . . . . . . . . . . . . . . . 7
1.7 EXPENSES OF COMPANY REGISTRATION.. . . . . . . . . . . . . . . . . 8
1.8 UNDERWRITING REQUIREMENTS. . . . . . . . . . . . . . . . . . . . . 8
1.9 DELAY OF REGISTRATION. . . . . . . . . . . . . . . . . . . . . . . 9
1.10 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. . . . . . . . . . .11
1.12 FORM S-3 REGISTRATION. . . . . . . . . . . . . . . . . . . . . . .11
1.13 ASSIGNMENT OF REGISTRATION RIGHTS. . . . . . . . . . . . . . . . .12
1.14 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. . . . . . . . . . .13
1.15 "MARKET STAND-OFF" AGREEMENT.. . . . . . . . . . . . . . . . . . .13
1.16 TERMINATION OF REGISTRATION RIGHTS.. . . . . . . . . . . . . . . .14
2. COVENANTS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . .14
2.1 DELIVERY OF FINANCIAL STATEMENTS.. . . . . . . . . . . . . . . . .14
2.2 INSPECTION.. . . . . . . . . . . . . . . . . . . . . . . . . . . .14
2.3 TERMINATION OF INFORMATION AND INSPECTION COVENANTS. . . . . . . .15
2.4 RIGHT OF FIRST OFFER.. . . . . . . . . . . . . . . . . . . . . . .15
2.5 EMPLOYEE STOCK POOL. . . . . . . . . . . . . . . . . . . . . . . .16
2.6 EXCLUDED INVESTMENTS.. . . . . . . . . . . . . . . . . . . . . . .16
3. COVENANTS OF THE INVESTORS. . . . . . . . . . . . . . . . . . . . . . .17
3.1 CERTAIN CORPORATE TRANSACTIONS.. . . . . . . . . . . . . . . . . .17
3.2 STANDSTILL.. . . . . . . . . . . . . . . . . . . . . . . . . . . .17
3.3 ADDITIONAL PREFERRED INVESTORS.. . . . . . . . . . . . . . . . . .17
4. CORPORATE OPPORTUNITY MATTERS.. . . . . . . . . . . . . . . . . . . . .19
5. MISCELLANEOUS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.1 SUCCESSORS AND ASSIGNS.. . . . . . . . . . . . . . . . . . . . . .19
5.2 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.3 COUNTERPARTS.. . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.4 TITLES AND SUBTITLES.. . . . . . . . . . . . . . . . . . . . . . .19
5.5 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.6 EXPENSES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.7 AMENDMENTS AND WAIVERS.. . . . . . . . . . . . . . . . . . . . . .20
5.8 SEVERABILITY.. . . . . . . . . . . . . . . . . . . . . . . . . . .20
5.9 AGGREGATION OF STOCK.. . . . . . . . . . . . . . . . . . . . . . .20
5.10 ENTIRE AGREEMENT; AMENDMENT; WAIVER. . . . . . . . . . . . . . . .20
</TABLE>
(i)
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AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT ("Agreement")
is made as of the 3rd day of March, 1999, 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 one or more of the Investors are parties
to the Series C Preferred Stock and Warrant 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/or Series B Preferred Stock and have
entered into an Amended and Restated Investors' Rights Agreement with the
Company dated March 12, 1998 (the "Existing Rights Agreement"); and
WHEREAS, in order to induce the Company to enter into the Preferred
Stock Agreement and to induce one or more 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 Existing Rights Agreement so that this
Agreement will supersede and replace the Existing Rights Agreement in its
entirety and 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 terms "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, Series B Preferred
Stock or Series C 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
<PAGE>
Series A Preferred Stock, Series B Preferred Stock, Series C 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(e), 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 5.5.
(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
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)
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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(f), 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 5.5.
(c) 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 MCI Worldcom Venture Fund, Inc. or any assignee of the rights of MCI
Worldcom Venture Fund, Inc. pursuant to Section 1.13 ("MCI WorldCom") 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 MCI WorldCom (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(g), 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 MCI WorldCom
and the Holders request to be registered within twenty (20) days of the
mailing of such notice by the Company in accordance with paragraph 5.5.
(d) Subject to the limitations set forth in Section 2.6 hereof, in the
event that, subsequent to expiration of the Exclusion Period (as defined in
Section 2.6), an Excluded Investor (as defined in Section 2.6) acquires
greater than five percent (5%) of the Common Stock of the Company (on a fully
diluted, as converted to Common Stock basis) (the "Excluded Investment"),
then if the Company shall receive a written request from MCI WorldCom that
the Company file a registration statement under the Act covering the
registration of all of the Registrable Securities then held by MCI WorldCom,
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(h), effect as
soon as practicable, and in any event shall use its best efforts to effect
within the later to occur of (i) sixty (60) days of the receipt of such
request or (ii) one hundred eighty (180) days of the closing of the Excluded
Investment, the registration under the Act of all Registrable Securities
which MCI WorldCom and the Holders request to be registered within twenty
(20) days of the mailing of such notice by the Company in accordance with
paragraph 5.5.
(e) 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
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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.
(f) 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
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.
(g) If MCI WorldCom intends to distribute the Registrable Securities
covered by its request under subsection 1.2(c) 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(c). The underwriter
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will be selected by MCI WorldCom and shall be reasonably acceptable to the
Company. In such event, the right of any other Holder to include its
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 MCI WorldCom and such Holder) to the extent provided
herein. MCI WorldCom 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 MCI WorldCom. 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 MCI WorldCom 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.
(h) If MCI WorldCom intends to distribute the Registrable Securities
covered by its request under subsection 1.2(d) 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(d). The underwriter will be selected by
MCI WorldCom and shall be reasonably acceptable to the Company. In such
event, the right of any other Holder to include its 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 MCI WorldCom and
such Holder) to the extent provided herein. MCI WorldCom 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 MCI WorldCom. 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 MCI WorldCom 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.
(i) The Company is obligated to effect only (i) two (2) such
registrations pursuant to subsection 1.2(a), (ii) one (1) such registration
pursuant to subsection 1.2(b), (iii) one (1) such registration pursuant to
subsection 1.2(c) and (iv) one (1) such registration pursuant to subsection
1.2(d).
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(j) Notwithstanding the foregoing, if the Company shall furnish to
either Holders requesting a registration statement pursuant to this Section
1.2, to Enron or to MCI WorldCom, 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 one hundred twenty (120) days after receipt of the
request of the Initiating Holders, Enron or MCI WorldCom, 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 5.5, the Company shall, subject to (i) the provisions
of Section 1.8 and (ii) any senior "piggy-back" registration rights granted
by the Company pursuant to that certain Warrant Registration Rights Agreement
dated as of May 5, 1998 between the Company and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Donaldson Lufkin & Jenrette
Securities Corporation or pursuant to that certain Warrant to Purchase Shares
of Common Stock granted to Sun Financial Group, Inc., dated as of May 19,
1998, cause to be registered under the Act all of the Registrable Securities
that 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:
(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
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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.
(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 subsections 1.5(a) or 1.8, 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), 1.2(b), 1.2(c) or 1.2(d) 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(i).
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 (a), by Enron if under
subsection 1.2(b) or by MCI WorldCom if under subsections 1.2(c) or 1.2(d))
("Holders' Counsel") shall be borne by the Company; provided, however, that
the Company
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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), of Enron if under
subsection 1.2(b), or of MCI WorldCom if under subsections 1.2(c) or 1.2(d)
(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), of Enron if under
subsection 1.2(b), or of MCI WorldCom if under subsections 1.2(c) or 1.2(d)
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, Enron or MCI WorldCom, as applicable, have learned
of a material adverse change in the condition, business, or prospects of the
Company from that known to the Holders, Enron or MCI WorldCom, 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,
Enron or MCI WorldCom, 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.
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 immediately 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
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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 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 a Holder requesting
indemnification hereunder or any such 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
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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 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.
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(e) Notwithstanding the foregoing, to the extent that any
customary and reasonable 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:
(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
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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; or (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.
(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 2,000,000 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
1,500,000 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 subsections 1.2(c) or 1.2(d)
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may be assigned (but only with all related obligations) by MCI WorldCom to a
transferee or assignee of such securities who, after such assignment or
transfer, holds at least 1,250,000 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 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 any of the dates set forth
in subsections 1.2(a), 1.2(b) or 1.2(c) 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
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(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 holding at least 1,000,000 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
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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, Series B Preferred Stock or Series C Preferred
Stock issued pursuant to (A) that certain Series A Preferred Stock Purchase
Agreement dated July 3, 1997 (the "Series A Agreement"), (B) that certain
Series B Preferred Stock Purchase Agreement dated March 12, 1998 (the "Series
B Agreement") or (C) 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, (B) 10% of the Series B Preferred Stock (or the common
stock issued upon conversion thereof) issued pursuant to the Series B
Agreement or (C) 10% of the Series C 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, Series B Preferred
Stock and/or Series C 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.
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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, Series B Preferred Stock and/or Series C 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, Series B Preferred Stock and/or Series C 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, (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) to the
issuance of securities pursuant to the conversion or exercise of convertible
or exercisable securities, (iv) to 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) to 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.
2.6 EXCLUDED INVESTMENTS. The Company agrees that, for a period
of one year from the date hereof (the "Exclusion Period"), it shall not issue
any of its equity securities in a private offering to any of the following
entities (each an "Excluded Investor"): AT&T Corporation, Sprint
Corporation, Qwest Communications International, Inc., Level 3
Communications, Inc., WilTel, LLC, Frontier Corporation, British
Telecommunications plc, GTE Corp. and the Regional Bell Operating Companies.
Notwithstanding anything else in this
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Agreement, if within thirty (30) days (unless such period is extended by the
mutual agreement of the Company and MCI WorldCom, Inc.) of the effective date
of that certain Framework Agreement dated as of the date hereof between the
Company and MCI WorldCom, Inc. (the "Framework Agreement"), MCI WorldCom,
Inc. has not executed any of the Carrier Services Agreement or the Network
Services Agreement or the OSS Licensing Agreement (as contemplated in the
Framework Agreement), the Exclusion Period shall terminate and the Company
thereafter shall be able to issue its equity securities to any of the
Excluded Investors and MCI WorldCom shall forfeit its demand registration
right granted pursuant to subsection 1.2(d) hereof.
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, Series B
Preferred Stock and Series C 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 Preferred Stock
Agreement, so long as an Investor has registration rights under this
Agreement, such 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. CORPORATE OPPORTUNITY MATTERS. Except as expressly provided in
this Section 4, the Investors other than Enron (the "Rhythms Stockholders"
for purposes of this Section 4.1) 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
17
<PAGE>
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 Stockholdersor 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.
4.1 Except as expressly provided in this Section 4, the
Investors other than MCI WorldCom (the "Rhythms Stockholders" for purposes of
this Section 4.2) and the Company acknowledge and agree that neither MCI
WorldCom nor any of its Affiliates shall be expressly or implicitly
restricted or proscribed pursuant to this Agreement, the relationship that
exists between MCI WorldCom and the Rhythms Stockholders, the relationship
between MCI WorldCom 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 MCI WorldCom and the Rhythms Stockholders, the
relationship between MCI WorldCom and the Company or otherwise, in any
business venture or business opportunity of MCI WorldCom or any of its
Affiliates, and MCI WorldCom 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 MCI WorldCom 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 owe by MCI WorldCom or its Affiliates to the Rhythms
Stockholders or the Company for MCI WorldCom 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.
18
<PAGE>
4.2 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 or MCI
WorldCom), shall only mean persons or entities controlled by the Company
(rather than persons or entities under common control with the Company), and
when used to refer to Affiliates of Enron or MCI WorldCom, 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.
19
<PAGE>
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 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]
20
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
RHYTHMS NETCONNECTIONS INC.
By:
-------------------------------
Catherine Hapka, President
Address: 6933 South Revere Parkway
Englewood, CO 80112-3931
INVESTOR:
MCI WORLDCOM VENTURE FUND, INC.
By:
-------------------------------
Its: /s/ President
------------------------------
Address: 1801 Pennsylvania Avenue, N.W.
-------------------------------
Washington, DC 20006
-------------------------------
ENRON COMMUNICATIONS GROUP, INC.
By:
-------------------------------
Its: Chairman
------------------------------
Address: 210 Southwest Morrison Street,
Suite 400,
Portland, Oregon 97204
ENTERPRISE PARTNERS III, L.P.
By:
-------------------------------
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 III ASSOCIATES, L.P.
By:
------------------------------
Its: General Partner
------------------------------
Address: 7979 Ivanhoe, Suite 550
La Jolla, CA 92037
Attn: William Stensrud
ENTERPRISE PARTNERS IV, L.P.
By:
-----------------------------
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:
-----------------------
Its: General Partner
-----------------------
Address: 3000 Sand Hill Road
Bldg. 1, Suite 260
Menlo Park, CA 94025
Attn: John Walecka
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
BRENTWOOD AFFILIATES FUND, L.P.
By: BRENTWOOD VII VENTURES, L.P.
Its General Partner
By:
------------------------------
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:
------------------------------
Its: General Partner
-----------------------------
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Kevin Compton
KPCB VIII FOUNDERS FUND
By:
------------------------------
Its: General Partner
-----------------------------
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Kevin Compton
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
KPCB INFORMATION SCIENCES ZAIBATSU
FUND II
By:
------------------------------
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:
------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Attn: Keith Geeslin
THE SPROUT CEO FUND, L.P.
By: DLJ Capital Corporation
Its General Partner
By:
------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Attn: Keith Geeslin
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
DLJ CAPITAL CORPORATION
By:
-------------------------------
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:
------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Attn: Keith Geeslin
EPLEY INVESTORS II, LLC
By:
------------------------------
Its:
-----------------------------
Address:
-----------------------------
-----------------------------
------------------------------
Catherine Hapka
Address: 6933 South Revere Parkway
Englewood, CO 80112-3931
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
BLUMENFELD & COHEN
By:
------------------------------
Its:
-----------------------------
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
---------------------------------
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
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
---------------------------------
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
---------------------------------
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
---------------------------------
Jeff Blumenfeld
Address: 1615 M Street, N.W., Suite 700
Washington, D.C. 20036
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
BROBECK, PHLEGER & HARRISON LLP
By:
------------------------------
Its:
-----------------------------
Address: Spear Street Tower
One Market Street
San Francisco, California 94104
---------------------------------
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
MCI Worldcom Venture Fund, Inc.
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>
EXHIBIT C
VOTING TRUST AGREEMENT
C-1
<PAGE>
VOTING TRUST AGREEMENT
THIS VOTING TRUST AGREEMENT (this "Agreement"), dated as of March
3, 1999, by and between MCI WorldCom Venture Fund, 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 C Preferred Stock, $0.001 par value ("Series C 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 limited purpose of voting in elections on certain matters as described
herein all of the shares of Series C 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 limited purpose of voting on
certain 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
the 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.
<PAGE>
(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 C PREFERRED. Only with respect
to a proposal for a Corporate Transaction (defined below), and only to the
extent such Corporate Transaction is submitted for a stockholder vote, in
which the Series C Preferred Stock has class or series voting rights (a
"Stockholder Proposal"), the Trustee shall vote the Trustee Shares for or
against such Stockholder Proposal, in the same proportion as a majority of
the then outstanding shares of Series A Preferred Stock and Series B
Preferred Stock, voting as a single class (the "Series A and B 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 or (B) the
issuance of equity securities in connection with a corporate partnering or
similar transaction.
(ii) OTHER STOCKHOLDER MATTERS. With respect to any
other proposal submitted for stockholder vote, the Trustee shall vote the
Trustee Shares in the manner directed (whether for, against or to abstain) by
the Beneficiary hereunder for whom the Trustee Shares are held; including,
without limitation, NOTWITHSTANDING subsection (i) above, with respect to any
proposal submitted for stockholder vote in connection with the following:
1. any action that would materially and adversely
alter the rights, preferences or privileges of the
Series C 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 or B
Preferred Stock are altered; or
2. authorization of additional shares of Series C
Preferred Stock; or
3. any action that would alter the right of the
holders of the then outstanding shares of Series C
Preferred Stock to elect one (1) director of the
corporation pursuant to Article IV(B)4(b)(iii) of
the Restated Certificate of Incorporation; or
4. amendment of Article IV(B)5(a) of the Restated
Certificate of Incorporation.
2
<PAGE>
(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 the Trustee and any other written
material addressing such proposal provided to stockholders or to the 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 the
Trustee. For all matters covered by Section 3(a)(ii) above, the Trustee
shall request instructions from such holders as soon as reasonably 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 the Trustee on the day prior to the deadline for
voting, the percentage of the Series A Preferred Stock and Series B 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 Series B Preferred Stock, voting as a single
class, and in the same percentage for, against and abstain as the vote of the
Series A Preferred Stock and Series B Preferred Stock voting as a single
class.
(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) THE 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.
3
<PAGE>
(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 any Trustee, a successor shall be appointed by the
Beneficiary, which successor shall be 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, Series B
Preferred Stock and Series C 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 the 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 the
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) THE 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
4
<PAGE>
(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 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 9 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 3, 2009; (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
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<PAGE>
result of an Excluded Merger or Excluded Sale). Notwithstanding the
foregoing, this Agreement may (before a Qualified Public Offering has
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 3, 2009). 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 the 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. 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 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.
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9. INSPECTION OF RECORDS. The Trustee shall keep at 6933 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.
10. 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.
11. 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, (iii) the third business day after sending by first class
United States mail, postage prepaid, (iv) the time of successful 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.
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<PAGE>
(y) If to the Trustee to: Rhythms NetConnections Inc.
6933 South Revere Parkway
Englewood, CO 80112-3931
FAX No.: (303) 476-4201
(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. 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 11(f) and understands its
effect.
(g) COMPENSATION OF THE TRUSTEE; PAYMENT OF COSTS. The Trustee
shall not be entitled to any compensation for its services as the 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
11(k). The Trustee will look solely to the Company for reimbursement of any
amounts incurred or expended by it in connection with its duties under this
Agreement, except as provided in Sections 5(f) and 11(k), and expressly
waives any rights which it might otherwise have to charge the trust corpus
for any costs, fees or expenses related to this Agreement, or to withhold any
amounts from or set off any amounts against the shares received by it 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 a majority in interest of the Shares and a Series A and B
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.
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<PAGE>
(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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<PAGE>
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:
---------------------------------
Title: CFO
------------------------------
"BENEFICIARY"
MCI WORLDCOM VENTURE FUND, INC.
By:
---------------------------------
Title: President
------------------------------
AGREED TO:
"COMPANY"
RHYTHMS NETCONNECTIONS INC.
By:
---------------------------------
Title:
------------------------------
[SIGNATURE PAGE FOR VOTING TRUST AGREEMENT]
10
<PAGE>
Schedule A
BENEFICIARY
MCI WORLDCOM VENTURE FUND, INC.
1801 Pennsylvania Avenue, N.W.
Washington, DC 20006
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<PAGE>
Exhibit A
VOTING TRUST CERTIFICATE
------------------------
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<PAGE>
RHYTHMS NETCONNECTIONS INC.
A Delaware Corporation
Voting Trust Certificate
Certificate
No. ________ 3,731,410 shares of Series C Preferred Stock
This certifies that MCI WorldCom Venture Fund, Inc. (or its
predecessor in interest) has deposited for transfer in trust to the Trustee
of the Rhythms NetConnections Inc. Voting Trust Three Million Seven Hundred
Thirty-One Thousand Four Hundred Ten (3,731,410) shares of Series C Preferred
Stock, par value $0.001 per share, of Rhythms NetConnections Inc., a Delaware
corporation, under a Voting Trust Agreement, dated as of ________, 1999 by
and between MCI WorldCom Venture Fund, 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 ___ day of ________, 1999.
RHYTHMS NETCONNECTIONS INC., TRUSTEE
By:____________________________________
Title:_________________________________
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<PAGE>
EXHIBIT D
FORM OF WARRANT
D-1
<PAGE>
THE TRANSFER OF THIS WARRANT IS SUBJECT TO
RESTRICTIONS CONTAINED HEREIN. THIS WARRANT
HAS BEEN ISSUED IN RELIANCE UPON THE
REPRESENTATION OF THE HOLDER THAT IT HAS BEEN
ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH
A VIEW TOWARD THE RESALE OR OTHER DISTRIBUTION
THEREOF. NEITHER THIS WARRANT NOR THE SHARES
ISSUABLE UPON THE EXERCISE OF THIS WARRANT
HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR ANY STATE SECURITIES LAWS.
RHYTHMS NETCONNECTIONS INC.
Common Stock Purchase Warrant
To Subscribe for and Purchase March 3, 1999
600,000 Shares of Common Stock of
Rhythms NetConnections Inc.
THIS CERTIFIES that, for the purchase price of $8.04 per share, MCI
WorldCom Venture Fund, Inc. or its registered assigns (the "Holder") is entitled
to subscribe for and purchase from Rhythms NetConnections Inc., a Delaware
corporation (hereinafter called the "Company"), up to 600,000 shares (subject to
adjustment as hereinafter provided) of fully paid and non-assessable Common
Stock of the Company (the "Common Stock"), subject to the provisions and upon
the terms and conditions hereinafter set forth at the price of $8.04 per share
(such price as from time to time to be adjusted as provided herein is called the
"Warrant Price"), at or prior to 5:00 p.m. Pacific time on March 3, 2004 (the
"Exercise Period).
This Warrant and any Warrant subsequently issued upon exchange or
transfer hereof are hereinafter collectively called the "Warrant."
Section 1. EXERCISE OF WARRANT. The rights represented by this
Warrant may be exercised by the Holder, in whole or in part (but not as to
fractional shares) at any time or from time to time during the Exercise Period
by the completion of the purchase form attached hereto and by the surrender of
this Warrant (properly endorsed) at the office of the Company as it may
designate by notice in writing to the Holder hereof at the address of the Holder
appearing on the books of the Company, and by payment to the Company of the
Warrant Price in cash or by certified or official bank check, for each share
being purchased. (In addition, see Section 2 below for net issuance
provisions.) In the event of any exercise of the rights represented by this
Warrant, a certificate or certificates for the shares of Common Stock so
purchased, registered in the name of the Holder, or its nominee or other party
designated in the purchase form by the Holder hereof, shall be delivered to the
Holder within thirty (30) business days after the date on which the rights
represented by this Warrant shall have been so exercised; and, unless this
<PAGE>
Warrant has expired or has been exercised in full, a new Warrant representing
the number of shares (except a remaining fractional share), if any, with
respect to which this Warrant shall not then have been exercised shall also
be issued to the Holder within such time. The person in whose name any
certificate for shares of Common Stock is issued upon exercise of this
Warrant shall for all purposes be deemed to have become the holder of record
of such shares on the date on which this Warrant was surrendered and payment
of the Warrant Price is made, except that, if the date of such surrender and
payment is a date on which the stock transfer books of the Company are
closed, such person shall be deemed to have become the holder of such shares
at the close of business on the next succeeding date on which the stock
transfer books are open. No fractional shares shall be issued upon exercise
of this Warrant and no payment or adjustment shal be made upon any exercise
on account of any cash dividends on the Common Stock issued upon such
exercise. If any fractional interest in a share of Common Stock would,
except for the provision of this Section 1, be delivered upon such exercise,
the Company, in lieu of delivery of a fractional share thereof, shall pay to
the Holder an amount in cash equal to the current market price of such
fractional share as determined in good faith by the Board of Directors of the
Company.
Section 2. NET ISSUANCE.
(a) RIGHT TO CONVERT. In addition to and without limiting the
rights of the Holder under the terms of this Warrant, if the fair market
value of a share of Common Stock is greater than the Warrant Price, in lieu
of exercising this Warrant for cash the Holder shall have the right to
convert this Warrant or any portion thereof (the "Conversion Right") into
shares of Common Stock equal to the value of this Warrant or the portion
thereof being canceled as provided in this Section 2 at any time or from time
to time during the Exercise Period. Upon exercise of the Conversion Right
with respect to a particular number of shares subject to the Warrant (the
"Converted Warrant Shares"), the Company shall deliver to the Holder (without
payment by the Holder of any exercise price or any cash or other
consideration) that number of shares of fully paid and nonassessable Common
Stock computed using the following formula:
X = Y (A - B)
A
Where X = the number of shares of Common Stock to be delivered to the
holder
Y = the number of Converted Warrant Shares
A = the fair market value of one share of the Company's
Common Stock on the Conversion Date (as defined below)
B = the per share exercise price of the Warrant (as
adjusted to the Conversion Date)
The Conversion Right may only be exercised with respect to a whole number of
shares subject to the Warrant. No fractional shares shall be issuable upon
exercise of the Conversion Right, and if the number of shares to be issued
determined in accordance with the foregoing formula is other than a whole
number, the Company shall pay to the Holder an amount in cash equal to the
fair
2
<PAGE>
market value of the resulting fractional share on the Conversion Date (as
defined below). Shares issued pursuant to the Conversion Right shall be
treated as if they were issued upon the exercise of the Warrant.
(b) METHOD OF EXERCISE. The Conversion Right may be exercised by
the Holder by the surrender of the Warrant at the principal office of the
Company together with a written statement specifying that the Holder thereby
intends to exercise the Conversion Right and indicating the total number of
shares under the Warrant that the Holder is exercising through the Conversion
Right. Such conversion shall be effective upon receipt by the Company of the
Warrant together with the aforesaid written statement, or on such later date
as is specified therein (the "Conversion Date"). Certificates for the shares
issuable upon exercise of the Conversion Right and, if applicable, a new
warrant evidencing the balance of the shares remaining subject to the
Warrant, shall be issued as of the Conversion Date and shall be delivered to
the Holder promptly following the Conversion Date.
(c) DETERMINATION OF FAIR MARKET VALUE. For purposes of this
Section 2, fair market value of a share of Common Stock on the Conversion
Date shall mean:
(i) If traded on a stock exchange, the fair market value of
the Common Stock shall be deemed to be the average of the closing selling
prices of the Common Stock on the stock exchange determined by the Board to
be the primary market for the Common Stock over the ten (10) trading day
period (or such shorter period immediately following the closing of an
initial public offering) ending on the date prior to the Conversion Date, as
such prices are officially quoted in the composite tape of transactions on
such exchange;
(ii) If traded over-the-counter, the fair market value of the
Common Stock shall be deemed to be the average of the closing bid prices (or,
if such information is available, the closing selling prices) of the Common
Stock over the ten (10) trading day period (or such shorter period
immediately following the closing of an initial public offering) ending on
the date prior to the Conversion Date, as such prices are reported by the
National Association of Securities Dealers through its NASDAQ system, any
successor system or any exchange on which it is listed, whichever is
applicable; or
(iii) If there is no public market for the Common Stock, then
the fair market value shall be determined by mutual agreement of the holder
of the Warrant and the Company, and if the holder and the Company are unable
to so agree, by an investment banker of national reputation selected by the
Company and reasonably acceptable to the holder of the Warrant.
Section 3. STOCK SPLITS, CONSOLIDATION, MERGER AND SALE. In the
event that before the issuance of the shares of Common Stock into which this
Warrant may be exercised the outstanding shares of Common Stock shall be
split, combined or consolidated, by dividend, reclassification or otherwise,
into a greater or lesser number of shares of Common Stock or any other class
or classes of stock, as appropriate, the Warrant Price in effect immediately
prior to such combination or consolidation and the number of shares
purchasable under this Warrant shall, concurrently with the effectiveness of
such combination or consolidation, be proportionately adjusted. If there
shall be effected any consolidation or merger of the Company
3
<PAGE>
with another corporation, or a sale of all or substantially all of the
Company's assets to another corporation, and if the holders of Common Stock
shall be entitled pursuant to the terms of any such transaction to receive
stock, securities or assets with respect to or in exchange for Common Stock,
then, as a condition of such consolidation, merger or sale, lawful and
adequate provisions shall be made whereby the Holder of this Warrant shall
thereafter have the right to receive, upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore receivable upon the exercise of such Warrant, such
shares of stock, securities or assets as may be issuable or payable with
respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such Common Stock immediately
theretofore so receivable had such consolidation, merger or sale not taken
place, and in any such case appropriate provisions shall be made with respect
to the rights and interests of the Holder to the end that the provisions
hereof shall thereafter be applicable, as nearly as may be, in relation to
any shares of stock, securities or assets thereafter deliverable upon the
exercise of this Warrant.
(a) STOCK TO BE RESERVED. The Company will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose
of issue upon the exercise of this Warrant as herein provided, such number of
shares of Common Stock as shall then be issuable upon the exercise of this
Warrant.
(b) ISSUE TAX. The issuance of certificates for shares of Common
Stock upon exercise of this Warrant shall be made without charge to the
Holders of this Warrant for any issuance tax in respect thereof provided that
the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the Holder of this Warrant.
(c) CLOSING OF BOOKS. The Company will at no time close its
transfer books against the transfer of the shares of Common Stock issued or
issuable upon the exercise of this Warrant in any manner which interferes
with the timely exercise of this Warrant.
Section 4. NOTICES OF RECORD DATES. In the event of:
(a) any taking by the Company 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 or other distribution (other than cash
dividends out of earned surplus), or 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, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or
any transfer of all or substantially all the assets of the Company to or
consolidation or merger of the Company with or into any other corporation, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then and in each such event the Company will give notice to the Holder of
this Warrant specifying (i) the date on which any such record is to be taken
for the purpose of such dividend,
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<PAGE>
distribution or right and stating the amount and character of such dividend,
distribution or right, and (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, and the time, if any
is to be fixed, as of which the holders of record of Common Stock will be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation
or winding-up. Such notice shall be given at least ten (10) days and not
more than ninety (90) days prior to the date therein specified, and such
notice shall state that the action in question or the record date is subject
to the effectiveness of a registration statement under the Securities Act of
1933, as amended (the "Securities Act") or to a favorable vote of
shareholders, if either is required.
Section 5. NO SHAREHOLDER RIGHTS OR LIABILITIES. This Warrant
shall not entitle the Holder hereof to any voting rights or other rights as a
shareholder of the Company. No provision hereof, in the absence of
affirmative action by the Holder hereof to purchase shares of Common Stock,
and no mere enumeration hereon of the rights or privileges of the Holder
hereof, shall give rise to any liability of such Holder for the Warrant Price
or as a shareholder of the Company, whether such liability is asserted by the
Company or by creditors of the Company.
Section 6. REPRESENTATIONS OF HOLDER. The Holder hereby represents
and acknowledges to the Company that:
(a) this Warrant, the Common Stock issuable upon exercise of this
Warrant and any securities issued with respect to any of them by way of a
stock dividend or stock split or in connection with a recapitalization,
merger, consolidation or other reorganization will be "restricted securities"
as such term is used in the rules and regulations under the Securities Act
and that such securities have not been and may not be registered under the
Securities Act or any state securities law, and that such securities must be
held indefinitely unless registration is effected or transfer can be made
pursuant to appropriate exemptions;
(b) the Holder has read, and fully understands, the terms of this
Warrant set forth on its face and the attachments hereto, including the
restrictions on transfer contained herein;
(c) the Holder is purchasing for investment for its own account
and not with a view to or for sale in connection with any distribution of
this Warrant or the Common Stock of the Company issuable upon exercise of
this Warrant and it has no intention of selling such securities in a public
distribution in violation of the federal securities laws or any applicable
state securities laws; provided that nothing contained herein will prevent
Holder from transferring such securities in compliance with the terms of this
Warrant and the applicable federal and state securities laws;
(d) the Holder is an "accredited investor" within the meaning of
paragraph (a) of Rule 501 of Regulation D promulgated by the Securities and
Exchange Commission and an "excluded purchaser" within the meaning of Section
25102(f) of the California Corporate Securities Law of 1968; and
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<PAGE>
(e) the Company may affix the following legend (in addition to any
other legend(s), if any, required by applicable state corporate and/or
securities laws) to certificates for shares of Common Stock (or other
securities) issued upon exercise of this Warrant ("Warrant Shares"):
"These securities have not been registered under the
Securities Act of 1933, as amended. 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."
Section 7. LIMITATIONS ON DISPOSITION.
(a) The Holder of this Warrant, by acceptance hereof, agrees to
comply in all respects with the provisions of this Section 7. Without in any
way limiting the representations set forth above, the Holder of this Warrant
agrees not to make any disposition of this Warrant or any Warrant Shares,
unless and until the transferee has agreed in writing for the benefit of the
Company to be bound by this Section 7 and the other provisions of this
Warrant as if such transferee were the original Holder hereof, provided and
to the extent such provisions are then applicable, and:
(i) There is then in effect a Registration Statement under
the Securities Act covering such proposed disposition and such disposition is
made in accordance with such Registration Statement; or
(ii) (A) the Holder 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 the
Company has given its prior written consent, and (B) if reasonably requested
by the Company, the Holder shall have furnished the Company with an opinion
of counsel, reasonably satisfactory to the Company, that such disposition
will not require registration of the Warrant and/or the Warrant 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, prior consent or opinion of counsel shall be
necessary for a transfer (A) by a Holder 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, or (B) to an "affiliate" of the Holder as that
term is defined in Rule 405 promulgated by the Securities and Exchange
Commission under the Securities Act, if the transferee agrees in writing to
be subject to the terms hereof to the same extent as if he were an original
Holder hereunder, and (ii) no transferee shall be required, as a condition to
any transfer of the Warrant or the Warrant Shares by the Holder, to agree to
be bound by this Section 7, if the transferee is acquiring the Warrant and/or
Warrant Shares pursuant to a Registration Statement under the Securities Act
or in a transaction made
6
<PAGE>
pursuant to Rule 144. Each new certificate evidencing the Warrant and/or
Warrant Shares so transferred shall bear the appropriate restrictive legends
set forth in Section 6(f) above, except that such certificate shall not bear
such restrictive legend if, in the opinion of counsel for the Company, such
legend is not required in order to establish or assist in compliance with any
provisions of the Securities Act or any applicable state securities laws.
Section 8. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this
Warrant is lost, stolen, mutilated or destroyed, the Company may, on such
terms as to indemnity or otherwise as it may in its discretion reasonably
impose (which shall, in the case of a mutilated Warrant, include the
surrender thereof), issue a new Warrant of like denomination and tenor as the
Warrant so lost, stolen, mutilated or destroyed. Any such new Warrant shall
constitute an original contractual obligation of the Company, whether or not
the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any
time enforceable by anyone.
Section 9. PRESENTMENT. Prior to due presentment of this Warrant
together with a completed assignment form attached hereto for registration of
transfer, the Company may deem and treat the Holder as the absolute owner of
the Warrant, notwithstanding any notation of ownership or other writing
thereon, for the purpose of any exercise thereof and for all other purposes,
and the Company shall not be affected by any notice to the contrary.
Section 10. NOTICE. Notice or demand pursuant to this Warrant shall
be sufficiently given or made, if sent by first-class mail, postage prepaid,
addressed, if to the Holder of this Warrant, to the Holder at its last known
address as it shall appear in the records of the Company, and if to the
Company, at 6933 South Revere Parkway, Englewood, Colorado 80112, Attention:
Secretary. The Company may alter the address to which communications are to
be sent by giving notice of such change of address in conformity with the
provisions of this Section 10 for the giving of notice.
Section 11. GOVERNING LAW. The validity, interpretation and
performance of this Warrant shall be governed by the laws of the State of
Delaware without regard to principles of conflicts of laws.
Section 12. SUCCESSORS, ASSIGNS. Subject to the restrictions on
transfer by Holder set forth in Section 7 hereof, all the terms and
provisions of the Warrant shall be binding upon and inure to the benefit of
and be enforceable by the respective successors and assigns of the parties
hereto.
Section 13. AMENDMENT. This Warrant may be modified, amended or
terminated by a writing signed by the Company and the Holder.
Section 14. SEVERABILITY. Should any part but not the whole of this
Warrant for any reason be declared invalid, such decision shall not affect
the validity of any remaining portion, which remaining portion shall remain
in force and effect as if this Warrant had been executed with the invalid
portion thereof eliminated, and it is hereby declared the intention of the
parties hereto that they would have executed the remaining portion of this
Warrant without including therein any such part which may, for any reason, be
hereafter declared invalid.
7
<PAGE>
Section 15. "MARKET STAND-OFF" AGREEMENT. Holder 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 Securities Act of 1933, as amended,
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:
(i) 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
(ii) all officers and directors of the Company and all other
persons with registration rights enter into similar agreements.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Common Stock of the Holder
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such period.
Section 16. NO IMPAIRMENT. The Company will not, by any voluntary
action, avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Company, but will at all
times in good faith assist in the carrying out of all the provisions of this
Warrant and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder of this Warrant
against impairment.
Section 17. NO RIGHT TO REDEEM. Except as explicitly provided
herein, this Warrant may not be called by the Company.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
8
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed and delivered on and as of the day and year first above written by one
of its officers thereunto duly authorized.
RHYTHMS NETCONNECTIONS INC.,
a Delaware corporation
Dated: March 3, 1999
-----------------------------------
Catherine Hapka, President and
Chief Executive Officer
The undersigned Holder agrees and accepts this Warrant and
acknowledges that it has read and confirms each of the representations contained
in Section 6.
MCI WORLDCOM VENTURE FUND, INC.
By:
---------------------------------
Its: President
--------------------------------
Address: 1801 Pennsylvania Avenue, N.W.
-----------------------------------
Washington, DC 20006
-----------------------------------
[SIGNATURE PAGE TO COMMON STOCK PURCHASE WARRANT]
<PAGE>
PURCHASE FORM
(To be executed by the Warrant Holder if he desires to exercise the Warrant in
whole or in part)
To: RHYTHMS NETCONNECTIONS INC.
The undersigned, whose Social Security or other identifying number is
_______________, hereby irrevocably elects the right of purchase represented by
the within Warrant for, and to purchase thereunder, ___________________________
shares of Common Stock provided for therein and tenders payment herewith to the
order of
RHYTHMS NETCONNECTIONS INC.
in the amount of
$____________
The undersigned requests that certificates for such shares be issued as follows:
Name:___________________________________________________________________________
Address:________________________________________________________________________
Deliver to:_____________________________________________________________________
Address:________________________________________________________________________
and, if said number of shares shall not be all the shares purchasable hereunder,
that a new Warrant for the balance remaining of the shares purchasable under the
within Warrant be registered in the name of, and delivered to, the undersigned
at the address stated below:
Address:__________________________________________________________________
__________________________________________________________________
Dated: ____________, 199__ Signature:__________________________________
(Signature must conform in all
respects to the name of the Warrant
Holder as specified on the face of
the Warrant, without alteration,
enlargement or any change
whatsoever)
<PAGE>
ASSIGNMENT
(To be executed by the Warrant Holder if he desires to effect a transfer of the
Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________________, whose Social Security or
other identification number is ________________________ [residing/located] at
____________________________ the attached Warrant, and appoints
_______________ residing at ____________________________ the undersigned's
attorney-in-fact to transfer said Warrant on the books of the Company, with
full power of substitution in the premises.
Dated: ______________, 199__.
In the presence of:
_____________________________________ _______________________________________
(Signature must conform in all respects
to the name of the Warrant Holder as
specified on the face of the Warrant,
without alteration, enlargement or any
change whatsoever).
<PAGE>
EXHIBIT 10.6
RHYTHMS NETCONNECTIONS INC.
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
March 3, 1999
<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.. . . . . . . . . . . . . . . . . . . . . . . 6
1.4 OBLIGATIONS OF THE COMPANY.. . . . . . . . . . . . . . . . . . . . 6
1.5 FURNISH INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 7
1.6 EXPENSES OF DEMAND REGISTRATION. . . . . . . . . . . . . . . . . . 7
1.7 EXPENSES OF COMPANY REGISTRATION.. . . . . . . . . . . . . . . . . 8
1.8 UNDERWRITING REQUIREMENTS. . . . . . . . . . . . . . . . . . . . . 8
1.9 DELAY OF REGISTRATION. . . . . . . . . . . . . . . . . . . . . . . 9
1.10 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. . . . . . . . . . .11
1.12 FORM S-3 REGISTRATION. . . . . . . . . . . . . . . . . . . . . . .11
1.13 ASSIGNMENT OF REGISTRATION RIGHTS. . . . . . . . . . . . . . . . .12
1.14 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. . . . . . . . . . .13
1.15 "MARKET STAND-OFF" AGREEMENT.. . . . . . . . . . . . . . . . . . .13
1.16 TERMINATION OF REGISTRATION RIGHTS.. . . . . . . . . . . . . . . .14
2. COVENANTS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . .14
2.1 DELIVERY OF FINANCIAL STATEMENTS.. . . . . . . . . . . . . . . . .14
2.2 INSPECTION.. . . . . . . . . . . . . . . . . . . . . . . . . . . .14
2.3 TERMINATION OF INFORMATION AND INSPECTION COVENANTS. . . . . . . .15
2.4 RIGHT OF FIRST OFFER.. . . . . . . . . . . . . . . . . . . . . . .15
2.5 EMPLOYEE STOCK POOL. . . . . . . . . . . . . . . . . . . . . . . .16
2.6 EXCLUDED INVESTMENTS.. . . . . . . . . . . . . . . . . . . . . . .16
3. COVENANTS OF THE INVESTORS. . . . . . . . . . . . . . . . . . . . . . .17
3.1 CERTAIN CORPORATE TRANSACTIONS.. . . . . . . . . . . . . . . . . .17
3.2 STANDSTILL.. . . . . . . . . . . . . . . . . . . . . . . . . . . .17
3.3 ADDITIONAL PREFERRED INVESTORS.. . . . . . . . . . . . . . . . . .17
4. CORPORATE OPPORTUNITY MATTERS.. . . . . . . . . . . . . . . . . . . . .19
5. MISCELLANEOUS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.1 SUCCESSORS AND ASSIGNS.. . . . . . . . . . . . . . . . . . . . . .19
5.2 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.3 COUNTERPARTS.. . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.4 TITLES AND SUBTITLES.. . . . . . . . . . . . . . . . . . . . . . .19
5.5 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.6 EXPENSES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.7 AMENDMENTS AND WAIVERS.. . . . . . . . . . . . . . . . . . . . . .20
5.8 SEVERABILITY.. . . . . . . . . . . . . . . . . . . . . . . . . . .20
5.9 AGGREGATION OF STOCK.. . . . . . . . . . . . . . . . . . . . . . .20
5.10 ENTIRE AGREEMENT; AMENDMENT; WAIVER. . . . . . . . . . . . . . . .20
</TABLE>
(i)
<PAGE>
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT ("Agreement")
is made as of the 3rd day of March, 1999, 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 one or more of the Investors are parties
to the Series C Preferred Stock and Warrant 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/or Series B Preferred Stock and have
entered into an Amended and Restated Investors' Rights Agreement with the
Company dated March 12, 1998 (the "Existing Rights Agreement"); and
WHEREAS, in order to induce the Company to enter into the Preferred
Stock Agreement and to induce one or more 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 Existing Rights Agreement so that this
Agreement will supersede and replace the Existing Rights Agreement in its
entirety and 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 terms "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, Series B Preferred
Stock or Series C 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
<PAGE>
Series A Preferred Stock, Series B Preferred Stock, Series C 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(e), 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 5.5.
(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
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)
2
<PAGE>
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(f), 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 5.5.
(c) 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 MCI Worldcom Venture Fund, Inc. or any assignee of the rights of MCI
Worldcom Venture Fund, Inc. pursuant to Section 1.13 ("MCI WorldCom") 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 MCI WorldCom (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(g), 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 MCI WorldCom
and the Holders request to be registered within twenty (20) days of the
mailing of such notice by the Company in accordance with paragraph 5.5.
(d) Subject to the limitations set forth in Section 2.6 hereof, in the
event that, subsequent to expiration of the Exclusion Period (as defined in
Section 2.6), an Excluded Investor (as defined in Section 2.6) acquires
greater than five percent (5%) of the Common Stock of the Company (on a fully
diluted, as converted to Common Stock basis) (the "Excluded Investment"),
then if the Company shall receive a written request from MCI WorldCom that
the Company file a registration statement under the Act covering the
registration of all of the Registrable Securities then held by MCI WorldCom,
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(h), effect as
soon as practicable, and in any event shall use its best efforts to effect
within the later to occur of (i) sixty (60) days of the receipt of such
request or (ii) one hundred eighty (180) days of the closing of the Excluded
Investment, the registration under the Act of all Registrable Securities
which MCI WorldCom and the Holders request to be registered within twenty
(20) days of the mailing of such notice by the Company in accordance with
paragraph 5.5.
(e) 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
3
<PAGE>
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.
(f) 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
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.
(g) If MCI WorldCom intends to distribute the Registrable Securities
covered by its request under subsection 1.2(c) 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(c). The underwriter
4
<PAGE>
will be selected by MCI WorldCom and shall be reasonably acceptable to the
Company. In such event, the right of any other Holder to include its
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 MCI WorldCom and such Holder) to the extent provided
herein. MCI WorldCom 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 MCI WorldCom. 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 MCI WorldCom 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.
(h) If MCI WorldCom intends to distribute the Registrable Securities
covered by its request under subsection 1.2(d) 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(d). The underwriter will be selected by
MCI WorldCom and shall be reasonably acceptable to the Company. In such
event, the right of any other Holder to include its 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 MCI WorldCom and
such Holder) to the extent provided herein. MCI WorldCom 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 MCI WorldCom. 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 MCI WorldCom 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.
(i) The Company is obligated to effect only (i) two (2) such
registrations pursuant to subsection 1.2(a), (ii) one (1) such registration
pursuant to subsection 1.2(b), (iii) one (1) such registration pursuant to
subsection 1.2(c) and (iv) one (1) such registration pursuant to subsection
1.2(d).
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(j) Notwithstanding the foregoing, if the Company shall furnish to
either Holders requesting a registration statement pursuant to this Section
1.2, to Enron or to MCI WorldCom, 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 one hundred twenty (120) days after receipt of the
request of the Initiating Holders, Enron or MCI WorldCom, 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 5.5, the Company shall, subject to (i) the provisions
of Section 1.8 and (ii) any senior "piggy-back" registration rights granted
by the Company pursuant to that certain Warrant Registration Rights Agreement
dated as of May 5, 1998 between the Company and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Donaldson Lufkin & Jenrette
Securities Corporation or pursuant to that certain Warrant to Purchase Shares
of Common Stock granted to Sun Financial Group, Inc., dated as of May 19,
1998, cause to be registered under the Act all of the Registrable Securities
that 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:
(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
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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.
(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 subsections 1.5(a) or 1.8, 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), 1.2(b), 1.2(c) or 1.2(d) 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(i).
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 (a), by Enron if under
subsection 1.2(b) or by MCI WorldCom if under subsections 1.2(c) or 1.2(d))
("Holders' Counsel") shall be borne by the Company; provided, however, that
the Company
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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), of Enron if under
subsection 1.2(b), or of MCI WorldCom if under subsections 1.2(c) or 1.2(d)
(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), of Enron if under
subsection 1.2(b), or of MCI WorldCom if under subsections 1.2(c) or 1.2(d)
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, Enron or MCI WorldCom, as applicable, have learned
of a material adverse change in the condition, business, or prospects of the
Company from that known to the Holders, Enron or MCI WorldCom, 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,
Enron or MCI WorldCom, 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.
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 immediately 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
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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 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 a Holder requesting
indemnification hereunder or any such 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
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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 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.
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(e) Notwithstanding the foregoing, to the extent that any
customary and reasonable 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:
(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
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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; or (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.
(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 2,000,000 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
1,500,000 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 subsections 1.2(c) or 1.2(d)
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may be assigned (but only with all related obligations) by MCI WorldCom to a
transferee or assignee of such securities who, after such assignment or
transfer, holds at least 1,250,000 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 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 any of the dates set forth
in subsections 1.2(a), 1.2(b) or 1.2(c) 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
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(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 holding at least 1,000,000 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
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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, Series B Preferred Stock or Series C Preferred
Stock issued pursuant to (A) that certain Series A Preferred Stock Purchase
Agreement dated July 3, 1997 (the "Series A Agreement"), (B) that certain
Series B Preferred Stock Purchase Agreement dated March 12, 1998 (the "Series
B Agreement") or (C) 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, (B) 10% of the Series B Preferred Stock (or the common
stock issued upon conversion thereof) issued pursuant to the Series B
Agreement or (C) 10% of the Series C 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, Series B Preferred
Stock and/or Series C 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.
15
<PAGE>
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, Series B Preferred Stock and/or Series C 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, Series B Preferred Stock and/or Series C 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, (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) to the
issuance of securities pursuant to the conversion or exercise of convertible
or exercisable securities, (iv) to 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) to 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.
2.6 EXCLUDED INVESTMENTS. The Company agrees that, for a period
of one year from the date hereof (the "Exclusion Period"), it shall not issue
any of its equity securities in a private offering to any of the following
entities (each an "Excluded Investor"): AT&T Corporation, Sprint
Corporation, Qwest Communications International, Inc., Level 3
Communications, Inc., WilTel, LLC, Frontier Corporation, British
Telecommunications plc, GTE Corp. and the Regional Bell Operating Companies.
Notwithstanding anything else in this
16
<PAGE>
Agreement, if within thirty (30) days (unless such period is extended by the
mutual agreement of the Company and MCI WorldCom, Inc.) of the effective date
of that certain Framework Agreement dated as of the date hereof between the
Company and MCI WorldCom, Inc. (the "Framework Agreement"), MCI WorldCom,
Inc. has not executed any of the Carrier Services Agreement or the Network
Services Agreement or the OSS Licensing Agreement (as contemplated in the
Framework Agreement), the Exclusion Period shall terminate and the Company
thereafter shall be able to issue its equity securities to any of the
Excluded Investors and MCI WorldCom shall forfeit its demand registration
right granted pursuant to subsection 1.2(d) hereof.
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, Series B
Preferred Stock and Series C 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 Preferred Stock
Agreement, so long as an Investor has registration rights under this
Agreement, such 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. CORPORATE OPPORTUNITY MATTERS. Except as expressly provided in
this Section 4, the Investors other than Enron (the "Rhythms Stockholders"
for purposes of this Section 4.1) 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
17
<PAGE>
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 Stockholdersor 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.
4.1 Except as expressly provided in this Section 4, the
Investors other than MCI WorldCom (the "Rhythms Stockholders" for purposes of
this Section 4.2) and the Company acknowledge and agree that neither MCI
WorldCom nor any of its Affiliates shall be expressly or implicitly
restricted or proscribed pursuant to this Agreement, the relationship that
exists between MCI WorldCom and the Rhythms Stockholders, the relationship
between MCI WorldCom 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 MCI WorldCom and the Rhythms Stockholders, the
relationship between MCI WorldCom and the Company or otherwise, in any
business venture or business opportunity of MCI WorldCom or any of its
Affiliates, and MCI WorldCom 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 MCI WorldCom 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 owe by MCI WorldCom or its Affiliates to the Rhythms
Stockholders or the Company for MCI WorldCom 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.
18
<PAGE>
4.2 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 or MCI
WorldCom), shall only mean persons or entities controlled by the Company
(rather than persons or entities under common control with the Company), and
when used to refer to Affiliates of Enron or MCI WorldCom, 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.
19
<PAGE>
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 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]
20
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
RHYTHMS NETCONNECTIONS INC.
By: /s/ Catherina Hapka
-------------------------------
Catherine Hapka, President
Address: 6933 South Revere Parkway
Englewood, CO 80112-3931
INVESTOR:
MCI WORLDCOM VENTURE FUND, INC.
By: /s/ Susan Mayer
-------------------------------
Its: /s/ President
------------------------------
Address: 1801 Pennsylvania Avenue, N.W.
-------------------------------
Washington, DC 20006
-------------------------------
ENRON COMMUNICATIONS GROUP, INC.
By: /s/ Ken Harrison
-------------------------------
Its: Chairman
------------------------------
Address: 210 Southwest Morrison Street,
Suite 400,
Portland, Oregon 97204
ENTERPRISE PARTNERS III, L.P.
By: /s/ William 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 III ASSOCIATES, L.P.
By: /s/ William Stensrud
------------------------------
Its: General Partner
------------------------------
Address: 7979 Ivanhoe, Suite 550
La Jolla, CA 92037
Attn: William Stensrud
ENTERPRISE PARTNERS IV, L.P.
By: /s/ William 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
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
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 Compton
------------------------------
Its: General Partner
-----------------------------
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Kevin Compton
KPCB VIII FOUNDERS FUND
By: /s/ Kevin Compton
------------------------------
Its: General Partner
-----------------------------
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Kevin Compton
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
KPCB INFORMATION SCIENCES ZAIBATSU
FUND II
By: /s/ Kevin 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 Geeslin
------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Attn: Keith Geeslin
THE SPROUT CEO FUND, L.P.
By: DLJ Capital Corporation
Its General Partner
By: /s/ Keith 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 AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
DLJ CAPITAL CORPORATION
By: /s/ Keith 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 Geeslin
------------------------------
Keith Geeslin, Attorney-in-Fact
Address: 3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Attn: Keith Geeslin
EPLEY INVESTORS II, LLC
By:
------------------------------
Its:
-----------------------------
Address:
-----------------------------
-----------------------------
/s/ Catherine Hapka
------------------------------
Catherine Hapka
Address: 6933 South Revere Parkway
Englewood, CO 80112-3931
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
BLUMENFELD & COHEN
By:
------------------------------
Its:
-----------------------------
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
---------------------------------
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
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
---------------------------------
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
---------------------------------
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
---------------------------------
Jeff Blumenfeld
Address: 1615 M Street, N.W., Suite 700
Washington, D.C. 20036
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
BROBECK, PHLEGER & HARRISON LLP
By:
------------------------------
Its:
-----------------------------
Address: Spear Street Tower
One Market Street
San Francisco, California 94104
---------------------------------
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
MCI Worldcom Venture Fund, Inc.
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>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-72409) of our report dated March 3, 1999 on our audits of the
consolidated financial statements of Rhythms NetConnections Inc. We also
consent to the reference to our firm under the caption "Experts."
PricewaterhouseCoopers LLP
Denver, Colorado
March 5, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 21,315
<SECURITIES> 115,497
<RECEIVABLES> 247
<ALLOWANCES> 50
<INVENTORY> 340
<CURRENT-ASSETS> 139,758
<PP&E> 11,965
<DEPRECIATION> 455
<TOTAL-ASSETS> 171,726
<CURRENT-LIABILITIES> 13,789
<BONDS> 157,465
0
17
<COMMON> 7
<OTHER-SE> (6,771)
<TOTAL-LIABILITY-AND-EQUITY> 171,726
<SALES> 528
<TOTAL-REVENUES> 528
<CGS> 4,695
<TOTAL-COSTS> 4,695
<OTHER-EXPENSES> 24,234
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,779
<INCOME-PRETAX> (36,334)
<INCOME-TAX> 0
<INCOME-CONTINUING> (36,334)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,334)
<EPS-PRIMARY> (14.61)
<EPS-DILUTED> (14.61)
</TABLE>
