<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 1999
REGISTRATION NO. 333-72409
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
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 PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common stock (including the associated
Rights to purchase Series 1 Junior
Participating Stock)(2).................. 10,781,250 $20.00 $215,625,000 $8,991(3)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) 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.
(3) Based on a calculated registration fee of $59,944, of which $50,953 was
previously paid.
--------------------------
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 APRIL 6, 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
9,375,000 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 $18.00 and $20.00 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 1,406,250 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 April , 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]
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................................................................................................. 53
Certain Relationships and Related Transactions............................................................. 64
Principal Stockholders..................................................................................... 68
Description of Capital Stock............................................................................... 70
Shares Eligible for Future Sale............................................................................ 74
Underwriting............................................................................................... 75
Legal Matters.............................................................................................. 77
Experts.................................................................................................... 77
Where You Can Find More Information........................................................................ 77
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.
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.
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 GIVE RETROACTIVE EFFECT TO A TWO FOR ONE
STOCK SPLIT EFFECTED IN NOVEMBER 1998 AND A SIX FOR FIVE STOCK SPLIT EFFECTED IN
MARCH 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 ten
additional markets: San Francisco, San Jose, Oakland/East Bay, Chicago, Los
Angeles, Orange County, Boston, Sacramento, New York and Philadelphia. 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, BellSouth, 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 separate strategic arrangements with MCI
WorldCom, Inc. and Microsoft Corporation. As part of our strategic arrangements,
MCI WorldCom's investment fund and Microsoft each invested $30 million in us.
The MCI WorldCom 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. In our
Microsoft arrangement, we will jointly distribute with Microsoft a co-branded
DSL version of the Microsoft Network (MSN) service focused on our small business
customers and on our customers' teleworkers. In April 1999, we entered into a
customer relationship with Qwest Communications Corporation, in connection with
which Qwest's wholly owned subsidiary, U.S. Telesource, Inc., invested $15
million in us.
We also market our services through our direct sales force and through our
partnerships with recognized leaders in the networking industry, including
Microsoft and Cisco Systems, Inc. Under our
4
<PAGE>
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 Microsoft, MCI WorldCom's investment fund, Qwest's subsidiary, Kleiner
Perkins Caufield & Byers, Enterprise Partners, Brentwood Venture Capital, the
Sprout Group and a subsidiary of Enron Corp., have to date invested
approximately $105.3 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
5
<PAGE>
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.
- 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......................... 9,375,000 shares
Common stock to be outstanding after this
offering................................... 70,564,582 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.
Nasdaq National Market symbol................ RTHM
</TABLE>
- ------------------------
(1) Based on the number of shares outstanding as of April 5, 1999. Includes
51,076,051 shares of common stock to be issued upon conversion of our
preferred stock and 5,598,989 shares of common stock which resulted from the
exercise of stock options that remain unvested as of April 5, 1999. Excludes
3,649,130 shares of common stock issuable upon the exercise of stock options
outstanding as of April 5, 1999, with a weighted average exercise price of
$8.70 per share, all of which are exercisable and 3,840 of which are vested,
7,184,674 shares of common stock issuable upon the exercise of outstanding
warrants, with a weighted average exercise price of $1.46 per share and
456,595 shares of treasury stock. 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 our 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, Microsoft 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 makes 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. Furthermore, as a result of recent preferred stock
issuances and stock option grants, we anticipate that there will be significant
charges to earnings in future periods. 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;
9
<PAGE>
- the success of our relationships with our partners and distributors,
including MCI WorldCom, Microsoft and Cisco;
- 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
10
<PAGE>
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 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
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outcomes of hearings and rulings could have a material and adverse effect on our
business, prospects, operating results and financial condition.
WE DEPEND ON THIRD PARTIES, PARTICULARLY MCI WORLDCOM, MICROSOFT 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 our
strategic partners, including MCI WorldCom, Microsoft 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
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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, 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 requirements 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."
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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 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
is 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 projects with Cisco and MCI WorldCom and our strategic arrangement
with Microsoft 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 portions of our network, that speed is not available over a
majority of our network. Actual transmission
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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
materially and adversely affect the availability and pricing of the equipment we
purchase and the technology we license.
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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 we lease may be unable to obtain or maintain permits
and rights-of-way necessary to develop and operate existing and future networks.
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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 83.2% of the common stock after completion of this
offering, or 81.7% 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
Our Board of Directors has adopted a stockholder rights plan. 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. In addition, 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;
20
<PAGE>
- providing for a classified Board of Directors with staggered, three-year
terms;
- 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. 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 APPROXIMATELY $15.60 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 $15.60 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 $164.6 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 to
Microsoft on March 16, 1999, and the issuance of Series C preferred stock
and Series D preferred stock and warrants to Qwest's subsidiary on April
5, 1999; and
- pro forma as adjusted to give effect to this offering, including
conversion of the existing Series A, Series B, Series C and Series D
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 $ 211,812 $ 376,364
--------- ----------- -----------
--------- ----------- -----------
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, 8,395,655 shares authorized pro forma and no shares authorized pro
forma as adjusted; no shares issued and outstanding actual, 8,395,655
shares issued and outstanding pro forma and no shares issued and
outstanding pro forma as adjusted......................................... -- 8 --
Series D convertible preferred stock, $0.001 par value; no shares authorized
actual, 441,176 shares authorized pro forma and no shares authorized pro
forma as adjusted; no shares issued and outstanding actual, 441,176 shares
issued and outstanding pro forma and no shares issued and outstanding pro
forma as adjusted......................................................... -- 1 --
Common stock, $0.001 par value; 80,049,892 shares authorized actual,
81,000,000 shares authorized pro forma and 250,000,000 shares authorized
pro forma as adjusted; 8,042,530 shares issued actual and pro forma and
68,493,581 shares issued pro forma as adjusted (2)........................ 8 8 68
Treasury stock, at cost; 438,115 shares....................................... (18) (18) (18)
Additional paid-in capital.................................................... 37,212 102,841 267,359
Warrants...................................................................... -- 10,371 10,371
Deferred compensation......................................................... (5,210) (5,210) (5,210)
Accumulated deficit........................................................... (38,756) (38,756) (38,756)
--------- ----------- -----------
Total stockholders' equity (deficit)...................................... (6,747) 69,262 233,814
--------- ----------- -----------
Total capitalization.................................................... $ 158,090 $ 234,099 $ 398,651
--------- ----------- -----------
--------- ----------- -----------
</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) Excludes 2,527,596 shares of common stock issued between January 1, 1999 and
April 5, 1999 upon the exercise of options. Also excludes 7,184,674 shares
of common stock issuable upon the exercise of outstanding warrants and
3,649,130 shares of common stock issuable upon the exercise of outstanding
options as of April 5, 1999.
23
<PAGE>
DILUTION
Our pro forma net tangible book value at December 31, 1998 was $1.16 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 Microsoft, and to the
issuance of Series C and Series D preferred stock to Qwest's subsidiary on April
5, 1999 and to the conversion of all outstanding shares of preferred stock into
51,076,051 shares of common stock upon the completion of this offering. Please
see "Capitalization." After giving effect to the sale of the 9,375,000 shares of
common stock in this offering, assuming a public offering price of $19.00 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 $3.40 per share. This represents an immediate increase in net tangible book
value per share of $2.24 to existing stockholders and immediate dilution in net
tangible book value of $15.60 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...................... $ 19.00
Pro forma net tangible book value per share at December 31,
1998..................................................... $ 1.16
Increase per share attributable to new investors........... 2.24
---------
As adjusted pro forma net tangible book value per share after
this offering.............................................. 3.40
---------
Dilution per share to new investors (1)...................... $ 15.60
---------
---------
</TABLE>
- ------------------------
(1) If the underwriters' over-allotment option is exercised in full, dilution
per share to new investors would be $15.31.
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 $19.00 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....................................... 59,118,581 86.3% $106,036,000 37.3% $ 1.79
New investors............................................... 9,375,000 13.7 178,125,000 62.7 $19.00
-------------- --- ----------- ---
Total................................................... 68,493,581(1) 100% $284,161,000 100%
-------------- --- ----------- ---
-------------- --- ----------- ---
</TABLE>
- ------------------------
(1) Excludes 2,527,596 shares of common stock issued between January 1, 1999 and
April 5, 1999 upon the exercise of options. Also excludes 7,184,674 shares
of common stock issuable upon the exercise of outstanding warrants and
3,649,130 shares of common stock issuable upon the exercise of outstanding
options as of April 5, 1999.
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)................................... $ (1.12) $ (12.18)
------- --------
------- --------
Unaudited pro forma net loss per share (basic and diluted)(1)............ $ (0.88)
--------
--------
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 $ 211,812 $ 376,364
Equipment and furniture, net...................... 1,621 11,510 11,510 11,510
Total assets...................................... 12,241 171,726 247,735 412,287
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) 69,262 233,814
</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 in
March 1999 for $60 million and the issuance of Series C and Series D
preferred stock and warrants in April 1999 for $15 million. Pro forma
amounts are unaudited. See "Certain Relationships and Related
Transactions--Series C Purchase Agreement; Other Agreements with MCI
WorldCom and --Series C Purchase Agreement; Other Agreements with Microsoft
and --Series C Purchase Agreement and Series D Purchase Agreement; Other
Agreement with Qwest."
(5) Adjusts the pro forma information to give effect to this offering. As
adjusted amounts are unaudited.
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 ten
additional markets: San Francisco, San Jose, Oakland/East Bay, Chicago, Los
Angeles, Orange County, Boston, Sacramento, New York and Philadelphia. 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 separate strategic arrangements with MCI
WorldCom and Microsoft. As part of our strategic arrangements, MCI WorldCom's
investment fund and Microsoft each invested $30 million in us. The MCI WorldCom
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. In our Microsoft arrangement, we will jointly distribute with
Microsoft a co-branded DSL version of the Microsoft Network (MSN) service
focused on our small business customers and on our customers' teleworkers. In
April 1999, we entered into a customer relationship with Qwest Communications
Corporation, in connection with which Qwest's subsidiary, U.S. Telesource, Inc.,
invested $15 million in us.
As a result of recent preferred stock and warrant issuances and stock option
grants, we anticipate that there will be significant charges to earnings in
future periods. These charges to earnings may total as high as $65 million
dollars over the next several years.
26
<PAGE>
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 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.
27
<PAGE>
- 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.
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
28
<PAGE>
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.
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 $60.0 million in separate investments by Microsoft and MCI WorldCom's
investment fund. In April 1999, we received $15.0 million in an equity
investment by Qwest's subsidiary.
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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 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. In March 1999, we entered into 36-month lease lines
with GATX Capital Corporation for an aggregate of up to $24 million in equipment
lease financing. We have also received a financing proposal from GATX for up to
$10 million of additional lease financing to be used for collocation fees. In
April 1999, we entered into a lease agreement with Cisco Systems Capital
Corporation for an aggregate of up to $20 million in equipment lease financing.
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
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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.
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;
- our ability to generate customer demand for our services in our target
markets;
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- 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 574,380 shares of common stock at a price of $1.85 per
share. This warrant is immediately exercisable. In March 1999, we entered into
additional 36-month lease lines for an aggregate of up to $24 million in lease
financing with GATX to be used for equipment. In connection with these March
1999 leases, we issued GATX warrants to purchase an aggregate of 45,498 shares
of common stock at a price of $10.55 per share. These warrants are immediately
exercisable. We also received a financing proposal from GATX in February 1999
for up to $10 million in additional lease financing to be allocated for
collocation fees. In April 1999, we entered into an agreement with Cisco Systems
Capital Corporation for up to $20 million in equipment lease financing and
issued to Cisco a warrant to purchase up to 75,000 shares of common stock at an
exercise price per share of $10.55. This warrant is immediately exercisable.
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 ten
additional markets: San Francisco, San Jose, Oakland/East Bay, Chicago, Los
Angeles, Orange County, Boston, Sacramento, New York and Philadelphia. 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 separate strategic arrangements with MCI
WorldCom and Microsoft. As part of our strategic arrangements, MCI WorldCom's
investment fund and Microsoft each invested $30 million in us. The MCI WorldCom
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. In our Microsoft arrangement, we will
jointly distribute with Microsoft a co-branded DSL version of the Microsoft
Network (MSN) service focused on our small business customers and on our
customers' teleworkers. In April 1999, we entered into a customer relationship
with Qwest Communications Corporation, in connection with which Qwest's wholly
owned subsidiary, U.S. Telesource, Inc., invested $15 million in us.
We also market our services through our direct sales force and through our
partnerships with recognized leaders in the networking industry, including
Microsoft and Cisco. 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
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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 Microsoft, MCI WorldCom's investment fund, Qwest's subsidiary, Kleiner
Perkins Caufield & Byers, Enterprise Partners, Brentwood Venture Capital, the
Sprout Group and a subsidiary of Enron Corp., have to date invested
approximately $105.3 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
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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 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;
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- provide large businesses with productivity enhancing remote office and
worker networking solutions;
- 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,
Microsoft 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 Microsoft in
which we will jointly distribute with Microsoft a co-branded DSL version of the
Microsoft Network service focused on our small business customers and our
customers' teleworkers. We have also 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. In addition, we 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,
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focusing on partners that can both add value to our network and give us a
meaningful distribution channel.
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,
which was amended in April 1999, 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, which are convertible into 4,477,692 shares of common stock, and a
warrant to purchase 720,000 shares of our common stock at $6.70 per share.
MCI WorldCom's investment fund also received a warrant to purchase 136,996
shares of common stock at the per share purchase price equal to the price
per share paid in this offering.
- 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 29 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.
MICROSOFT
In March 1999, we entered into a strategic partnership with Microsoft,
pursuant to which, among other things:
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- MICROSOFT INVESTMENT. Microsoft invested $30 million in us, in return for
3,731,409 shares of our Series C preferred stock, which are convertible
into 4,477,691 shares of common stock, and a warrant to purchase 720,000
shares of our common stock at $6.70 per share.
- CO-BRANDING FOR SMALL BUSINESSES AND TELEWORKERS. Microsoft has agreed to
jointly distribute with us over the Internet a co-branded DSL version of
the Microsoft Network service focused on our small business customers and
on our customers' teleworkers. This agreement expires in March 2002.
QWEST
In April 1999, we entered into a customer relationship with Qwest, in
connection with which Qwest's wholly owned subsidiary, U.S. Telesource, Inc.,
invested $15 million in us, in return for 932,836 shares of Series C preferred
stock, which are convertible into 1,119,403 shares of common stock, and 441,176
shares of Series D preferred stock, which are convertible into 441,176 shares of
common stock, subject to adjustment if the purchase price per share in this
offering is less than $17.00. U.S Telesource also received a warrant to purchase
180,000 shares of our common stock at $6.70 per share.
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.
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
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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.
(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
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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.
- 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
applications 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. Our strategic relationship with Microsoft will focus on
delivering co-branded network applications that will facilitate our customers'
access to the Internet and other destinations.
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.
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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 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."
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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 Microsoft,
MCI WorldCom and Cisco, for the marketing and sales of our network services."
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.
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- 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 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
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<PAGE>
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 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.
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- 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.
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.
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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.
- 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
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- 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,
- 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;
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- 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 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
49
<PAGE>
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 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, BellSouth, 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.
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<PAGE>
We have signed agreements with BellSouth 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.
EMPLOYEES
As of April 5, 1999, we had approximately 400 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
51
<PAGE>
agreements, which gives us the ability to obtain copper telephone lines on which
we provide our chosen variety of DSL technologies.
In addition, on March 12, 1999, our subsidiary ACI Corp. filed a complaint
with the Oregon Public Utilities Commission (the "Oregon PUC") against U S West
Communications regarding collocation matters. ACI has requested the Oregon PUC
to intervene in an on-going dispute between ACI and U S West Communications
regarding ACI's ability to collocate in three central offices located in
Portland, Oregon pursuant to Section 251(c)(6) of the 1996 Telecommunications
Act. ACI has requested that the Oregon PUC make a determination that U S West
Communications can, in fact, accommodate ACI's requests for collocation and, if
such a determination is made, that the Oregon PUC immediately order U S West
Communications to make space available to ACI on the terms and conditions set
forth in the existing interconnection agreement between the companies. ACI has
also sought monetary damages in an amount to be proven at a hearing to
compensate for ACI's economic losses. No hearing date or schedule has yet been
set for this proceeding.
On February 18, 1999, we filed a complaint for declaratory relief in San
Diego County Superior Court (North County) against Thomas R. Lafleur. Mr.
Lafleur was a former employee who resigned and/or was terminated in 1998. After
he left, we sent him a check for the repurchase or buy-back of his unvested
shares; Mr. Lafleur refused to cash this check. The declaratory relief action is
to determine that his shares were unvested and thus properly repurchased. On or
about March 26, 1999, Mr. Lafleur filed an answer to the complaint and also
filed a cross-complaint against us for fraud, breach of the covenant of good
faith and fair dealing, conspiracy to inflict emotional distress, intentional
infliction of emotional distress, conversion and declaratory relief. The
cross-complaint seeks compensatory and punitive damages according to proof, and
438,115 shares of common stock. Mr. Lafleur alleges in his cross-complaint that
since we failed to purchase his shares within 60 days following his termination,
the terms of his stock purchase agreement prevent us from repurchasing his
shares. We intend to vigorously defend against such cross-claims, and intend to
file a demurrer to the cross-complaint. We are currently accounting for these
438,115 shares as treasury stock.
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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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of April 5, 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................................... 54 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 Corp., 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, a position he has held since
February 1998. Mr. Zander is a director of Documentum, Inc. and one privately
held company.
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 eight 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
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it more 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 3,504,905(2) --
365,094(3)
Michael E. Calabrese (4).......................... 1998 42,417 157,623(5) 360,000(2) --
Vice President, Sales Engineering 1997 -- -- -- --
James A. Greenberg (6)............................ 1998 145,000 31,538 48,000(2) --
Chief Network Officer 1997 63,205 16,615 547,642(2) 50,000 (7)
Gloria A. Farler (8).............................. 1998 137,500 29,906 24,000(2) --
Vice President, Marketing Support 1997 25,781 7,161 48,000(2)
Eric H. Geis (9).................................. 1998 136,000 29,580 -- --
Vice President of National Deployment 1997 96,519 18,417 132,000(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................. 360,000 10.7% $ 0.25 September 9, 2008 $ 56,601 $ 143,437
James A. Greenberg................... 48,000 1.4% 0.25 September 9, 2008 7,547 19,125
Gloria A. Farler (4)................. 24,000 0.7% 0.25 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 3,364,680 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(2) REALIZED(3) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- -------------- ------------- ----------- ------------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Catherine M. Hapka........... 3,869,999(4) $ 73,019 -- -- -- --
Michael E. Calabrese......... -- -- 360,000 -- $1,440,000 --
James A. Greenberg........... 547,642(5) -- 48,000 -- 192,000 --
Gloria A. Farler (6)......... 43,200(7) -- 24,000 -- 96,000 --
Eric H. Geis................. 132,000(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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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 3,504,905 shares of common stock at an exercise price of
$0.04 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.
BENEFIT PLANS
1999 STOCK INCENTIVE PLAN
Our 1999 Stock Incentive Plan is intended to serve as the successor equity
incentive program to the 1997 Stock Option/Stock Issuance Plan. The 1999 Stock
Incentive Plan was adopted by the board on March 16, 1999. Subject to
stockholder approval, the 1999 Stock Incentive Plan will become effective upon
effectiveness of the offering. All outstanding options under the 1997 Stock
Option/Stock Issuance Plan will at that time be incorporated into the 1999 Stock
Incentive Plan, and no further option grants will be made under the 1997 Stock
Option/Stock Issuance Plan. The incorporated options will continue to be
governed by their existing terms, unless the plan administrator elects to extend
one or more features of the 1999 Incentive Plan to those options. Except as
otherwise noted below, the incorporated options have substantially the same
terms as will be in effect for grants made under the Discretionary Option Grant
Program of the 1999 Stock Incentive Plan.
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An initial reserve of 8,161,944 shares of common stock has been authorized
for issuance under the 1999 Stock Incentive Plan. This share reserve consists of
(i) the number of shares estimated to remain available for issuance under the
1997 Stock Option/Stock Issuance Plan on the effective date of the new 1999
Stock Incentive Plan, including the shares subject to outstanding options
thereunder, plus (ii) an additional increase of approximately 5,500,000 shares.
The number of shares of common stock reserved for issuance under the 1999 Stock
Incentive Plan will automatically increase on the first trading day in January
each calendar year, beginning in calendar year 2000, by an amount equal to four
percent (4%) of the total number of shares of common stock outstanding on the
last trading day in December in the preceding calendar year, but in no event
will this annual increase exceed 2,880,000 shares. In addition, no participant
in the 1999 Stock Incentive Plan may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances for more than
900,000 shares of common stock in the aggregate per calendar year.
The 1999 Stock Incentive Plan is divided into five separate components:
- the Discretionary Option Grant Program, under which eligible individuals
in our employ or service (including officers, non-employee board members
and consultants) may, at the discretion of the plan administrator, be
granted options to purchase shares of common stock at an exercise price
not less than 100% of the fair market value of those shares on the grant
date;
- the Stock Issuance Program under which eligible individuals may, in the
plan administrator's discretion, be issued shares of common stock
directly, upon the attainment of designated performance milestones or upon
the completion of a specified service requirement or as a bonus for past
services;
- the Salary Investment Option Grant Program, which may, at the plan
administrator's sole discretion, be activated for one or more calendar
years and, if so activated, will allow executive officers and other highly
compensated employees the opportunity to apply a portion of their base
salary each year to the acquisition of special below-market stock option
grants;
- the Automatic Option Grant Program, under which option grants will
automatically be made at periodic intervals to eligible non-employee board
members to purchase shares of common stock at an exercise price equal to
100% of the fair market value of those shares on the grant date; and
- the Director Fee Option Grant Program, which may, in the plan
administrator's sole discretion, be activated for one or more calendar
years and, if so activated, will allow non-employee board members the
opportunity to apply a portion of the annual retainer fee otherwise
payable to them in cash each year to the acquisition of special
below-market option grants.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the compensation committee. The compensation committee as
plan administrator will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances under those
programs, the time or times when the grants or issuances are to be made, the
number of shares subject to each grant or issuance, the status of any granted
option as either an incentive stock option or a non-statutory stock option under
the Federal tax laws, the vesting schedule to be in effect for the option grant
or stock issuance and the maximum term for which any granted option is to remain
outstanding. However, the board acting by disinterested majority will have the
exclusive authority to make any discretionary option grants or stock issuances
to members of the compensation committee. The compensation committee will also
have the exclusive authority to select the executive officers and other highly
compensated employees who may participate in the Salary Investment Option Grant
Program in the event that program is activated for one or more calendar years.
Neither the compensation committee nor the board will exercise any
administrative discretion with respect to option grants under the Salary
Investment Option Grant Program or under the Automatic Option Grant or Director
Fee Option Grant Program for the non-employee board members. All grants under
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those latter three programs will be made in strict compliance with the express
provisions of each program.
The exercise price for the shares of common stock subject to option grants
made under the 1999 Stock Incentive Plan may be paid in cash or in shares of
common stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day sale program without any cash outlay by the
optionee.
The plan administrator will have the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the 1997 Stock Option/Stock Issuance Plan) in return
for the grant of new options for the same or different number of option shares
with an exercise price per share based upon the fair market value of the common
stock on the new grant date.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program. These rights will provide the holders with
the election to surrender their outstanding options for an appreciation
distribution from us equal to the excess of (i) the fair market value of the
vested shares of common stock subject to the surrendered option over (ii) the
aggregate exercise price payable for those shares. Such appreciation
distribution may be made in cash or in shares of common stock. None of the
incorporated options from the 1997 Stock Option/Stock Issuance Plan contain any
stock appreciation rights.
In the event that we are acquired by merger or asset sale, each outstanding
option under the Discretionary Option Grant Program which is not to be assumed
by the successor corporation will automatically accelerate in full, and all
unvested shares under the Discretionary Option Grant and Stock Issuance Programs
will immediately vest, except to the extent our repurchase rights with respect
to those shares are to be assigned to the successor corporation. The plan
administrator will have complete discretion to grant one or more options under
the Discretionary Option Grant Program which will vest and become exercisable
for all the option shares in the event those options are assumed in the
acquisition and the optionee's service with us or the acquiring entity is
terminated within a designated period (not to exceed eighteen months) following
that acquisition. The vesting of outstanding shares under the Stock Issuance
Program may be accelerated upon similar terms and conditions.
The plan administrator is also authorized to grant options and structure
repurchase rights so that the shares subject to those options or repurchase
rights will immediately vest in connection with a change in ownership or control
(whether by successful tender offer for more than fifty percent of our
outstanding voting stock or by a change in the majority of our board through one
or more contested elections for board membership). Such accelerated vesting may
occur either at the time of such change or upon the subsequent termination of
the individual's service within a designated period (not to exceed eighteen
months) following the change.
The options to be incorporated from the 1997 Stock Option/Stock Issuance
Plan will immediately vest if we are acquired by merger or asset sale, unless
our repurchase rights with respect to the unvested shares subject to those
options are assigned to the successor entity. There are no other change in
control provisions currently in effect for those options. However, the plan
administrator will have the discretion to extend the acceleration provisions of
the 1999 Stock Incentive Plan to any or all of the options outstanding under the
1997 Stock Option/Stock Issuance Plan.
In the event the plan administrator elects to activate the Salary Investment
Option Grant Program for one or more calendar years, each executive officer and
other highly compensated employee selected for participation may elect, prior to
the start of the calendar year, to reduce his or her base salary for that
calendar year by a specified dollar amount not less than $10,000 nor more than
$50,000. Each selected individual who files this timely election will
automatically be granted, on the first trading day in January of the calendar
year for which that salary reduction is to be in effect, a non-statutory option
to purchase that number of shares of common stock determined by dividing the
salary reduction amount by two-thirds of the fair market value per share of
common stock on the grant date. The
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option will be exercisable at a price per share equal to one-third of the fair
market value of the option shares on the grant date. As a result, the total
spread on the option shares at the time of grant (the fair market value of the
option shares on the grant date less the aggregate exercise price payable for
those shares) will be equal to the amount of salary invested in that option. The
option will vest and become exercisable in a series of twelve equal monthly
installments over the calendar year for which the salary reduction is to be in
effect.
Under the Automatic Option Grant Program, eligible non-employee board
members will receive a series of option grants over their period of board
service. Each individual who first becomes a non-employee board member at any
time at or after the effective date of this offering will receive an option
grant for 28,800 shares of common stock on the date such individual joins the
board, provided such individual has not been in our prior employ. In addition,
on the date of each annual stockholders meeting held after the effective date of
this offering, each non-employee board member who is to continue to serve as a
non-employee board member (including the individuals who are currently serving
as non-employee board members) will automatically be granted an option to
purchase 7,200 shares of common stock, provided such individual has served on
the board for at least six months. There will be no limit on the number of such
7,200 share option grants any one eligible non-employee Board member may receive
over his or her period of continued board service, and non-employee board
members who have previously been in our employ will be eligible to receive one
or more such annual option grants over their period of board service.
Each automatic grant will have an exercise price per share equal to the fair
market value per share of common stock on the grant date and will have a term of
10 years, subject to earlier termination following the optionee's cessation of
board service. Each automatic option will be immediately exercisable for all of
the option shares; however, any unvested shares purchased under the option will
be subject to repurchase by the Company, at the exercise price paid per share,
should the optionee cease to serve on the board service prior to vesting in
those shares. The shares subject to each initial 28,800-share automatic option
grant will vest in a series of six successive equal semi-annual installments
upon the optionee's completion of each six-month period of board service over
the thirty-six-month period measured from the grant date. The shares subject to
each annual 7,200-share automatic grant will vest upon in two successive equal
semi-annual installments upon the optionee's completion of each six-month period
of board service measured from the grant date. However, the shares will
immediately vest in full upon certain changes in control or ownership or upon
the optionee's death or disability while a board member. Following the
optionee's cessation of board service for any reason, each option will remain
exercisable for a 12-month period and may be exercised during that time for any
or all shares in which the optionee is vested at the time of such cessation of
service.
If the Director Fee Option Grant Program is activated in the future, each
non-employee board member will have the opportunity to apply all or a portion of
any annual retainer fee otherwise payable in cash to the acquisition of a
below-market option grant. The option grant will automatically be made on the
first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option will have an exercise price per share
equal to one-third of the fair market value of the option shares on the grant
date, and the number of shares subject to the option will be determined by
dividing the amount of the retainer fee applied to the program by two-thirds of
the fair market value per share of common stock on the grant date. As a result,
the total spread on the option (the fair market value of the option shares on
the grant date less the aggregate exercise price payable for those shares) will
be equal to the portion of the retainer fee invested in that option. The option
will vest and become exercisable for the option shares in a series of twelve
equal monthly installments over the calendar year for which the election is to
be in effect. However, the option will become immediately exercisable and vested
for all the option shares upon (i) certain changes in the ownership or control
or (ii) the death or disability of the optionee while serving as a board member.
The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon (i) an acquisition of us by
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merger or asset sale or (ii) the successful completion of a tender offer for
more than 50% of our outstanding voting stock or a change in the majority of our
board effected through one or more contested elections for board membership.
Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option Grant
and Director Fee Option Grant Programs and may be granted to one or more
officers as part of their option grants under the Discretionary Option Grant
Program. Options with this limited stock appreciation right may be surrendered
to us upon the successful completion of a hostile tender offer for more than 50%
of our outstanding voting stock. In return for the surrendered option, the
optionee will be entitled to a cash distribution from us in an amount per
surrendered option share equal to the excess of (i) the highest price per share
of common stock paid in connection with the tender offer over (ii) the exercise
price payable for such share.
The board may amend or modify the 1999 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 1999 Stock Incentive Plan will
terminate on the earliest of (i) February 28, 2009, (ii) the date on which all
shares available for issuance under the 1999 Stock Incentive Plan have been
issued as fully-vested shares or (iii) the termination of all outstanding
options in connection with certain changes in control or ownership of us.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan was adopted by the board on March 16,
1999. Subject to stockholder approval, the 1999 Employee Stock Purchase Plan
will become effective immediately upon the execution of the Underwriting
Agreement for this offering. The plan is designed to allow our eligible
employees and those of our participating subsidiaries to purchase shares of
common stock, at semi-annual intervals, through their periodic payroll
deductions under the plan.
One million two hundred thousand shares (1,200,000) of common stock will
initially be reserved for issuance under the plan. The reserve will
automatically increase on the first trading in January each year, beginning with
calendar year 2000, by an amount equal to one percent of the total number of
outstanding shares of our common stock on the last trading day in December in
the immediately preceding calendar year, but in no event will any such annual
increase exceed 780,000 shares.
The plan will be implemented in a series of successive offering periods,
each with a maximum duration of 24 months. However, the initial offering period
will begin on the execution date of the Underwriting Agreement and will end on
the last business day in April 2001. The next offering period will commence on
the first business day in May 2001, and subsequent offering periods will
commence as designated by the plan administrator.
Individuals who are eligible employees (scheduled to work more than 20 hours
per week for more than five calendar months per year) on the start date of any
offering period may enter the plan on that start date or on any subsequent
semi-annual entry date (the first business day of May or November each year).
Individuals who become eligible employees after the start date of the offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.
Payroll deductions may not exceed 15% of the participant's cash earnings,
and the accumulated payroll deductions of each participant will be applied to
the purchase of shares on his or her behalf on each semi-annual purchase date
(the last business day in April and October each year) at a purchase price per
share equal to 85% of the lower of (i) the fair market value of the common stock
on the participant's entry date into the offering period or (ii) the fair market
value on the semi-annual purchase date. In no event, however, may any
participant purchase more than 900 shares on any semi-annual purchase date, nor
may all participants in the aggregate purchase more than 300,000 shares on any
semi-annual purchase date.
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If the fair market value per share of our common stock on any purchase date
is less than the fair market value per share on the start date of the two-year
offering period, then that offering period will automatically terminate, and a
new two-year offering period will begin on the next business day, with all
participants in the terminated offering to be automatically transferred to the
new offering period.
Should we be acquired by merger, sale of substantially all its assets or
sale of securities possessing more than fifty percent of the total combined
voting power of our outstanding securities, then all outstanding purchase rights
will automatically be exercised immediately prior to the effective date of an
acquisition. The purchase price will be equal to 85% of the lower of (i) the
fair market value per share of common stock on the participant's entry date into
the offering period in which an acquisition occurs or (ii) the fair market value
per share of common stock immediately prior to an acquisition. The limitation on
the maximum number of shares purchasable in the aggregate on any one purchase
date will not be in effect for any purchase date attributable to such an
acquisition.
The plan will terminate on the earlier of (i) the last business day of April
2009, (ii) the date on which all shares available for issuance under the plan
shall have been sold pursuant to purchase rights exercised thereunder or (iii)
the date on which all purchase rights are exercised in connection with an
acquisition of us by merger or asset sale.
The board may at any time alter, suspend or discontinue the plan. However,
certain amendments may require stockholder approval.
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 29,472,000
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 504,000 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. This investors' rights agreement and addendum
has been 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 876,226 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 9,707,863 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. This agreement replaced the investors' rights agreement and
addendum from the Series A preferred stock financing and has been superseded by
the 1999 Investors' Rights Agreement. Please see "--Investors' Rights
Agreement."
SERIES C PURCHASE AGREEMENT; OTHER AGREEMENTS WITH MCI WORLDCOM
In March 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, for an aggregate purchase price of $30.0 million, 3,731,410
shares of Series C preferred stock, which are convertible into 4,477,692 shares
of common stock, and a warrant to purchase an aggregate of 720,000 shares of our
common stock at $6.70 per share. In April 1999, we issued to MCI WorldCom's
investment fund a warrant to purchase an additional 136,996 shares of common
stock at the purchase price per share paid in this offering. In connection with
this purchase agreement, we entered into an Amended and Restated Investors'
Rights Agreement, which has been superseded by the 1999 Investors' Rights
Agreement from the Qwest investment. Please see "--Investors' Rights Agreement."
The MCI WorldCom investment was part of a broader strategic arrangement
between us and MCI WorldCom. As part of this strategic arrangement, we also
entered into an 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
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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. See "Business--Strategic Partnerships."
SERIES C PURCHASE AGREEMENT; OTHER AGREEMENTS WITH MICROSOFT
In March 1999, we entered into a Series C Preferred Stock and Warrant
Purchase Agreement with Microsoft, pursuant to which Microsoft acquired, for an
aggregate purchase price of $30.0 million, 3,731,409 shares of Series C
preferred stock, which are convertible into 4,477,691 shares of common stock,
and a warrant to purchase an aggregate of 720,000 shares of our common stock at
a purchase price of $6.70 per share. In connection with this purchase agreement,
we entered into an Amended and Restated Investors' Rights Agreement dated March
16, 1999 which has been superseded by the 1999 Investors' Rights Agreement from
the Qwest investment. Please see "--Investors' Rights Agreement."
The Microsoft investment was also part of a broader strategic arrangement.
As part of the Microsoft arrangement, we entered into an agreement in which
Microsoft agreed to jointly distribute with us a co-branded DSL version of the
Microsoft Network service focused on our small business customers. See
"Business--Strategic Partnerships."
SERIES C PURCHASE AGREEMENT AND SERIES D PURCHASE AGREEMENT; OTHER AGREEMENTS
WITH QWEST
In connection with a broader customer relationship between us and Qwest, in
April 1999 we entered into a Series C Preferred Stock and Warrant Purchase
Agreement and a Series D Preferred Stock Purchase Agreement with U.S.
Telesource, Qwest's wholly-owned subsidiary. Pursuant to these agreements it
acquired, for an aggregate purchase price of approximately $15 million, 932,836
shares of Series C preferred stock, which are convertible into 1,119,403 shares
of common stock, 441,176 shares of Series D preferred stock, which are
convertible into 441,176 shares of common stock and a warrant to purchase an
aggregate of 180,000 shares of our common stock at a purchase price of $6.70 per
share. In connection with these purchase agreements, we entered into an Amended
and Restated Investors' Rights Agreement (the "1999 Investors' Rights
Agreement"), that replaced the investors' rights agreement from the Microsoft
investment. Please see "--Investors Rights Agreement."
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 or Qwest acquire greater
than 5% of our common stock, then MCI WorldCom's investment fund or Qwest's
wholly-owned subsidiary, as the case may be, may require us to register for
public sale all of its shares of our stock (each, a "Contingent
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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,
- one Contingent Demand for Registration pursuant to the request of MCI
WorldCom's investment fund, and
- one Contingent Demand for Registration pursuant to the request of Qwest's
subsidiary.
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. 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 are 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.
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 4,732,800 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 and an underwriter in this 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 14.2% of our
outstanding equity. See "Underwriting."
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 12.4% of our outstanding equity. All of
the shares owned by Sprout Capital VII, L.P. are subject to a voting trust 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
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<PAGE>
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 438,115 shares of common stock at an exercise price of $0.04 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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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of April 5, 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 April 5,
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).............................................. 8,278,651 13.5% 11.7%
Enterprise Partners (3).................................................... 10,440,415 17.0% 14.7%
Kleiner Perkins Caufield & Byers (4)....................................... 8,278,651 13.5% 11.7%
MCI WorldCom Venture Fund, Inc. (5)........................................ 5,334,688 8.6% 7.4%
The Sprout Group (6)....................................................... 8,278,651 13.5% 11.7%
Enron Communications Group (7)............................................. 5,393,258 8.8% 7.6%
Microsoft Corporation (8).................................................. 5,197,691 8.4% 7.3%
Catherine M. Hapka (9)..................................................... 4,621,130 7.5% 6.5%
Michael E. Calabrese....................................................... 360,000 * *
Eric H. Geis............................................................... 150,000 * *
James A. Greenberg (10).................................................... 715,642 1.2% 1.0%
Gloria Farler (11)......................................................... 30,000 * *
Kevin R. Compton (12)...................................................... -- -- --
Keith B. Geeslin (13)...................................................... -- -- --
Ken Harrison (14).......................................................... -- -- --
Susan Mayer (15)........................................................... -- -- --
William R. Stensrud (16)................................................... -- -- --
John L. Walecka (17)....................................................... -- -- --
Edward J. Zander........................................................... -- -- --
All directors and executive officers as a group (16 persons) (18).......... 7,582,886 12.3% 10.7%
</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 856,996 shares issuable upon exercise of warrants exercisable
within 60 days of April 5, 1999. The address for MCI WorldCom Venture Fund,
Inc. is 1801 Pennsylvania Avenue, Washington, D.C. 20006.
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<PAGE>
(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 Road, Building 3, Suite 170, Menlo Park,
California 94025. Of these, Sprout Capital VII, L.P. beneficially owns
7,201,565 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 720,000 shares issuable upon exercise of a warrant exercisable
within 60 days of April 5, 1999. The address for Microsoft Corporation is
One Microsoft Way, Redmond, Washington 98052.
(9) Includes shares held by Ms. Hapka's children, Christopher H. Safaya and
Catherine A. Safaya, in the amount of 5,333 shares each and shares held by
Christopher H. Safaya 1999 Trust and Catherine A. Safaya 1999 Trust in the
amount of 120,000 shares each.
(10) Includes 120,000 shares issuable upon exercise of options exercisable
within 60 days of April 5, 1999.
(11) Ms. Farler resigned in February 1999.
(12) 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.
(13) 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.
(14) 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.
(15) 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.
(16) 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.
(17) 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.
(18) Includes 120,000 shares issuable upon exercise of options or warrants
exercisable within 60 days of April 5, 1999 and excludes shares held by
the Brentwood Entities, the Enterprise Entities, the KPCB Entities, MCI
WorldCom, the Sprout Entities, Enron Communications Group and Microsoft.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
After this offering, we will be authorized to issue 250,000,000 shares of
common stock, $0.001 par value per share, of which 70,564,582 shares will be
issued and outstanding, 1,000,000 shares of Series 1 preferred stock, $0.001 par
value per share, of which no shares will be issued and outstanding and 4,000,000
shares of undesignated preferred stock, $0.001 par value per share, of which no
shares will be issued and outstanding.
COMMON STOCK
As of April 5, 1999, there were 10,570,126 shares of common stock
outstanding and held of record by approximately 75 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, we may issue up to 1,000,000 shares of
Series 1 preferred stock and the Board of Directors will have the authority,
without further action by the stockholders, to issue 4,000,000 additional 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 4,732,800 shares of common stock
with an exercise price of $0.004 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 issued to Sun Financial Group Inc., now GATX Capital
Corporation, a warrant to purchase 574,380 shares of common stock with an
exercise price of $1.85 per share. In March 1999, we issued to GATX warrants to
purchase an additional 45,498 shares of common stock with an exercise price of
$10.55 per share. These warrants are immediately exercisable and expire 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 720,000
shares of common stock at an exercise price of $6.70 per share. This warrant is
immediately exercisable and expires on March 2, 2004. In April 1999, we issued
to MCI WorldCom's investment fund a warrant to purchase an additional
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<PAGE>
136,996 shares of common stock at the per share exercise price equal to the
price per share paid in this offering. This warrant is immediately exercisable
and expires on April 4, 2004.
In connection with its $30 million equity investment in us in March 1999, we
issued to Microsoft a warrant to purchase up to 720,000 shares of common stock
at an exercise price of $6.70 per share. This warrant is immediately exercisable
and expires on March 15, 2004.
In connection with its $15 million equity investment in us in April 1999, we
issued to Qwest's wholly-owned subsidiary a warrant to purchase up to 180,000
shares of our common stock at an exercise price of $6.70 per share. This warrant
is immediately exercisable and expires on April 4, 2004.
In April 1999, we issued to Cisco Systems Capital Corporation a warrant to
purchase up to 75,000 shares of common stock at an exercise price of $10.55 per
share. This warrant is immediately exercisable and expires on April 5, 2002.
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. For a description of these rights, see "Certain Relationships and
Related Transactions--Investors' Rights Agreement."
The holders of the warrants issued in connection with the senior discount
notes, GATX and Cisco are entitled to piggyback registration rights similar to
those described above. Furthermore, we are obligated to register, within 180
days following the consummation of this offering, the shares issuable upon
exercise of the warrants issued in connection with the senior discount notes and
to keep such registration statement effective for up to 120 days.
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, 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
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<PAGE>
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
Our Board of Directors has adopted a rights plan (the "Rights Agreement")
pursuant to which one right (a "Right") to purchase one one-thousandth of a
share (a "Unit") of a series of preferred stock, par value $0.001 per share (the
"Rights Plan preferred stock") at $115 per Unit was issued as a dividend for
each outstanding share of common stock. 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 expire on April 2, 2009, 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
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<PAGE>
$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) $115 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 1,000,000.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Securities
Transfer & Trust, Inc.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The market price of our common stock could decline as a result of sales of a
large number of shares of our common stock in the market after this offering, or
the perception that such sales could occur. Such sales also might make it more
difficult for us to sell equity securities in the future at a time and price
that we deem appropriate. After this offering, 70,564,582 shares of common stock
will be outstanding, and 456,595 shares will be held as treasury stock. Of the
70,564,582 outstanding shares, the 9,375,000 shares being offered hereby are
freely tradable. This leaves 61,189,582 shares eligible for sale in the public
market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ----------------- -----------------------------------------------------------------------------------------------
<S> <C>
1,120,047 After the date of this prospectus
204,000 At various times after 90 days from the date of this prospectus (Rule 144)
59,865,535 At various times after 180 days from the date of this prospectus (subject, in some cases, to
volume limitations) (lock-up and Rule 144)
</TABLE>
In general, under Rule 144, as currently in effect, an affiliate of Rhythms
or a person (or persons whose shares are required to be aggregated) who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of (1)
1% of the then outstanding shares of common stock (approximately 710,212 shares
immediately after this offering) or (2) the average weekly trading volume in the
common stock during the four calendar weeks preceding the date on which notice
of such sale is filed, subject to certain restrictions. In addition, a person
who is not deemed to have been our affiliate at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years, would be entitled to sell such shares under Rule 144(k)
without regard to the requirements described above. To the extent that shares
were acquired from one of our affiliates, such person's holding period for the
purpose of effecting a sale under Rule 144 commences on the date of transfer
from the affiliate. 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 affiliates subject only to the manner of sale
provisions of Rule 144 and by our affiliates under Rule 144 without compliance
with its one-year holding period requirement.
As of the date of this prospectus, options to purchase a total of 3,649,130
shares of common stock are outstanding and immediately exercisable, of which
3,840 shares are currently vested. Shares issued upon the exercise of stock
options granted under our stock option plans will be eligible for resale in the
public market from time to time subject to vesting and, in the case of certain
options, the expiration of the lock-up agreements referred to below.
Our directors and officers and certain of our stockholders who beneficially
own 59,865,535 shares in the aggregate have entered into lock-up agreements
pursuant to which they have agreed that they will not offer, sell, or otherwise
dispose, directly or indirectly, any shares of common stock without the prior
written consent of Merrill Lynch and Salomon Smith Barney for a period of 180
days from the date of this prospectus.
Warrants to purchase 7,184,674 shares of common stock will be outstanding
after this offering. The shares underlying these warrants will be eligible for
sale at various times after 180 days from the date of this prospectus. Certain
holders of warrants to purchase approximately 5,427,678 shares of common stock
have the right, subject to certain conditions and limitations, to include their
shares in certain registration statements relating to our securities. By
exercising their registration rights and causing a large number of shares to be
registered and sold in the public market, these holders may cause the price of
the common stock to fall. In addition, any demand to include such shares in our
registration statements could have an adverse effect on our ability to raise
needed capital. Please see "Business-- Legal Proceedings," "Management--Benefit
Plans," "Principal and Selling Stockholders," "Description of
Securities--Registration Rights" and "Underwriting."
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<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon Smith Barney
Inc., Hambrecht & Quist LLC 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 LLC...........................................
Thomas Weisel Partners LLC......................................
-----------
Total................................................. 9,375,000
-----------
-----------
</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 1,406,250 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 9,375,000 shares offered hereby. If purchased,
such additional shares will be sold by the underwriters on the same terms as
those on which the 9,375,000 shares are being sold.
Affiliates of Donaldson, Lufkin & Jenrette Securities Corporation, one of
the underwriters, will own in excess of 10% of our outstanding common stock. See
"Principal Stockholders." Consequently, this offering is being made pursuant to
the provisions of Section 2720 of the Conduct Rules of the National Association
of Securities Dealers, Inc. Pursuant to these provisions, the public offering
price of an equity security can be no higher than the price recommended by a
"qualified independent underwriter" meeting certain standards. Therefore,
Merrill Lynch will serve in this role, and the price of the shares offered will
be no higher than that recommended by Merrill Lynch in its capacity as the
qualified independent underwriter. In this capacity and in its capacity as one
of the underwriters, Merrill Lynch has participated in the preparation of the
registration statement of which this prospectus is a part and has performed due
diligence with respect thereto. We have agreed to indemnify Merrill
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<PAGE>
Lynch, in its capacity as the qualified independent underwriter, against certain
liabilities, including liabilities under the Securities Act.
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.
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 1,406,250 additional
shares of common stock.
<TABLE>
<CAPTION>
TOTAL
WITHOUT TOTAL
PER SHARE 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 $1,550,000 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
76
<PAGE>
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 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 and Donaldson, Lufkin & Jenrette Securities Corporation acted
as initial purchasers 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
72,000 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.
77
<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, except for the last paragraph of Note 11
as to which the date is March 19, 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; 54,635,294 shares authorized in 1997, 80,049,892
shares in 1998; 2,482,222 shares issued in 1997, 8,042,530 shares in 1998..... 2,000 8,000
Treasury stock, at cost; 438,115 shares......................................... -- (18,000)
Additional paid-in capital...................................................... 14,012,000 37,212,000
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................................................................. $ (1.12) $ (12.18)
------------------ -----------------
------------------ -----------------
Diluted............................................................... $ (1.12) $ (12.18)
------------------ -----------------
------------------ -----------------
Shares Used in Computing Net Loss Per Share:
Basic................................................................. 2,161,764 2,984,216
------------------ -----------------
------------------ -----------------
Diluted............................................................... 2,161,764 2,984,216
------------------ -----------------
------------------ -----------------
</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)............................ -- $ -- -- $-- 2,161,764 $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 ($0.04 per share exercise
price)................................ -- -- -- -- 320,458 --
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 -- -- 2,482,222 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 ($0.04 to $0.25 per share
exercise price)....................... -- -- -- -- 5,560,308 6,000
Purchase of treasury stock for cash
($0.04 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 8,042,530 $8,000
---------- ------- --------- ------ --------- ------
---------- ------- --------- ------ --------- ------
<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 ($0.04 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 ($0.04 to $0.25 per share
exercise price)....................... -- -- 236,000 -- -- 242,000
Purchase of treasury stock for cash
($0.04 per share)..................... 438,115 (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............ 438,115 $(18,000) $37,212,000 $(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 36,653,940 and
52,958,513 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 4,732,800 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 $0.004 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 574,380 warrants to purchase common
stock at a price of $1.85 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 54,635,294
shares of common stock, as adjusted for the November 1998 and March 1999 stock
splits, 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 54,983,160,
as adjusted for the November 1998 and March 1999 stock splits, 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 59,715,960,
as adjusted for the November 1998 and March 1999 stock splits.
Effective November 4, 1998, the Company completed a two-for-one split of its
common stock. 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 2.4 to 1 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 Board of Directors. In the event of a liquidation of the
Company, the holders of the Series A and
F-11
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
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 11,673,530 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..................................................... 5,801,714 $ 0.29 $ 0.04
Exercised................................................... (320,458) $ 0.29 $ 0.04
-----------
Outstanding at December 31, 1997........................ 5,481,256 $ 0.29 $ 0.04
Granted..................................................... 3,364,680 $ 2.62 $ 0.84
Exercised................................................... (5,560,308) $ 0.30 $ 0.04
Canceled.................................................... (136,348) $ 1.10 $ 0.22
-----------
Outstanding at December 31, 1998........................ 3,149,280 $ 2.73 $ 0.89
-----------
-----------
</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>
------------------------------ --------------------------
$0.04 177,480 9.03 years $ 0.04 177,480 $ 0.04
$0.21 to $0.25 1,591,680 9.42 years $ 0.23 1,591,680 $ 0.23
$1.67 to $1.88 1,380,120 9.83 years $ 1.75 1,380,120 $ 1.75
</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 84,527,584,
as adjusted for the November 1998 and March 1999 stock splits, 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 WorldCom also received warrants to purchase up to 720,000 shares
of common stock at a price of $6.70 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
1,615,686 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.
On March 19, 1999, the Company completed a six for five split of its common
stock. The accompanying consolidated financial statements have been restated for
all periods presented to reflect the stock split.
NOTE 12--SUBSEQUENT EVENTS (UNAUDITED)
Effective March 15, 1999, the Company amended its Certificate of
Incorporation to increase the number of authorized common shares to 74,171,062,
as adjusted for the March 1999 stock split, and to authorize an additional
3,731,409 shares of Series C preferred stock.
On March 16, 1999, the Company issued 3,731,409 shares of its Series C
preferred stock to Microsoft at a price of $8.04 per share for total proceeds to
the Company of $30,000,000. In connection with this investment, Microsoft also
received warrants to purchase up to 720,000 shares of common stock at a price of
$6.70 per share. The terms of the transaction also provide for the Company and
Microsoft to enter into various business relationships.
F-14
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
The Company has filed a registration statement for a public offering of
approximately 9,375,000 shares of common stock.
On March 16, 1999, the Company's Board of Directors approved the 1999 Stock
Incentive Plan and the 1999 Employee Stock Purchase Plan, subject to stockholder
approval. The 1999 Stock Incentive Plan is intended to serve as the successor
equity incentive program to the 1997 Stock Option/Stock Issuance Plan. An
initial reserve of 8,161,944 shares of common stock has been authorized for
issuance under the 1999 Stock Incentive Plan. The Company has also initially
reserved an additional 1,200,000 shares of common stock for the 1999 Employee
Stock Purchase Plan. The 1999 Stock Incentive Plan will become effective upon
the effectiveness of the public offering. The 1999 Stock Incentive Plan will
become effective upon the execution of an Underwriting Agreement for the public
offering.
On March 31, 1999, the Company entered into a 36-month lease line that
provides for $24,000,000 in equipment on an operating lease basis. In connection
with this lease agreement, the Company issued 45,498 warrants to purchase common
stock at a price of $10.55 per share, exercisable immediately.
Effective April 5, 1999, the Company restated its Certificate of
Incorporation to increase the number of authorized common shares to 81,000,000,
to authorize an additional 932,836 shares of Series C preferred stock, to
authorize 441,176 shares of Series D preferred stock, and to designate 1,000,000
shares as Series 1 junior participating preferred stock.
On April 6, 1999, the Company issued 932,836 shares of its Series C
preferred stock at a price of $8.04 per share and 441,176 shares of its Series D
preferred stock at a price of $17.00 per share to a wholly owned subsidiary of
Qwest Communications Corporation for total proceeds of $15,000,000. In
connection with this investment, Qwest also received warrants to purchase
180,000 shares of common stock at a price of $6.70 per share and MCI WorldCom
received an additional warrant to purchase 136,996 shares of common stock at a
price per share equal to the initial offering price per share of the Company's
public offering of common stock.
During April 1999, the Company entered into a 36-month lease line that
provides for $20,000,000 in equipment on an operating lease basis. In connection
with this lease agreement, the Company issued 75,000 warrants to purchase common
stock at a price of $10.55 per share, exercisable immediately.
F-15
<PAGE>
[MAPS OF SAN DIEGO, CA AND CHICAGO, IL SHOWING RHYTHMS DEPLOYMENT]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9,375,000 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 LLC
APRIL , 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................................................ $ 59,944
Nasdaq National Market fee...................................... 90,000
NASD fee........................................................ 22,062
Blue Sky fees and expenses...................................... 5,000
Printing and engraving expenses................................. 500,000
Legal fees and expenses......................................... 600,000
Accounting fees and expenses.................................... 200,000
Transfer Agent and Registrar fees............................... 10,000
Miscellaneous expenses.......................................... 62,994
---------
Total....................................................... $1,550,000
---------
---------
</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 (adjusted for subsequent stock splits):
(1) An aggregate of 2,161,764 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 14,736,000 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 15,240,000 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 876,226 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 9,707,863 shares of common stock) was issued
in a private placement in March
II-2
<PAGE>
1998 to Brentwood Venture Capital, Enterprise Partners, Kleiner Perkins
Caufield & Byers, the 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 4,732,800 shares of common stock with exercise prices of $0.004 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 574,380 shares of common
stock with an exercise price of $1.85 per share in connection with an
equipment lease financing.
(8) In March 1999 the Registrant issued to MCI WorldCom Venture Fund,
Inc. and to Microsoft Corporation 3,731,410 and 3,731,409 shares of Series C
preferred stock, respectively, and issued to each of them a warrant to
purchase 720,000 shares of common stock for an aggregate purchase price of
$60.0 million. In April 1999, the Registrant issued to MCI WorldCom Venture
Fund, Inc. a warrant to purchase 136,996 shares of common stock at the
purchase price per share sold in this offering.
(9) In March 1999 the Registrant issued to GATX Capital Corporation,
warrants to purchase an aggregate of 45,498 shares of common stock with an
exercise price per share of $10.55 in connection with an equipment lease
financing.
(10) In April 1999 the Registrant issued to U.S. Telesource, Inc.
932,836 shares of Series C preferred stock, which are convertible into
1,119,403 shares of common stock, and 441,176 shares of Series D preferred
stock, which are convertible into 441,176 shares of common stock, subject to
adjustment if the price per share in this offering is less than $17.00. The
Registrant also issued to U.S. Telesource, Inc. a warrant to purchase
180,000 shares of common stock at an exercise price of $6.70 per share. The
aggregate consideration received for this issuance was $15 million.
(11) In April 1999 the Registrant issued to Cisco Systems Capital
Corporation a warrant to purchase 75,000 shares of common stock with an
exercise price per share of $10.55 in connection with an equipment lease
financing.
(12) From August 1997 through April 5, 1999, the Registrant granted
stock options to purchase an aggregate of 12,387,070 shares of common stock
to employees and consultants with aggregate exercise prices ranging from
$0.04 to $16.00 per share pursuant to the Registrant's stock option plan. As
of April 5, 1999, 8,408,362 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.
II-3
<PAGE>
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 Certificate of Designation of Series 1 Junior Participating Preferred Stock of Registrant.
3.3 Form of Restated Certificate of Incorporation of the Registrant to become effective immediately prior
to the Offering.
3.4 Bylaws of the Registrant, as amended.
3.5 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.
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.
4.7** Common Stock Purchase Warrant, dated March 16, 1999, by and between the Registrant and Microsoft
Corporation.
4.8 Warrant to Purchase Shares of Common Stock, dated March 31, 1999, by and between Registrant and GATX
Capital Corporation.
4.9 Warrant Purchase Agreement, dated as of April 6, 1999, by and between Registrant and MCI WorldCom
Venture Fund, Inc.
4.10 Common Stock Purchase Warrant, dated April 6, 1999, by and among Registrant and MCI WorldCom Venture
Fund, Inc.
4.11 Common Stock Purchase Warrant, dated April 6, 1999, by and among the Registrant and U.S. Telesource,
Inc.
4.12 Common Stock Purchase Warrant, dated April 5, 1999, by and among Registrant and Cisco Systems Capital
Corporation.
4.13 Rights Agreement, dated April 2, 1999, by and among Registrant and American Securities Transfer &
Trust, 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.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
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.
9.5 Voting Agreement, dated April 6, 1999, by and between Registrant and the Investors listed on Schedule
A thereto.
10.1* Series A Preferred Stock Purchase Agreement, dated July 3, 1997, by and among the Registrant and the
Investors listed on Schedule A thereto.
10.2* Subsequent Closing Purchase Agreement, dated December 23, 1997, by and among the Registrant and the
Investors listed on Schedule A thereto.
10.3* Series B Preferred Stock Purchase Agreement, dated March 12, 1998, by and among the Registrant and
the Investors listed on Schedule A thereto.
10.4**++ 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, Inc.
10.8** Series C Preferred Stock and Warrant Purchase Agreement, dated March 16, 1999, by and among the
Registrant and Microsoft Corporation.
10.9** Amended and Restated Investors' Rights Agreement, dated March 16, 1999, by and among the Registrant
and the Investors listed on Schedule A thereto.
10.10** Distribution Agreement, dated March 16, 1999, by and among the Registrant and Microsoft Corporation.
10.11* 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.
10.12** Business Lease (Single Tenant) between the Registrant and BR Venture, LLC dated September 1998.
10.13* Employment Agreement between the Registrant and Catherine M. Hapka, dated June 10, 1997.
10.14* Employment Agreement between the Registrant and Jeffrey Blumenfeld, dated August 10, 1997.
10.15* Employment Agreement between the Registrant and James A. Greenberg, dated July 14, 1997.
10.16* Employment Agreement between the Registrant and Rand A. Kennedy, dated August 22, 1997.
10.17* 1997 Stock Option/Stock Issuance Plan.
10.18 1999 Stock Incentive Plan.
10.19 1999 Employee Stock Purchase Plan.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
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.
10.23 Third Addendum, dated March 31, 1999, to Master Lease Agreement, dated November 19, 1997, by and
among Registrant and GATX Capital Corporation.
10.24 Master Lease Agreement, dated March 31, 1999, by and among Registrant and GATX Capital Corporation.
10.25 First Addendum, dated March 31, 1999, to Master Lease Agreement, dated March 31, 1999, by and among
Registrant and GATX Capital Corporation.
10.26 Amendment No. 1, dated April 6, 1999, to Framework Agreement, dated March 3, 1999, by and among the
Registrant and MCI WorldCom, Inc.
10.27 Series C Preferred Stock and Warrant Purchase Agreement, dated April 6, 1999, by and among the
Registrant and U.S Telesource, Inc.
10.28 Series D Preferred Stock Purchase Agreement, dated April 6, 1999, by and among the Registrant and the
Investors listed on Schedule A thereto.
10.29 Amended and Restated Investors' Rights Agreement, dated April 6, 1999, by and among the Registrant
and the Investors listed on Schedule A thereto.
10.30 Lease Agreement, dated April 5, 1999, by and among the Registrant and Cisco Systems Capital
Corporation.
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.
24.2** 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.
++ Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text (the "Mark"). This Exhibit has been filed
separately with the Secretary of the Commission without the Mark pursuant to
the Registrant's Application Requesting Confidential Treatment under Rule
406 under the Securities Act.
(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.
II-6
<PAGE>
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.
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-7
<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 6th day of April 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 April 6, 1999
Catherine M. Hapka Officer and Director
/s/ SCOTT C. CHANDLER
- ------------------------------ Chief Financial Officer April 6, 1999
Scott C. Chandler
*
- ------------------------------ Director April 6, 1999
Kevin R. Compton
*
- ------------------------------ Director April 6, 1999
Keith B. Geeslin
*
- ------------------------------ Director April 6, 1999
Ken L. Harrison
*
- ------------------------------ Director April 6, 1999
Susan Mayer
*
- ------------------------------ Director April 6, 1999
William R. Stensrud
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Director April 6, 1999
John L. Walecka
*
- ------------------------------ Director April 6, 1999
Edward J. Zander
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ SCOTT C. CHANDLER
-------------------------
Scott C. Chandler
ATTORNEY IN FACT
</TABLE>
II-9
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
RHYTHMS NETCONNECTIONS INC.
(a Delaware corporation)
9,375,000 Shares of Common Stock
PURCHASE AGREEMENT
Dated: April 6, 1999
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1. Representations and Warranties. . . . . . . . . . . . . . . . . . . . . .2
(a) Representations and Warranties by the Company.. . . . . . . . . . . . .2
(i) Compliance with Registration Requirements.. . . . . . . . . . .2
(ii) Independent Accountants.. . . . . . . . . . . . . . . . . . . .3
(iii) Financial Statements. . . . . . . . . . . . . . . . . . . . . .3
(iv) No Material Adverse Change in Business. . . . . . . . . . . . .4
(v) Good Standing of the Company. . . . . . . . . . . . . . . . . .4
(vi) Good Standing of Designated Subsidiaries. . . . . . . . . . . .4
(vii) Capitalization. . . . . . . . . . . . . . . . . . . . . . . . .5
(viii) Authorization of Agreement. . . . . . . . . . . . . . . . . . .5
(ix) Authorization and Description of Securities.. . . . . . . . . .5
(x) Absence of Defaults and Conflicts.. . . . . . . . . . . . . . .5
(xi) Absence of Labor Dispute. . . . . . . . . . . . . . . . . . . .6
(xii) Absence of Proceedings. . . . . . . . . . . . . . . . . . . . .6
(xiii) Accuracy of Exhibits. . . . . . . . . . . . . . . . . . . . . .6
(xiv) Possession of Intellectual Property.. . . . . . . . . . . . . .6
(xv) Absence of Further Requirements.. . . . . . . . . . . . . . . .7
(xvi) Possession of Licenses and Permits. . . . . . . . . . . . . . .7
(xvii) Title to Property.. . . . . . . . . . . . . . . . . . . . . . .8
(xviii) Compliance with Cuba Act. . . . . . . . . . . . . . . . . . . .9
(xix) Investment Company Act. . . . . . . . . . . . . . . . . . . . .9
(xx) Environmental Laws. . . . . . . . . . . . . . . . . . . . . . .9
(xxi) Registration Rights.. . . . . . . . . . . . . . . . . . . . . .9
(xxii) Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . .9
(xxiii) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(xxiv) Internal Accounting Controls. . . . . . . . . . . . . . . . . 10
(b) OFFICER'S CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 2. Sale and Delivery to Underwriters; Closing. . . . . . . . . . . . . . . 10
(a) Initial Securities. . . . . . . . . . . . . . . . . . . . . . . . . . 10
(b) Option Securities.. . . . . . . . . . . . . . . . . . . . . . . . . . 10
(c) Payment.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(d) Denominations; Registration.. . . . . . . . . . . . . . . . . . . . . 12
(e) Appointment of Qualified Independent Underwriter. . . . . . . . . . . 12
SECTION 3. Covenants of the Company. . . . . . . . . . . . . . . . . . . . . . . . 12
(a) Compliance with Securities Regulations and Commission Requests. . . . 12
(b) Filing of Amendments. . . . . . . . . . . . . . . . . . . . . . . . . 12
(c) Delivery of Registration Statements.. . . . . . . . . . . . . . . . . 13
(d) Delivery of Prospectuses. . . . . . . . . . . . . . . . . . . . . . . 13
(e) Continued Compliance with Securities Laws.. . . . . . . . . . . . . . 13
(f) Blue Sky Qualifications.. . . . . . . . . . . . . . . . . . . . . . . 13
(g) Rule 158. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
i
<PAGE>
(h) Use of Proceeds.. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(i) Listing.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(j) Restriction on Sale of Securities.. . . . . . . . . . . . . . . . . . 14
(k) Reporting Requirements. . . . . . . . . . . . . . . . . . . . . . . . 14
(l) Compliance with Rule 463. . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 4. Payment of Expenses.. . . . . . . . . . . . . . . . . . . . . . . . . . 15
(a) Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(b) Termination of Agreement. . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 5. Conditions of Underwriters' Obligations.. . . . . . . . . . . . . . . . 15
(a) Effectiveness of Registration Statement.. . . . . . . . . . . . . . . 15
(b) Opinion of Counsel for Company. . . . . . . . . . . . . . . . . . . . 16
(c) Opinion of Counsel for Underwriters.. . . . . . . . . . . . . . . . . 16
(d) Officers' Certificate.. . . . . . . . . . . . . . . . . . . . . . . . 16
(e) Accountant's Comfort Letter.. . . . . . . . . . . . . . . . . . . . . 17
(f) Bring-down Comfort Letter.. . . . . . . . . . . . . . . . . . . . . . 17
(g) Approval of Listing.. . . . . . . . . . . . . . . . . . . . . . . . . 17
(h) No Objection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(i) Lock-up Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . 17
(j) Conditions to Purchase of Option Securities.. . . . . . . . . . . . . 17
(i) Officers' Certificate.. . . . . . . . . . . . . . . . . . . . 17
(ii) Opinions of Counsel for Company.. . . . . . . . . . . . . . . 17
(iii) Opinion of Counsel for Underwriters.. . . . . . . . . . . . . 17
(iv) Bring-down Comfort Letter.. . . . . . . . . . . . . . . . . . 18
(k) Additional Documents. . . . . . . . . . . . . . . . . . . . . . . . . 18
(l) Termination of Agreement. . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 6. Indemnification.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(a) Indemnification of Underwriters.. . . . . . . . . . . . . . . . . . . 18
(b) Indemnification of Company, Directors and Officers. . . . . . . . . . 20
(c) Actions against Parties; Notification.. . . . . . . . . . . . . . . . 20
(d) Settlement without Consent if Failure to Reimburse. . . . . . . . . . 21
SECTION 7. Contribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 8. Representations, Warranties and Agreements to Survive Delivery. . . . . 22
SECTION 9. Termination of Agreement. . . . . . . . . . . . . . . . . . . . . . . . 23
(a) Termination; General. . . . . . . . . . . . . . . . . . . . . . . . . 23
(b) Liabilities.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 10. Default by One or More of the Underwriters.. . . . . . . . . . . . . . 23
SECTION 11. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 12. Parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ii
<PAGE>
SECTION 13. GOVERNING LAW AND TIME.. . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 14. Effect of Headings.. . . . . . . . . . . . . . . . . . . . . . . . . . 24
SCHEDULES
Schedule A - List of Underwriters . . . . . . . . . . . . . . . .Sch A-1
Schedule B - Pricing Information. . . . . . . . . . . . . . . . .Sch B-1
Schedule C - List of Persons subject to Lock-up . . . . . . . . .Sch C-1
EXHIBITS
Exhibit A - Forms of Opinions of Company's Counsel. . . . . . . . . .A-1
Exhibit B - Form of Lock-up Letter. . . . . . . . . . . . . . . . . .B-1
</TABLE>
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DRAFT OF APRIL 2, 1999
RHYTHMS NETCONNECTIONS INC.
(a Delaware corporation)
9,375,000 Shares of Common Stock
(Par Value $.001 Per Share)
PURCHASE AGREEMENT
April 6, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Salomon Smith Barney Inc.
Hambrecht & Quist
Thomas Weisel Partners LLC
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Rhythms NetConnections Inc., a Delaware corporation (the "Company"),
confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"), Salomon Smith Barney Inc. ("Salomon") and
each of the other Underwriters named in Schedule A hereto (collectively, the
"Underwriters", which term shall also include any underwriter substituted as
hereinafter provided in Section 10 hereof), for whom Merrill Lynch, Salomon,
Hambrecht & Quist and Thomas Weisel Partners LLC are acting as representatives
(in such capacity, the "Representatives"), with respect to the issue and sale by
the Company and the purchase by the Underwriters, acting severally and not
jointly, of the respective numbers of shares of Common Stock, par value $.001
per share, of the Company ("Common Stock") set forth in said Schedule A, and
with respect to the grant by the Company to the Underwriters, acting severally
and not jointly, of the option described in Section 2(b) hereof to purchase all
or any part of 1,406,250 additional shares of Common Stock to cover
over-allotments, if any. The aforesaid 9,375,000 shares of Common Stock (the
"Initial Securities") to be purchased by the Underwriters and all or any part of
the 1,406,250 shares of Common Stock subject to the option described in Section
2(b) hereof (the "Option Securities") are hereinafter called, collectively, the
"Securities".
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
<PAGE>
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-72409) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated March __, 1999 together with the Term
Sheet and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. For purposes of this Agreement, all references
to the Registration Statement, any preliminary prospectus, the Prospectus or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof, and agrees with each Underwriter,
as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of
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<PAGE>
the Company, are contemplated by the Commission, and any request on the
part of the Commission for additional information has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any Option Securities are
purchased, at the Date of Delivery), the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements
of the 1933 Act and the 1933 Act Regulations and did not and will not
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. Neither the Prospectus nor any
amendments or supplements thereto, at the time the Prospectus or any such
amendment or supplement was issued and at the Closing Time (and, if any
Option Securities are purchased, at the Date of Delivery), included or
will include an untrue statement of a material fact or omitted or will
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading. If Rule 434 is used, the Company will comply with the
requirements of Rule 434 and the Prospectus shall not be "materially
different", as such term is used in Rule 434, from the prospectus
included in the Registration Statement at the time it became effective.
The representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or Prospectus
made in reliance upon and in conformity with information furnished to the
Company in writing by any Underwriter through Merrill Lynch or Salomon
expressly for use in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when
so filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectus delivered to the Underwriters
for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) INDEPENDENT ACCOUNTANTS. The accountants who certified the
financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required by
the 1933 Act and the 1933 Act Regulations.
(iii) FINANCIAL STATEMENTS. The financial statements included in
the Registration Statement and the Prospectus, together with the related
schedules and notes, present fairly the financial position of the Company
and its consolidated subsidiaries at the dates indicated and the
statement of operations, stockholders' equity and cash flows of the
Company and its consolidated subsidiaries for the periods specified; said
financial statements have been prepared in conformity with generally
accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods involved. The
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<PAGE>
supporting schedules included in the Registration Statement present
fairly in accordance with GAAP the information required to be stated
therein. The selected financial data and the summary financial
information included in the Prospectus present fairly the information
shown therein and have been compiled on a basis consistent with that of
the audited financial statements included in the Registration Statement.
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein,
(A) there has been no material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects
of the Company and its subsidiaries considered as one enterprise (a
"Material Adverse Effect"), whether or not arising in the ordinary course
of business, (B) there have been no transactions entered into by the
Company or any of its subsidiaries, other than those in the ordinary
course of business, which are material with respect to the Company and
its subsidiaries considered as one enterprise, and (C) there has been no
dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(v) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware and has corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its obligations
under this Agreement; and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would
not result in a Material Adverse Effect.
(vi) GOOD STANDING OF DESIGNATED SUBSIDIARIES. Each of ACI
Corp. and ACI Corp.-Virginia (collectively, the "Designated
Subsidiaries") has been duly organized and is validly existing as a
corporation (or, in the case of ACI Corp.-Virginia, a Virginia public
benefit corporation) in good standing under the laws of the jurisdiction
of its incorporation, has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing
of property or the conduct of business, except where the failure so to
qualify or to be in good standing would not result in a Material Adverse
Effect; except as otherwise disclosed in the Registration Statement, all
of the issued and outstanding capital stock of each Designated Subsidiary
has been duly authorized and validly issued, is fully paid and
non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity; none of the outstanding shares of
capital stock of any Designated Subsidiary was issued in violation of the
preemptive or similar rights arising by operation of law, or under the
charter or by-laws of such Designated Subsidiary or under any agreement
to which the
4
<PAGE>
Company or such Designated Subsidiary is a party. The only subsidiaries
of the Company are the subsidiaries listed on Exhibit 21 to the
Registration Statement.
(vii) CAPITALIZATION. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
employee benefit or stock option plans referred to in the Prospectus or
pursuant to the exercise of convertible securities or options referred to
in the Prospectus). The shares of issued and outstanding capital stock
of the Company have been duly authorized and validly issued and are fully
paid and non-assessable; none of the outstanding shares of capital stock
of the Company was issued in violation of the preemptive or other similar
rights of any securityholder of the Company.
(viii) AUTHORIZATION OF AGREEMENT. This Agreement has been duly
authorized, executed and delivered by the Company.
(ix) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The
Securities have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered by
the Company pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and fully paid and
non-assessable; the Common Stock conforms to all statements relating
thereto contained in the Prospectus and such description conforms to the
rights set forth in the instruments defining the same; no holder of the
Securities will be subject to personal liability by reason of being such
a holder; and the issuance of the Securities is not subject to the
preemptive or other similar rights of any securityholder of the Company.
(x) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company nor
any of its subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage,
deed of trust, loan or credit agreement, note, lease or other agreement
or instrument to which the Company or any of its subsidiaries is a party
or by which it or any of them may be bound, or to which any of the
property or assets of the Company or any subsidiary is subject
(collectively, "Agreements and Instruments") except for such defaults
that would not result in a Material Adverse Effect, and the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein and in the Registration Statement
(including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Prospectus
under the caption "Use of Proceeds") and compliance by the Company with
its obligations hereunder have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute
a breach of, or default or a Repayment Event (as defined below) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any subsidiary pursuant to,
the Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that, singly or in the
aggregate,
5
<PAGE>
would not result in a Material Adverse Effect), nor will such action
result in any violation of the provisions of the charter or by-laws of
the Company or any subsidiary or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over
the Company or any of its subsidiaries or any of their assets, properties
or operations. As used herein, a "Repayment Event" means any event or
condition which gives the holder of any note, debenture or other evidence
of indebtedness or preferred stock (or any person acting on such holder's
behalf) the right to require the repurchase, redemption or repayment of
all or a portion of such indebtedness or preferred stock by the Company
or any of its subsidiaries.
(xi) ABSENCE OF LABOR DISPUTE. No labor dispute with the
employees of the Company or any of its subsidiaries exists or, to the
knowledge of the Company, is imminent, and the Company is not aware of
any existing or imminent labor disturbance by the employees of any of its
or any of its subsidiaries' principal suppliers, manufacturers, customers
or contractors, which, in either case, may reasonably be expected to
result in a Material Adverse Effect.
(xii) ABSENCE OF PROCEEDINGS. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company or
any subsidiary, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which might reasonably be
expected to result in a Material Adverse Effect, or which might
reasonably be expected to materially and adversely affect the properties
or assets thereof or the consummation of the transactions contemplated in
this Agreement or the performance by the Company of its obligations
hereunder. The aggregate of all pending legal or governmental proceedings
to which the Company or any subsidiary is a party or of which any of
their respective property or assets is the subject which are not
described in the Registration Statement, including ordinary routine
litigation incidental to the business, could not reasonably be expected
to result in a Material Adverse Effect.
(xiii) ACCURACY OF EXHIBITS. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) POSSESSION OF INTELLECTUAL PROPERTY. Except as disclosed
in the Registration Statement, (A) the Company and its subsidiaries own
or possess, or can acquire on reasonable terms, adequate patents, patent
rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service
marks, trade names or other intellectual property (collectively,
"Intellectual Property") necessary to carry on the business now operated
by them except that the Company and its subsidiaries may fail to so own,
possess or have the ability to acquire on reasonable terms any
Intellectual Property if such failure would not result, singly or in the
aggregate, in a
6
<PAGE>
Material Adverse Effect, and (B) neither the Company nor any of its
subsidiaries has received any notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with respect
to any Intellectual Property or of any facts or circumstances which would
render any Intellectual Property invalid or inadequate to protect the
interest of the Company or any of its subsidiaries therein, and which
infringement or conflict (if the subject of any unfavorable decision,
ruling or finding) or invalidity or inadequacy, singly or in the
aggregate, would result in a Material Adverse Effect.
(xv) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale
of the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except such as have been already obtained
or as may be required under the 1933 Act or the 1933 Act Regulations or
state securities laws.
(xvi) POSSESSION OF LICENSES AND PERMITS. Except as disclosed in
the Registration Statement, the Company and its subsidiaries possess such
permits, licenses, approvals, consents and other authorizations issued by
the appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by them
(collectively, "Governmental Licenses"); the Company and its subsidiaries
are in compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to comply would not, singly or in
the aggregate, have a Material Adverse Effect; all of the Governmental
Licenses are valid and in full force and effect, except where the
invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect; and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would result in a Material Adverse Effect. The
Company has not been informed of any fact, event or circumstance that is
reasonably likely to impair the Company's (or its subsidiaries') ability
to obtain any Governmental Licenses necessary or advisable in order to
effectuate the Company's future plans and strategies described in the
Prospectus. Without limiting the generality of this paragraph:
(A) The Company and each of its subsidiaries hold all
telecommunications regulatory licenses, permits, authorizations,
consents and approvals (the "Telecommunications Licenses") required
from the Federal Communications Commission (the "FCC") for the
Company and its subsidiaries to conduct their business on and as of
the date hereof in the manner described in the Prospectus, except
as would not have, individually or in the aggregate, a Material
Adverse Effect; the Telecommunications Licenses have been duly and
validly issued and are in full force and effect, except where the
failure to be in full force and effect would not have, individually
or in the aggregate, a Material Adverse Effect; no proceedings to
revoke or restrict the Telecommunications
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<PAGE>
Licenses are pending or, to the best of the Company's knowledge,
threatened; neither the Company nor its subsidiaries are in
violation of any of the terms and conditions of any of the
Telecommunications Licenses, are in violation of the Communications
Act of 1934, as amended (the "Communications Act"), or are in
violation of any FCC rules and regulations, except as would not
have, individually or in the aggregate, a Material Adverse Effect;
and the Company and its subsidiaries have in effect with the FCC
all international and domestic service tariffs necessary to conduct
their business on and as of the date hereof in the manner described
in the Prospectus except as would not have, individually or in the
aggregate, a Material Adverse Effect;
(B) The Company and its subsidiaries have obtained all
state and municipal Telecommunications Licenses and filed all
tariffs required for the provision of telecommunications services
in any state to conduct their business on and as of the date hereof
in the manner described in the Prospectus, except where the failure
to do so would not have, individually or in the aggregate, a
Material Adverse Effect;
(C) There is no outstanding adverse judgment,
injunction, decree or order that has been issued by the FCC or any
state utility commission or similar state agency ("PUC") or
municipality against the Company or its subsidiaries or any action,
proceeding or investigation pending before the FCC or any state PUC
or municipality, or, to the Company's knowledge, threatened by the
FCC or any state PUC or municipality against the Company or its
subsidiaries which, if the subject of any unfavorable decision,
ruling or finding, would have a Material Adverse Effect on the
Company or its subsidiaries;
(D) No license, permit, consent, approval, order or
authorization of, or filing with, the FCC or with any state PUC or
municipal authority on the part of the Company or its subsidiaries
is required in connection with the issuance or sale of the
Securities; and
(E) Neither the issuance and sale of the Securities nor
the performance by the Company or its subsidiaries of their
obligations under this Agreement will result in a violation in any
material respect of: (1) the Communications Act or the applicable
rules or regulations, or any order, writ, judgment, injunction,
decree or award of the FCC binding on the Company or its
subsidiaries; (2) any state telecommunications laws or any
applicable state PUC rules or regulations, or any order, writ,
judgment, injunction, decree or award of any state PUC binding on
the Company or its subsidiaries; or (3) any municipal rules or
regulations applicable to the Company or its subsidiaries.
(xvii) TITLE TO PROPERTY. The Company and its subsidiaries have
good and marketable title to all real property owned by the Company and
its subsidiaries and good title to all other properties owned by them, in
each case, free and clear of all mortgages,
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<PAGE>
pledges, liens, security interests, claims, restrictions or encumbrances
of any kind except such as (a) are described in the Prospectus or (b) do
not, singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company or any of its subsidiaries; and all of
the leases and subleases material to the business of the Company and its
subsidiaries, considered as one enterprise, and under which the Company
or any of its subsidiaries holds properties described in the Prospectus,
are in full force and effect, and neither the Company nor any of its
subsidiaries has any notice of any material claim of any sort that has
been asserted by anyone adverse to the rights of the Company or any of
its subsidiaries under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or any subsidiary to
the continued possession of the leased or subleased premises under any
such lease or sublease.
(xviii) COMPLIANCE WITH CUBA ACT. The Company has complied with,
and is and will be in compliance with, the provisions of that certain
Florida act relating to disclosure of doing business with Cuba, codified
as Section 517.075 of the Florida statutes, and the rules and regulations
thereunder (collectively, the "Cuba Act") or is exempt therefrom.
(xix) INVESTMENT COMPANY ACT. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xx) ENVIRONMENTAL LAWS. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any of its subsidiaries is in violation of any federal, state, local
or foreign statute, law, rule, regulation, ordinance, code, policy or
rule of common law or any judicial or administrative interpretation
thereof, including any judicial or administrative order, consent, decree
or judgment, relating to pollution or protection of human health, the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including,
without limitation, laws and regulations relating to the release or
threatened release of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials (collectively, "Environmental Laws"), (B) the Company
and its subsidiaries have all permits, authorizations and approvals
required under any applicable Environmental Laws and are each in
compliance with their requirements, (C) there are no pending or
threatened administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of noncompliance or
violation, investigation or proceedings relating to any Environmental Law
against the Company or any of its subsidiaries and (D) there are no
events or circumstances that might reasonably be expected to form the
basis of an order for clean-up or remediation, or an action, suit or
proceeding by any private party or governmental body or agency, against
or affecting the
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<PAGE>
Company or any of its subsidiaries relating to Hazardous Materials or any
Environmental Laws.
(xxi) REGISTRATION RIGHTS. There are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement.
(xxii) TAX RETURNS. The Company and its subsidiaries have filed
all federal, state, local and foreign tax returns that are required to be
filed or have duly requested extensions thereof and have paid all taxes
required to be paid by any of them and any related assessments, fines or
penalties, except for any such tax, assessment, fine or penalty that is
being contested in good faith and by appropriate proceedings, and
adequate charges, accruals and reserves have been provided for in the
financial statements referred to in Section 1(a)(iii) above in respect of
all federal, state, local and foreign taxes for all periods as to which
the tax liability of the Company or any of its subsidiaries has not been
finally determined or remains open to examination by applicable taxing
authorities, except for such failures to file, request extensions, make
payments and provide for adequate charges, accruals and reserves as would
not, singly or in the aggregate, result in a Material Adverse Effect.
(xxiii) INSURANCE. The Company and each of its subsidiaries
maintains insurance covering its properties, operations, personnel and
business. Such insurance insures against such losses and risks as are
adequate in accordance with customary industry practice to protect the
Company, each of its subsidiaries and their businesses. Neither the
Company or any of its subsidiaries has received notice from any insurer
or agent of such insurer that substantial capital improvement or other
expenditures will have to be made in order to continue such insurance.
All such insurance is outstanding and duly in force on the date hereof.
(xxiv) INTERNAL ACCOUNTING CONTROLS. The Company maintains a
system of internal accounting controls sufficient to provide reasonable
assurances that (A) transactions are executed in accordance with
management's general or specific authorization; (B) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets; (C) access to assets is permitted only in
accordance with management's general or specific authorization; and (D)
the recorded accountability for assets is compared with existing assets
at reasonable intervals and appropriate action is taken with respect to
any differences.
(b) OFFICER'S CERTIFICATES. Any certificate signed by any officer of
the Company or any of its subsidiaries delivered to the Representatives or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company to each Underwriter as to the matters covered thereby.
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SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING.
(a) INITIAL SECURITIES. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, severally and not
jointly, and each Underwriter, severally and not jointly, agrees to purchase
from the Company at the price per share set forth in Schedule B, the number of
Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) OPTION SECURITIES. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase up to an additional
1,406,250 shares of Common Stock at the price per share set forth in Schedule B,
less an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial Securities but not payable on the Option
Securities. The option hereby granted will expire 30 days after the date hereof
and may be exercised in whole or in part from time to time only for the purpose
of covering over-allotments which may be made in connection with the offering
and distribution of the Initial Securities upon notice by the Representatives to
the Company setting forth the number of Option Securities as to which the
several Underwriters are then exercising the option and the time and date of
payment and delivery for such Option Securities. Any such time and date of
delivery (a "Date of Delivery") shall be determined by the Representatives, but
shall not be later than seven full business days after the exercise of said
option, nor in any event prior to the Closing Time, as hereinafter defined. If
the option is exercised as to all or any portion of the Option Securities, each
of the Underwriters, acting severally and not jointly, will purchase that
proportion of the total number of Option Securities then being purchased which
the number of Initial Securities set forth in Schedule A opposite the name of
such Underwriter bears to the total number of Initial Securities, subject in
each case to such adjustments as the Representatives in their discretion shall
make to eliminate any sales or purchases of fractional shares.
(c) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Baker &
McKenzie, 805 Third Avenue, New York, New York 10022, or at such other place as
shall be agreed upon by the Representatives and the Company, at 9:00 A.M.
(Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M.
(Eastern time) on any given day) business day after the date hereof (unless
postponed in accordance with the provisions of Section 10), or such other time
not later than ten business days after such date as shall be agreed upon by the
Representatives and the Company (such time and date of payment and delivery
being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company, on each Date of Delivery as specified in the notice from the
Representatives to the Company.
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Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company against delivery to
the Representatives for the respective accounts of the Underwriters of
certificates for the Securities to be purchased by them. It is understood that
each Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch or Salomon, individually and not as representative of
the Underwriters, may (but shall not be obligated to) make payment of the
purchase price for the Initial Securities or the Option Securities, if any, to
be purchased by any Underwriter whose funds have not been received by the
Closing Time or the relevant Date of Delivery, as the case may be, but such
payment shall not relieve such Underwriter from its obligations hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations and
registered in such names as the Representatives may request in writing at least
one full business day before the Closing Time or the relevant Date of Delivery,
as the case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
(e) APPOINTMENT OF QUALIFIED INDEPENDENT UNDERWRITER. The Company
hereby confirms its engagement of Merrill Lynch as, and Merrill Lynch hereby
confirms its agreement with the Company to render services as, a "qualified
independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of
the National Association of Securities Dealers, Inc. with respect to the
offering and sale of the Securities. Merrill Lynch, solely in its capacity as
qualified independent underwriter and not otherwise, is referred to herein as
the "Independent Underwriter".
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
Underwriter as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS.
The Company, subject to Section 3(b), will comply with the requirements of Rule
430A or Rule 434, as applicable, and will notify the Representatives
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the Prospectus or any amended Prospectus shall have been filed,
(ii) of the receipt of any comments from the Commission, (iii) of any request by
the Commission for any amendment to the Registration Statement or any amendment
or supplement to the Prospectus or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
preliminary prospectus, or of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes. The Company will
promptly effect the filings necessary pursuant to Rule 424(b) and will take such
steps as it deems necessary to ascertain promptly whether the form of prospectus
transmitted for filing under Rule 424(b) was received for filing
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by the Commission and, in the event that it was not, it will promptly file such
prospectus. The Company will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) FILING OF AMENDMENTS. The Company will give the Representatives
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus, included in the
Registration Statement at the time it became effective or to the Prospectus,
will furnish the Representatives with copies of any such documents a reasonable
amount of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Representatives or counsel
for the Underwriters shall object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has furnished or
will deliver to the Representatives and counsel for the Underwriters, without
charge, signed copies of the Registration Statement as originally filed and of
each amendment thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates of
experts, and will also deliver to the Representatives, without charge, a
conformed copy of the Registration Statement as originally filed and of each
amendment thereto (without exhibits) for each of the Underwriters. The copies
of the Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) DELIVERY OF PROSPECTUSES. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), such number of copies of the Prospectus
(as amended or supplemented) as such Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion of
the distribution of the Securities as contemplated in this Agreement and in the
Prospectus. If at any time when a prospectus is required by the 1933 Act to be
delivered in connection with sales of the Securities, any event shall occur or
condition shall exist as a result of which it is necessary, in the opinion of
counsel for the Underwriters or for the Company, to amend the Registration
Statement or amend or supplement the Prospectus in order that the Prospectus
will not include any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not misleading
in the light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel, at any
such time to amend the Registration Statement or amend or supplement the
Prospectus in order to comply with the
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requirements of the 1933 Act or the 1933 Act Regulations, the Company will
promptly prepare and file with the Commission, subject to Section 3(b), such
amendment or supplement as may be necessary to correct such statement or
omission or to make the Registration Statement or the Prospectus comply with
such requirements, and the Company will furnish to the Underwriters such number
of copies of such amendment or supplement as the Underwriters may reasonably
request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best efforts, in
cooperation with the Underwriters, to qualify the Securities for offering and
sale under the applicable securities laws of such states and other jurisdictions
as the Representatives may designate and to maintain such qualifications in
effect for a period of not less than one year from the later of the effective
date of the Registration Statement and any Rule 462(b) Registration Statement;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation or as a
dealer in securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any jurisdiction in
which it is not otherwise so subject. In each jurisdiction in which the
Securities have been so qualified, the Company will file such statements and
reports as may be required by the laws of such jurisdiction to continue such
qualification in effect for a period of not less than one year from the
effective date of the Registration Statement and any Rule 462(b) Registration
Statement.
(g) RULE 158. The Company will timely file such reports pursuant to
the 1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds received by
it from the sale of the Securities in the manner specified in the Prospectus
under "Use of Proceeds".
(i) LISTING. The Company will use its best efforts to effect and
maintain the quotation of the Securities on the Nasdaq National Market and will
file with the Nasdaq National Market all documents and notices required by the
Nasdaq National Market of companies that have securities that are traded in the
over-the-counter market and quotations for which are reported by the Nasdaq
National Market.
(j) RESTRICTION ON SALE OF SECURITIES. During a period of 180 days
from the date of the Prospectus, the Company will not, without the prior written
consent of Merrill Lynch and Salomon, (i) directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the foregoing
or (ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Stock, whether any such swap or transaction described
in clause (i) or (ii) above is to be settled by delivery of Common Stock or
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such other securities, in cash or otherwise. The foregoing sentence shall not
apply to (A) the Securities to be sold hereunder, (B) any shares of Common Stock
issued by the Company upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof and referred to in the
Prospectus, (C) any shares of Common Stock issued or options to purchase Common
Stock granted pursuant to existing employee benefit plans of the Company
referred to in the Prospectus or (D) any shares of Common Stock issued pursuant
to any non-employee director stock plan or dividend reinvestment plan.
(k) REPORTING REQUIREMENTS. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will
file all documents required to be filed with the Commission pursuant to the 1934
Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
(l) COMPLIANCE WITH RULE 463. The Company will file with the
Commission such reports on Form 10-Q as may be required pursuant to Rule 463 of
the 1933 Act Regulations.
SECTION 4. PAYMENT OF EXPENSES.
(a) EXPENSES. Whether or not any sale of the Securities is
consummated, the Company will pay all expenses incident to the performance of
its obligations under this Agreement, including (i) the preparation, printing
and filing of the Registration Statement (including financial statements and
exhibits) as originally filed and of each amendment thereto, (ii) the
preparation, printing and delivery to the Underwriters of this Agreement, and
such other documents as may be required in connection with the offering,
purchase, sale, issuance or delivery of the Securities, (iii) the preparation,
issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or other
duties payable upon the sale, issuance or delivery of the Securities to the
Underwriters, (iv) the fees and disbursements of the Company's counsel,
accountants and other advisors, (v) the qualification of the Securities under
securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the preparation
of the Blue Sky Survey and any supplement thereto which amounts shall not exceed
$2500, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectus and any amendments
or supplements thereto, (vii) the fees and expenses of any transfer agent or
registrar for the Securities, (viii) the filing fees incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in connection
with, the review by the National Association of Securities Dealers, Inc. (the
"NASD") of the terms of the sale of the Securities, (ix) the fees and expenses
incurred in connection with the inclusion of the Securities in the Nasdaq
National Market and (x) the fees and expenses of the Independent Underwriter.
(b) TERMINATION OF AGREEMENT. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or
Section 9(a)(i) hereof, the Company shall reimburse the Underwriters for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
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SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations
of the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any subsidiary of the Company
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the 1933 Act or proceedings
therefor initiated or threatened by the Commission, and any request on the part
of the Commission for additional information shall have been complied with to
the reasonable satisfaction of counsel to the Underwriters. A prospectus
containing the Rule 430A Information shall have been filed with the Commission
in accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434,
a Term Sheet shall have been filed with the Commission in accordance with Rule
424(b).
(b) OPINIONS OF COUNSEL FOR COMPANY. At the Closing Time, the
Representatives shall have received the favorable opinions, dated as of the
Closing Time, together with signed or reproduced copies of such letters for each
of the other Underwriters, (i) of Brobeck, Phleger & Harrison LLP, counsel for
the Company, to the effect set forth in Exhibit A-1 hereto, (ii) of Hale and
Dorr LLP, counsel for the Company, to the effect set forth in Exhibit A-2
hereto, (iii) of Blumenfeld & Cohen, counsel for the Company, to the effect set
forth in Exhibit A-3 hereto, (iv) of Leboeuf, Lamb, Greene & MacRae L.L.P.,
counsel for the Company, to the effect set forth on Exhibit A-4 hereto, and (v)
of Jeffrey Blumenfeld, General Counsel of the Company, to the effect set forth
on Exhibit A-5 hereto. In giving the opinion described in clause (i) above such
counsel may rely, as to all matters governed by the laws of jurisdictions other
than the law of the State of New York, the federal law of the United States and
the General Corporation Law of the State of Delaware, upon the opinions of
counsel satisfactory to the Representatives. Such counsel may also state that,
insofar as such opinion involves factual matters, they have relied, to the
extent they deem proper, upon certificates of officers of the Company and its
subsidiaries and certificates of public officials.
(c) OPINION OF COUNSEL FOR UNDERWRITERS. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Baker & McKenzie, counsel for the Underwriters, together with signed or
reproduced copies of such letter for each of the other Underwriters,
substantially to the effect set forth in Exhibit A-7 hereto. In giving such
opinion such counsel may rely, as to all matters governed by the laws of
jurisdictions other than the law of the State of New York, the federal law of
the United States and the General Corporation Law of the State of Delaware, upon
the opinions of counsel satisfactory to the Representatives. Such counsel may
also state that, insofar as such opinion involves factual matters, they have
relied, to the extent they deem proper, upon certificates of officers of the
Company and its subsidiaries and certificates of public officials.
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(d) OFFICERS' CERTIFICATE. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, and the Representatives shall have
received a certificate of the President or a Vice President of the Company and
of the chief financial or chief accounting officer of the Company, dated as of
Closing Time, to the effect that (i) there has been no such material adverse
change, (ii) the representations and warranties in Section 1(a) hereof are true
and correct with the same force and effect as though expressly made at and as of
Closing Time, (iii) the Company has complied with all agreements and satisfied
all conditions on its part to be performed or satisfied at or prior to Closing
Time, and (iv) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or are contemplated by the Commission.
(e) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of this
Agreement, the Representatives shall have received from PricewaterhouseCoopers
L.L.P. a letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of such letter for
each of the other Underwriters containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(f) BRING-DOWN COMFORT LETTER. At Closing Time, the Representatives
shall have received from PricewaterhouseCoopers L.L.P. a letter, dated as of
Closing Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (e) of this Section, except that the specified
date referred to shall be a date not more than three business days prior to
Closing Time.
(g) APPROVAL OF LISTING. At Closing Time, the Securities shall have
been approved for inclusion in the Nasdaq National Market, subject only to
official notice of issuance.
(h) NO OBJECTION. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(i) LOCK-UP AGREEMENTS. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the form of
Exhibit B hereto signed by the persons listed on Schedule C hereto.
(j) CONDITIONS TO PURCHASE OF OPTION SECURITIES. In the event that
the Underwriters exercise their option provided in Section 2(b) hereof to
purchase all or any portion of the Option Securities, the representations and
warranties of the Company contained herein and the statements in any
certificates furnished by the Company or any subsidiary of the Company hereunder
shall be true and correct as of each Date of Delivery and, at the relevant Date
of Delivery, the Representatives shall have received:
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(i) OFFICERS' CERTIFICATE. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of the
chief financial or chief accounting officer of the Company confirming
that the certificate delivered at the Closing Time pursuant to
Section 5(d) hereof remains true and correct as of such Date of Delivery.
(ii) OPINIONS OF COUNSEL FOR COMPANY. The favorable opinions of
Brobeck, Phleger & Harrison LLP, Hale and Dorr LLP, Blumenfeld & Cohen,
and Leboeuf, Lamb, Greene & MacRae L.L.P., each counsel for the Company,
and of Jeffrey Blumenfeld, General Counsel of the Company, each, in form
and substance satisfactory to counsel for the Underwriters, dated such
Date of Delivery, relating to the Option Securities to be purchased on
such Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(b) hereof.
(iii) OPINION OF COUNSEL FOR UNDERWRITERS. The favorable opinion
of Baker & McKenzie, counsel for the Underwriters, dated such Date of
Delivery, relating to the Option Securities to be purchased on such Date
of Delivery and otherwise to the same effect as the opinion required by
Section 5(c) hereof.
(iv) BRING-DOWN COMFORT LETTER. A letter from
PricewaterhouseCoopers L.L.P., in form and substance satisfactory to the
Representatives and dated such Date of Delivery, substantially in the
same form and substance as the letter furnished to the Representatives
pursuant to Section 5(f) hereof, except that the "specified date" in the
letter furnished pursuant to this paragraph shall be a date not more than
five days prior to such Date of Delivery.
(k) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of
Delivery, counsel for the Underwriters shall have been furnished with such
documents and opinions as they may require for the purpose of enabling them to
pass upon the issuance and sale of the Securities as herein contemplated, or in
order to evidence the accuracy of any of the representations or warranties, or
the fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the Underwriters.
(l) TERMINATION OF AGREEMENT. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option
Securities, on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representatives by notice to the Company at
any time at or prior to Closing Time or such Date of Delivery, as the case may
be, and such termination shall be without liability of any party to any other
party except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
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SECTION 6. INDEMNIFICATION.
(a) INDEMNIFICATION OF UNDERWRITERS. (1) The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the Rule 430A Information
and the Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or proceeding
by any governmental agency or body, commenced or threatened, or of any
claim whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission; provided that (subject to
Section 6(d) below) any such settlement is effected with the written
consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill Lynch
or Salomon), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such expense
is not paid under (i) or (ii) above;
PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch or Salomon expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto); and
PROVIDED further that the Company will not be liable to an Underwriter with
respect to any Preliminary Prospectus to the extent that the Company shall
sustain the burden of proof of proving that any such loss, liability, claim,
damage or expense resulted from the fact that such Underwriter, in contravention
of a requirement of this Agreement or applicable law, sold Shares to a person to
whom such Underwriter failed to send or give, at or prior to the Closing Date, a
copy of the Final Prospectus
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as then amended or supplemented if (i) the Company has previously furnished
copies thereof (sufficiently in advance of the Closing Date to allow for the
distribution by the Closing Date) to the Underwriter and the loss, liability,
claim, damage or expense of such Underwriter resulted from an untrue statement
or omission or alleged untrue statement or omission of a material fact contained
in or omitted from the Preliminary Prospectus which was corrected in the Final
Prospectus as, if applicable, amended or supplemented prior to the Closing Date
and (ii) giving or sending such Final Prospectus by the Closing Date to the
party or parties asserting such loss, liability, claim, damage or expense would
have constituted a complete defense to the claim asserted by such person.
(2) In addition to and without limitation of the Company's obligation
to indemnify Merrill Lynch as an Underwriter, the Company also agrees to
indemnify and hold harmless the Independent Underwriter and each person, if any,
who controls the Independent Underwriter within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act, from and against any and all loss,
liability, claim, damage, and expense whatsoever, as incurred, incurred as a
result of the Independent Underwriter's participation as a "qualified
independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of
the National Association of Securities Dealers, Inc. in connection with the
offering of the Securities.
(3) Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of an Underwriter
or who controls an underwriter within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act and who, at the date of this Agreement, is a
director or officer of the Company or controls the Company within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act, such indemnity
agreement is subject to the undertaking of the Company in the Registration
Statement under Item 17.
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS. Each
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in
subsection (a)(1) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such Underwriter through Merrill Lynch or Salomon expressly for use
in the Registration Statement (or any amendment thereto) or such preliminary
prospectus or the Prospectus (or any amendment or supplement thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the
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extent it is not materially prejudiced as a result thereof and in any event
shall not relieve it from any liability which it may have otherwise than on
account of this indemnity agreement. In the case of parties indemnified
pursuant to Section 6(a)(1) above, counsel to the indemnified parties shall be
selected by Merrill Lynch or Salomon, and, in the case of parties indemnified
pursuant to Section 6(b) above, counsel to the indemnified parties shall be
selected by the Company. An indemnifying party may participate at its own
expense in the defense of any such action; provided, however, that counsel to
the indemnifying party shall not (except with the consent of the indemnified
party) also be counsel to the indemnified party. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances; provided, that, if indemnity is sought pursuant to
Section 6(a)(2), then, in addition to the fees and expenses of such counsel for
the indemnified parties, the indemnifying party shall be liable for the
reasonable fees and expenses of not more than one counsel (in addition to any
local counsel) separate from its own counsel and that of the other indemnified
parties for the Independent Underwriter in its capacity as a "qualified
independent underwriter" and all persons, if any, who control the Independent
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
1934 Act in connection with any one action or separate but similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances if, in the reasonable judgment of the Independent Underwriter,
there may exist a conflict of interest between the Independent Underwriter and
the other indemnified parties. Any such separate counsel for the Independent
Underwriter and such control persons of the Independent Underwriter shall be
designated in writing by the Independent Underwriter. No indemnifying party
shall, without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(1)(ii) effected without its written consent if (i) such settlement
is entered into more than 45 days after receipt by such indemnifying party of
the aforesaid request, (ii) such indemnifying party shall have received notice
of the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
SECTION 7. CONTRIBUTION. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any
21
<PAGE>
losses, liabilities, claims, damages or expenses referred to therein, then each
indemnifying party shall contribute to the aggregate amount of such losses,
liabilities, claims, damages and expenses incurred by such indemnified party, as
incurred, (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Securities pursuant to this Agreement or
(ii) if the allocation provided by clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company on the one hand and of the Underwriters on the other hand in connection
with the statements or omissions which resulted in such losses, liabilities,
claims, damages or expenses, as well as any other relevant equitable
considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Underwriters, in each case
as set forth on the cover of the Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet, bear to the aggregate initial public
offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters on
the other hand shall be determined by reference to, among other things, whether
any such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Underwriters agree that Merrill Lynch will not
receive any additional benefits hereunder for serving as the Independent
Underwriter in connection with the offering and sale of the Securities.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of
22
<PAGE>
any damages which such Underwriter has otherwise been required to pay by reason
of any such untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto, shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of any
Underwriter or controlling person, or by or on behalf of the Company, and shall
survive delivery of the Securities to the Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States or the international
financial markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the
Representatives, impracticable to market the Securities or to enforce contracts
for the sale of the Securities, or (iii) if trading in any securities of the
Company has been suspended or materially limited by the Commission or the Nasdaq
National Market, or if trading generally on the American Stock Exchange or the
New York Stock Exchange or in the Nasdaq National Market has been suspended or
materially limited, or minimum or maximum prices for trading have been fixed, or
maximum ranges for prices have been required, by any of said exchanges or by
such system or by order of the Commission, the National Association of
Securities Dealers, Inc. or any other governmental authority, or (iv) if a
banking moratorium has been declared by either Federal or New York authorities.
23
<PAGE>
(b) LIABILITIES. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one or more
of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing Time,
the obligation of the Underwriters to purchase and of the Company to sell
the Option Securities to be purchased and sold on such Date of Delivery
shall terminate without liability on the part of any non-defaulting
Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the Representatives or the Company shall have the
right to postpone Closing Time or the relevant Date of Delivery, as the case may
be, for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 10.
SECTION 11. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of Marcey Becker;
notices to the Company shall be directed to it at 6933 South Revere Parkway,
Englewood, Colorado 80112, attention of Scott Chandler; in each case, with
copies to their respective primary outside legal counsel, if known.
24
<PAGE>
SECTION 12. PARTIES. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters, the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters and the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters and the Company and their
respective successors, and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No purchaser of Securities from any Underwriter
shall be deemed to be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. EFFECT OF HEADINGS. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
25
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriters and the Company in accordance with its terms.
Very truly yours,
RHYTHMS NETCONNECTIONS INC.
By
-------------------------------
Title:
CONFIRMED AND ACCEPTED,
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
SALOMON SMITH BARNEY INC.
HARMBRECHT & QUIST
THOMAS WEISEL PARTNERS LLC
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
-------------------------------------
Authorized Signatory
By: SALOMON SMITH BARNEY INC.
By
-------------------------------------
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
26
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Name of Underwriter Initial Securities
------------------- ------------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated. . . . . . . . . . . . . . . . . . . .
Salomon Smith Barney Inc . . . . . . . . . . . . . . . . .
Hambrecht & Quist. . . . . . . . . . . . . . . . . . . . .
Thomas Weisel Partners LLC . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
Sch A-1
<PAGE>
SCHEDULE B
RHYTHMS NETCONNECTIONS INC.
9,375,000 Shares of Common Stock
(Par Value $.001 Per Share)
1. The initial public offering price per share for the
Securities, determined as provided in said Section 2, shall be $ .
2. The purchase price per share for the Securities to be paid
by the several Underwriters shall be $ , being an amount equal to the
initial public offering price set forth above less $ per share;
provided that the purchase price per share for any Option Securities
purchased upon the exercise of the over-allotment option described in
Section 2(b) shall be reduced by an amount per share equal to any
dividends or distributions declared by the Company and payable on the
Initial Securities but not payable on the Option Securities.
Sch B-1
<PAGE>
SCHEDULE C
List of persons and entities subject to lock-up:
Enterprise Partners III, L.P.
Enterprise Partners IV, L.P.
Enterprise Partners III Associates, L.P.
Brentwood Associates VII, L.P.
Brentwood Affiliates Fund, L.P.
First Union Trust Company N.A. as Voting Trustee
DLJ First ESC L.L.C.
DLJ Capital Corporation
The Sprout CEO Fund, L.P.
Enron Communications Group, Inc.
Kleiner Perkins Caulfield & Byers VIII
KPCB VIII Founders Fund
KPCB VIII Information Sciences Zaibatsu Fund II
MCI WorldCom Investment Fund
Catherine Hapka
Catherine A. Safaya 1999 Trust
Christopher H. Safaya 1999 Trust
Catherine A. Safaya
Christopher H. Safaya
James A. Greenberg
Epley Investors II, LLC
Sun Financial Group, Inc.
Jeffrey Blumenfeld
Michael Calabrese
David Shimp
Frank Tolve
Rand Kennedy
Scott Chandler
Frederick Smith
Robert Masitti
Joseph D'Angelo
Eric Geis
Jeffrey Greogen
Brobeck, Phleger & Harrison LLP
Martin C. Nichols
UMB as Trustee for BPH Retirement Savings for John
Denniston
Craig Andrews
Gary Cohen
Microsoft Corporation
Sch C-1
<PAGE>
Exhibit A-1
[Form of Brobeck, Phleger & Harrison LLP Opinion]
Exh A-1
<PAGE>
Exhibit A-2
[Form of Hale and Dorr LLP Opinion]
Exh A-2
<PAGE>
Exhibit A-3
[Form of Blumenfeld & Cohen Opinion]
Exh A-3
<PAGE>
Exhibit A-4
[Form of Leboeuf, Lamb, Greene & MacRae L.L.P. Opinion]
Exh A-4
<PAGE>
Exhibit A-5
[Form of General Counsel Opinion]
Exh A-5
<PAGE>
Exhibit A-6
[Form of Baker & McKenzie Opinion]
Exh A-6
<PAGE>
Exhibit B
March __, 1999
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Salomon Smith Barney Inc.
Hambrecht & Quist
Thomas Weisel Partners LLC
as Representative(s) of the Underwriters
c/o: Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
World Financial Center-North Tower
New York, New York 10281-1209
and
Salomon Smith Barney Inc.
7 World Trade Center
New York, New York 10048
Re: PROPOSED PUBLIC OFFERING BY RHYTHMS NETCONNECTIONS INC.
Dear Sirs:
The undersigned, a stockholder, officer and/or director of Rhythms
NetConnections Inc., a Delaware corporation (the "Company"), understands that
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Salomon Smith Barney Inc. ("Salomon") and certain other lead
managers propose to enter into a Purchase Agreement (the "Purchase Agreement")
with the Company providing for the public offering of shares (the "Securities")
of the Company's common stock, par value $.001 per share (the "Common Stock").
In recognition of the benefit that such an offering will confer upon the
undersigned as a stockholder, officer and/or director of the Company, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the undersigned agrees with each underwriter to be named in
the Purchase Agreement that, during a period of 180 days from the date of the
Purchase Agreement, the undersigned will not, without the prior written consent
of Merrill Lynch and Salomon, directly or indirectly, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of, or
otherwise dispose of or transfer any shares of the Company's Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of disposition, or
file any registration statement under the Securities Act of 1933, as amended,
with respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction is to be settled by delivery of Common Stock or
other securities, in cash or otherwise.
Very truly yours,
Signature:
--------------------------------
Print Name:
-------------------------------
Exh B-1
<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 242 and 245 of the General Corporation Law
of the State of Delaware.
3. The text of the Certificate of Incorporation is hereby amended and
restated in its entirety 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 One
Hundred Eight Million (108,000,000) shares. Eighty-One Million (81,000,000)
shares shall be Common Stock, $0.001 par value per share and Twenty-Seven
Million (27,000,000) shares shall be Preferred Stock, $0.001 par value per
share.
<PAGE>
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, (iii) the Series C Preferred
Stock, which series shall consist of 8,395,655 shares and (iv) the Series D
Preferred Stock, which series shall consist of 441,176 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 this 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, Series C Preferred Stock or Series D
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, Series C Preferred Stock and Series D
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, $0.6432 per share of Series C Preferred Stock per
annum and $1.36 per share of Series D 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, Series C Preferred Stock and Series D
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 form other than cash shall be deemed to
-2-
<PAGE>
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, Series C preferred stock and Series D 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, Series C Preferred Stock and Series D Preferred Stock, and the number of
shares of common stock, Series A preferred stock, Series B preferred stock,
Series C preferred stock and Series D 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, Series C Preferred Stock and Series D 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, (Y) all such Series C preferred stock shall be distributed to the Series
C Preferred Stock and (Z) all such Series D preferred stock shall be distributed
to the Series D Preferred Stock and (ii) in all other cases the holders of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D 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, Series C Preferred
Stock and Series D 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, Series C Preferred Stock and Series D
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, Series C
Preferred Stock and Series D 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,
$8.04 for each outstanding share of Series C Preferred Stock and $17.00 for each
outstanding share of Series D Preferred Stock (hereafter referred to as the
"Original Series A Issue Price," "Original Series B Issue Price," "Original
Series C Issue Price" and "Original Series D 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, Series C
Preferred Stock and Series D 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, Series C Preferred Stock and
-3-
<PAGE>
Series D 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 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, Series C Preferred Stock and Series D Preferred Stock shall
have conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT.
i) Subject to subsection 3(c), each share of Series A
Preferred Stock, each share of Series B Preferred Stock, each share of Series C
Preferred Stock and each share of Series D 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, Series C Preferred Stock or
Series D 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, (C) the Original
Series C Issue Price for each share of Series C Preferred Stock and (D) the
Original Series D Issue Price for each share of Series D 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, the initial
Conversion Price per share for shares of Series C Preferred Stock shall be the
Original Series C Issue Price and the initial Conversion Price per share for
shares of Series D Preferred Stock shall be the Original Series D Issue Price;
provided, however, that the Conversion Price for the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D 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, each share of Series C Preferred Stock and each share
of Series D 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, Series C Preferred Stock and Series D
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,
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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, Series C Preferred Stock and Series D Preferred Stock.
(b) MECHANICS OF CONVERSION. Before any holder of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D
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 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, Series C Preferred Stock and/or Series D 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, Series C Preferred Stock and/or Series D
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, Series C Preferred Stock and/or Series D Preferred
Stock shall not be deemed to have converted such Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and/or Series D 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,
Series C Preferred Stock and Series D Preferred Stock shall be subject to
adjustment from time to time as follows:
i) A. Except as otherwise set forth in subsections 3(c)(i)(F)
and (G) with respect to the Series C Preferred Stock and Series D Preferred
Stock, upon each issuance by the corporation of any Additional Stock (as
defined below), after the date upon which any shares of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series
D Preferred Stock were first issued (the "Purchase Date" with respect to such
series), without consideration or for a consideration per share less than the
Conversion Price for such series in effect immediately prior to the issuance
of such Additional Stock, the Conversion Price for such series in effect
immediately prior to each such issuance shall forthwith (except as otherwise
provided in this clause (i)) be adjusted to a price determined by multiplying
such Conversion Price by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such
issuance (including, without limitation, the number of shares of Common Stock
issuable upon the conversion of all outstanding Preferred Stock and all other
convertible securities and the exercise of all
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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, Series C Preferred Stock or Series D
Preferred Stock shall be made in an amount less than one cent per share,
provided that any adjustments which are not required to be made by reason of
this sentence shall be carried forward and shall be either taken into account in
any subsequent adjustment made prior to 3 years from the date of the event
giving rise to the adjustment being carried forward, or shall be made at the end
of 3 years from the date of the event giving rise to the adjustment being
carried forward. Except to the limited extent provided for in subsections
3(c)(i)(E)(3) and 3(c)(i)(E)(4), no adjustment of such Conversion Price pursuant
to this subsection 3(c)(i) shall have the effect of increasing the Conversion
Price above the Conversion Price in effect immediately prior to such adjustment.
C. In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by this corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
D. In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as determined by the Board of
Directors irrespective of any accounting treatment.
E. In the case of the issuance (whether before, on or after
the applicable Purchase Date) of options to purchase or rights to subscribe for
Common Stock, securities by their terms convertible into or exchangeable for
Common Stock or options to purchase or rights to subscribe for such convertible
or exchangeable securities, the following provisions shall apply for all
purposes of this subsection 3(c)(i) and subsection 3(c)(ii):
1. The aggregate maximum number of shares of Common
Stock deliverable upon exercise (assuming the satisfaction of any conditions to
exercisability, including without limitation, the passage of time, but without
taking into account potential antidilution adjustments) of such options to
purchase or rights to subscribe for Common Stock shall be deemed to have been
issued at the time such options or rights were issued and for a consideration
equal to the consideration (determined in the manner provided in subsections
3(c)(i)(C) and (c)(i)(D)), if any, received by the corporation upon the issuance
of such options or rights plus the exercise price provided in such options or
rights (without taking into account potential antidilution adjustments) for the
Common Stock covered thereby.
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2. The aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange (assuming the satisfaction
of any conditions to convertibility or exchangeability, including, without
limitation, the passage of time, but without taking into account potential
antidilution adjustments) for any such convertible or exchangeable securities or
upon the exercise of options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such securities were
issued or such options or rights were issued and for a consideration equal to
the consideration, if any, received by the corporation for any such securities
and related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the additional consideration, if any, to be
received by the corporation (without taking into account potential antidilution
adjustments) upon the conversion or exchange of such securities or the exercise
of any related options or rights (the consideration in each case to be
determined in the manner provided in subsections 3(c)(i)(C) and (c)(i)(D)).
3. In the event of any change in the number of shares of
Common Stock deliverable or in the consideration payable to this corporation
upon exercise of such options or rights or upon conversion of or in exchange for
such convertible or exchangeable 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, Series C Preferred
Stock and/or Series D 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,
Series C Preferred Stock and/or Series D 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).
E. Upon each issuance by the corporation of any Additional
Stock (as defined below), after the respective Purchase Date for the Series C
Preferred Stock and Series D Preferred Stock, without consideration or for a
consideration per share less than the respective Conversion Price for such
Series C Preferred Stock and Series D Preferred Stock in effect immediately
prior to the issuance of such Additional Stock, the Conversion Price for such
Series C Preferred Stock and/or Series D Preferred Stock in effect
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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 respective 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 respective 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.
F. At any time after the respective Purchase Date for
the Series D Preferred Stock, upon the pricing committee of the corporation's
board of directors approving the sale of Common Stock in the corporation's
initial public offering of such securities for a cash consideration per share
(the "IPO Price") less than the Conversion Price in effect immediately prior
to such action, the Conversion for the Series D Preferred Stock in effect
immediately prior to such action will be adjusted to a price per share equal
to the IPO Price.
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, Series C Preferred Stock or
Series D 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, Series C Preferred Stock and
Series D Preferred Stock will be converted to Common Stock or (II) upon exercise
of warrants or rights granted to underwriters in connection with such a public
offering, or
E. shares of Common Stock issued or issuable to persons or
entities with which the corporation has business relationships provided such
issuances are for other than primarily equity financing purposes approved by the
Board of Directors.
iii) In the event the corporation should at any time or from
time to time after the Purchase Date fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or other securities or
rights convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of
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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, Series C Preferred Stock and Series D Preferred Stock
then in effect shall be appropriately decreased so that the number of shares of
Common Stock issuable on conversion of each share of such series shall be
increased in proportion to such increase of the aggregate of shares of Common
Stock outstanding and those issuable with respect to such Common Stock
Equivalents with the number of shares issuable with respect to Common Stock
Equivalents determined from time to time in the manner provided for deemed
issuances in subsection 3(c)(i)(E).
iv) If the number of shares of Common Stock outstanding at any
time after the Purchase Date is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date of such combination, the
Conversion Price for the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D 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, Series C Preferred Stock and Series D
Preferred Stock shall thereafter be entitled to receive upon conversion of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D 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, Series C Preferred Stock and
Series D 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, Series C Preferred Stock and Series D
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, Series C
Preferred Stock and Series D Preferred Stock against impairment.
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(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, Series C Preferred Stock
and/or Series D 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,
Series C Preferred Stock and/or Series D 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,
Series C Preferred Stock and/or Series D Preferred Stock pursuant to this
Section 3, this corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and/or Series D 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, Series C Preferred Stock or Series D 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, Series C Preferred
Stock or Series D 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, Series C Preferred Stock and Series D 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, Series C Preferred Stock and Series D 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, Series C Preferred Stock and Series D 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, Series C Preferred Stock and
Series D 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
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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, Series C Preferred Stock or Series D 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, the holder of each share of Series C
Preferred Stock and the holder of each share of Series D 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, such share
of Series C Preferred Stock and/or such share of Series D Preferred Stock could
then be converted (with any fractional share determined on an aggregate
conversion basis being rounded to the nearest whole share), and with respect to
such vote, each such holder shall have full voting rights and powers equal to
the voting rights and powers of the holders of Common Stock, and shall be
entitled, notwithstanding any provision hereof, to notice of any stockholders'
meeting in accordance with the bylaws of this corporation (the "Bylaws"), 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
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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 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 subsection 4(a) above.
5. PROTECTIVE PROVISIONS.
(a) SERIES D 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 D 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 D 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 D 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, Series B Preferred Stock and Series C Preferred Stock are
altered; or
ii) authorize additional shares of Series D Preferred Stock;
or
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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)(d)); or
iv) amend this Article IV(B)5(a).
(b) 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)(b)(i) (provided that, subject to
Section IV(B)(5)(b)(i), the corporation shall not be prohibited from amending
Article IV(B)(3)(d)); 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(b).
(c) SERIES B PREFERRED STOCK. Subject to the rights of series of
Preferred Stock which may from time to time come into existence, so long as
shares of Series B Preferred Stock are outstanding, this corporation shall not
without first obtaining the approval (by vote or written consent, as provided by
law) of the holders of at least a majority of the then outstanding shares of
Series B Preferred Stock, voting together as a separate series on an as
converted basis:
i) take any action that would materially and adversely alter
the rights, preferences or privileges of the Series B Preferred Stock as a
separate series in a manner that is dissimilar and disproportionate relative to
the manner in which the rights, preferences or privileges of the Series A
Preferred Stock are altered; 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
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iv) amend Article IV(B)(3)(c)(i) (provided that, subject to
Section IV(B)(5)(c)(i), the corporation shall not be prohibited from amending
Article IV(B)(3)(d)); 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(c).
(d) 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, Series C Preferred Stock
and/or Series D 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, Series C Preferred Stock
and Series D 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, Series C Preferred Stock or Series D 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, Series C Preferred Stock or Series D
Preferred Stock shall be converted pursuant to Section 3 hereof, the shares so
converted shall be cancelled and shall not be issuable by the corporation. The
Certificate of Incorporation of this corporation shall be appropriately amended
to effect the corresponding reduction in the corporation's authorized capital
stock.
C. COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or winding up
of the corporation, the assets of the corporation shall be distributed as
provided in Article IV(B)2 hereof.
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<PAGE>
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
Bylaws, 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 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.
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<PAGE>
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.
ARTICLE VIII
Elections of directors need not be by written ballot except and to the
extent provided in the Bylaws.
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.
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IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
executed as of this 5th day of April, 1999.
RHYTHMS NETCONNECTIONS INC.
By: /s/ Catherine Hapka
---------------------------------------
Catherine Hapka, President
<PAGE>
Exhibit 3.2
CERTIFICATE OF DESIGNATION
of
SERIES 1 JUNIOR PARTICIPATING PREFERRED STOCK
of
RHYTHMS NETCONNECTIONS INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
Rhythms NetConnections Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation as required by Section 151 of the
General Corporation Law at a meeting duly called and held on March 27, 1999;
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of the Corporation (hereinafter called the "Board of Directors" or
the "Board") in accordance with the provisions of the Certificate of
Incorporation, the Board of Directors hereby creates a series of Preferred
Stock, par value $0.001 per share (the "Preferred Stock"), of the Corporation
and hereby states the designation and number of shares, and fixes the relative
rights, preferences, and limitations thereof as follows:
Series 1 Junior Participating Preferred Stock:
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series 1 Junior Participating Preferred Stock" (the "Series 1
Preferred Stock") and the number of shares constituting the Series 1 Preferred
Stock shall be One Million (1,000,000). Such number of shares may be increased
or decreased by resolution of the Board of Directors; PROVIDED, that no decrease
shall reduce the number of shares of Series 1 Preferred Stock to a number less
than the number of shares then outstanding plus the number of shares reserved
for issuance upon the exercise of outstanding options, rights or warrants or
upon the conversion of any outstanding securities issued by the Corporation
convertible into Series 1 Preferred Stock.
Section 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the rights of the holders of any shares of any series
of Preferred Stock (or any similar stock) ranking prior and superior to the
Series 1 Preferred Stock with respect to dividends, each holder of a share
of Series 1 Preferred Stock, in preference to the holders of shares of
Common Stock, par value $0.001 per share (the "Common Stock"), of the
Corporation, and of any other junior stock, shall be entitled to receive,
when declared by the Board of Directors out of funds legally available for
the purpose, quarterly dividends payable in cash on the last day of March,
June, September and December in each year (each such date being referred to
herein as a "Quarterly
<PAGE>
Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share
Series 1 Preferred Stock, in an amount per share (rounded to the nearest
cent) equal to, subject to the provision for adjustment hereinafter set
forth, One Thousand (1,000) times the aggregate per share amount of all
cash dividends, and One Thousand (1,000) times the aggregate per share
amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance
of a share or fraction of Series 1 Preferred Stock. In the event the
Corporation shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock
(by reclassification or otherwise than by payment of a dividend in
shares of Common Stock) into a greater or lesser number of shares of
Common Stock, then in each such case the amount to which holders of
shares of Series 1 Preferred Stock were entitled immediately prior to
such event under clause (b) of the preceding sentence shall be adjusted
by multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
shares of Series 1 Preferred Stock as provided in paragraph (A) of this
Section immediately after it declares a dividend or distribution on the
Common Stock (other than a dividend payable in shares of Common Stock);
provided, however, that, in the event no dividend or distribution shall
have been declared on the Common Stock during the period between any
Quarterly Distribution Date and the next subsequent Quarterly Dividend
Payment Date, a dividend of $1.15 per share of Series 1 Preferred Stock
shall nevertheless be payable on such subsequent Quarterly Dividend Payment
Date.
(C) Dividends shall begin to accrue and be cumulative on each
outstanding share of Series 1 Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue of such
share of Series 1 Participating Preferred Stock, unless the date of issue
of such share is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such share shall begin to accrue
from the date of issue of such share, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series 1 Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment
Date, in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series
1 Preferred Stock in an amount less than the total amount of such dividends
at the time accrued and payable on such shares shall be allocated pro rata
on a share-by-share basis among all such shares at the time outstanding.
The Board of Directors may fix a record date for the determination of
holders of shares of Series 1 Preferred Stock entitled
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<PAGE>
to receive payment of a dividend or distribution declared thereon, which
record date shall be not more than 60 days prior to the date fixed for
the payment thereof.
Section 3. VOTING RIGHTS. The holders of shares of Series 1 Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each share of Series 1 Preferred Stock shall entitle the holder thereof to
One Thousand (1,000) votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at any
time declare or pay any dividend on the Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of
the outstanding shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each such case the number
of votes per share to which holders of shares of Series 1 Preferred Stock
were entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock, or
by law, the holders of shares of Series 1 Preferred Stock and the holders
of shares of Common Stock and any other capital stock of the Corporation
having general voting rights shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by law,
holders of Series 1 Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled
to vote with holders of Common Stock as set forth herein) for taking any
corporate action.
Section 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series 1 Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series 1 Preferred
Stock outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series 1 Preferred
Stock;
(ii) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series 1
Preferred Stock, except dividends paid ratably on the shares of Series
1 Preferred Stock and all such parity stock on
3
<PAGE>
which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then
entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series 1 Preferred
Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the
Series 1 Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Series 1 Preferred Stock, or any shares of stock ranking
on a parity with the Series 1 Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as determined
by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph
(A) of this Section 4, purchase or otherwise acquire such shares at such
time and in such manner.
Section 5. REACQUIRED SHARES. Any shares of Series 1 Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other Certificate of Designations
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(A) Upon any liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (1) to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series 1 Preferred Stock unless, prior
thereto, the holders of shares of Series 1 Preferred Stock shall have
received One Thousand Dollars ($1,000) per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment, provided that the holders of shares
of Series 1 Preferred Stock shall be entitled to receive an aggregate
amount per share, subject to the provision for adjustment hereinafter set
forth, equal to 1,000 times the aggregate amount to be distributed per
share to holders of shares of Common Stock, or (2) to the holders of shares
of stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series 1 Preferred Stock, except
distributions made ratably on the Series 1 Preferred Stock and all such
parity stock in proportion to the total amounts to which the holders of all
such shares
4
<PAGE>
are entitled upon such liquidation, dissolution or winding up. In the
event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the aggregate amount to
which holders of shares of Series 1 Preferred Stock were entitled
immediately prior to such event under the proviso in clause (1) of the
preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstandng immediately
prior to such event.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full to the Series 1 Liquidation Preference
and the liquidation preferences of all other series of Preferred Stock, if
any, which rank on a parity with the Series 1 Participating Preferred
Stock, then such remaining assets shall be distributed ratably to the
holders of such parity shares in proportion to their respective liquidation
preferences. In the event, however, that there are not sufficient assets
available to permit payment in full of the Common Adjustment, then such
remaining assets shall be distributed ratably to the holders of Common
Stock.
(C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then
in each such case the Adjustment Number in effect immediately prior to such
event shall be adjusted by multiplying such Adjustment Number by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such
event.
Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series 1 Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to One Thousand (1,000) times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series 1 Preferred Stock shall be adjusted
by multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
5
<PAGE>
Section 8. NO REDEMPTION. The shares of Series 1 Preferred Stock shall
not be redeemable.
Section 9. RANK. The Series 1 Preferred Stock shall rank, with respect to
the payment of dividends and the distribution of assets, junior to all series of
any other class of the Corporation's Preferred Stock.
Section 10. AMENDMENT. The Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series 1 Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of at
least a majority of the outstanding shares of Series 1 Preferred Stock, voting
together as a single class.
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6
<PAGE>
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Corporation by its Chief Financial Officer this 2nd day of April 1999.
/s/ Scott C. Chandler
----------------------------------------
Name: Scott C. Chandler
Title: Chief Financial Officer
[SIGNATURE PAGE TO CERTIFICATE OF DESIGNATION OF
SERIES 1 JUNIOR PARTICIPATING PREFERRED STOCK OF
RHYTHMS NETCONNECTIONS INC.]
<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
original Certificate of Incorporation of the corporation was filed with the
Secretary of State of the State of Delaware on February 27, 1997.
2. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, the Restated Certificate of Incorporation was adopted by the
corporation's Board of Directors and stockholders, the stockholders of the
corporation having approved the Restated Certificate of Incorporation by the
written consent of the holders of at least a majority of the outstanding shares
in accordance with Section 228 thereof. The Restated Certificate of
Incorporation restates, integrates and amends the provisions of the existing
Restated Certificate of Incorporation of this corporation.
3. The text of the Certificate of Incorporation as heretofore amended or
supplemented is hereby restated and further amended to read in its entirety as
follows:
ARTICLE I
The name of this corporation is Rhythms NetConnections Inc.
ARTICLE II
The address of this corporation's registered office in the State of
Delaware is 15 East North Street, City of Dover, County of Kent 19901. The name
of its registered agent at such address is Incorporating Services, Ltd.
ARTICLE III
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may now or hereafter be organized under the Delaware
General Corporation Law.
ARTICLE IV
(A) CLASSES OF STOCK. This corporation is authorized to issue two
classes of stock, denominated Common Stock and Preferred Stock. The Common
Stock shall have a par value of $0.001 per share and the Preferred Stock
shall have a par value of $0.001 per share. The total number of shares of
Common Stock which the Corporation is authorized to issue is Two Hundred
Fifty Million shares (250,000,000), and the total number of shares of
Preferred Stock which the Corporation is authorized to issue is five million
(5,000,000), of which one million (1,000,000)
<PAGE>
shares shall be designated Series 1 Junior Participating Preferred Stock (the
"Series 1 Preferred Stock") and the remaining shares shall be undesignated as
to series.
(B) ISSUANCE OF UNDESIGNATED PREFERRED STOCK. The Preferred Stock may be
issued from time to time in one or more series. The Board of Directors is
hereby authorized, by filing one or more certificates pursuant to the Delaware
General Corporation Law (each, a "Preferred Stock Designation"), to fix or alter
from time to time the designations, powers, preferences and rights of each such
series of Preferred Stock and the qualifications, limitations or restrictions
thereof, including without limitation the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), redemption price or prices, and the liquidation
preferences of any wholly-unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series and the
designation thereof, or any of them; and to increase or decrease the number of
shares of any series subsequent to the issuance of shares 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 decreased in accordance with the
foregoing sentence, the shares constituting such decrease shall resume the
status that they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
(C) RIGHTS PREFERENCES, PRIVILEGES AND RESTRICTIONS OF SERIES 1 JUNIOR
PARTICIPATING PREFERRED STOCK.
1. DIVIDENDS AND DISTRIBUTIONS.
a. Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and superior to
the Series 1 Preferred Stock with respect to dividends, each holder of a share
of Series 1 Preferred Stock, in preference to the holders of shares of Common
Stock, par value $0.001 per share (the "Common Stock"), of the Corporation, and
of any other junior stock, shall be entitled to receive, when declared by the
Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the last day of March, June, September and December
in each year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share Series 1 Preferred Stock,
in an amount per share (rounded to the nearest cent) equal to, subject to the
provision for adjustment hereinafter set forth, One Thousand (1,000) times the
aggregate per share amount of all cash dividends, and One Thousand (1,000) times
the aggregate per share amount (payable in kind) of all non-cash dividends or
other distributions, other than a dividend payable in shares of Common Stock or
a subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of a share or fraction of Series 1
Preferred Stock. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount to which holders of shares of Series 1 Preferred
Stock were entitled immediately prior to such event under clause (b) of the
preceding sentence shall be adjusted by multiplying
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such amount by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
b. The Corporation shall declare a dividend or distribution
on the shares of Series 1 Preferred Stock as provided in paragraph (a) of
this Section immediately after it declares a dividend or distribution on the
Common Stock (other than a dividend payable in shares of Common Stock);
provided, however, that, in the event no dividend or distribution shall have
been declared on the Common Stock during the period between any Quarterly
Distribution Date and the next subsequent Quarterly Dividend Payment Date, a
dividend of $1.00 per share of Series 1 Preferred Stock shall nevertheless be
payable on such subsequent Quarterly Dividend Payment Date.
c. Dividends shall begin to accrue and be cumulative on each
outstanding share of Series 1 Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue of such
share of Series 1 Participating Preferred Stock, unless the date of issue of
such share is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such share shall begin to accrue
from the date of issue of such share, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series 1 Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series 1
Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The
Board of Directors may fix a record date for the determination of holders of
shares of Series 1 Preferred Stock entitled to receive payment of a dividend
or distribution declared thereon, which record date shall be not more than 60
days prior to the date fixed for the payment thereof.
2. VOTING RIGHTS. The holders of shares of Series 1 Preferred
Stock shall have the following voting rights:
a. Subject to the provision for adjustment hereinafter set
forth, each share of Series 1 Preferred Stock shall entitle the holder
thereof to One Thousand (1,000) votes on all matters submitted to a vote of
the stockholders of the Corporation. In the event the Corporation shall at
any time declare or pay any dividend on the Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the number of votes
per share to which holders of shares of Series 1 Preferred Stock were
entitled immediately prior to such event shall be adjusted by multiplying
such number by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
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b. Except as otherwise provided herein, in any other
Certificate of Designations creating a series of Preferred Stock or any
similar stock, or by law, the holders of shares of Series 1 Preferred Stock
and the holders of shares of Common Stock and any other capital stock of the
Corporation having general voting rights shall vote together as one class on
all matters submitted to a vote of stockholders of the Corporation.
c. Except as set forth herein, or as otherwise provided by
law, holders of Series 1 Preferred Stock shall have no special voting rights
and their consent shall not be required (except to the extent they are
entitled to vote with holders of Common Stock as set forth herein) for taking
any corporate action.
3. CERTAIN RESTRICTIONS.
a. Whenever quarterly dividends or other dividends or
distributions payable on the Series 1 Preferred Stock as provided in Section
2 are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series 1 Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series 1
Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series 1
Preferred Stock, except dividends paid ratably on the shares of Series 1
Preferred Stock and all such parity stock on which dividends are payable or
in arrears in proportion to the total amounts to which the holders of all
such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series 1 Preferred
Stock, provided that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such junior stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series 1 Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series 1 Preferred Stock, or any shares of
stock ranking on a parity with the Series 1 Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon
such terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or classes.
b. The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless
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the Corporation could, under paragraph (a) of this Section, purchase or
otherwise acquire such shares at such time and in such manner.
4. REACQUIRED SHARES. Any shares of Series 1 Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock subject to the conditions and restrictions on issuance set
forth herein, in the Certificate of Incorporation, or in any other
Certificate of Designations creating a series of Preferred Stock or any
similar stock or as otherwise required by law.
5. LIQUIDATION, DISSOLUTION OR WINDING UP.
a. Upon any liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (1) to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution
or winding up) to the Series 1 Preferred Stock unless, prior thereto, the
holders of shares of Series 1 Preferred Stock shall have received One
Thousand Dollars ($1,000) per share, plus an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not declared, to the
date of such payment, provided that the holders of shares of Series 1
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 1,000
times the aggregate amount to be distributed per share to holders of shares
of Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with
the Series 1 Preferred Stock, except distributions made ratably on the Series
1 Preferred Stock and all such parity stock in proportion to the total
amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. In the event the Corporation shall
at any time declare or pay any dividend on the Common Stock payable in shares
of Common Stock, or effect a subdivision or combination or consolidation of
the outstanding shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the aggregate amount
to which holders of shares of Series 1 Preferred Stock were entitled
immediately prior to such event under the proviso in clause (1) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstandng immediately prior to such event.
b. In the event, however, that there are not sufficient
assets available to permit payment in full to the Series 1 Liquidation
Preference and the liquidation preferences of all other series of Preferred
Stock, if any, which rank on a parity with the Series 1 Participating
Preferred Stock, then such remaining assets shall be distributed ratably to
the holders of such parity shares in proportion to their respective
liquidation preferences. In the event, however, that there are not
sufficient assets available to permit payment in full of the Common
Adjustment, then such remaining assets shall be distributed ratably to the
holders of Common Stock.
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c. In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately prior to such
event shall be adjusted by multiplying such Adjustment Number by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
6. CONSOLIDATION, MERGER, ETC. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other
stock or securities, cash and/or any other property, then in any such case
each share of Series 1 Preferred Stock shall at the same time be similarly
exchanged or changed into an amount per share, subject to the provision for
adjustment hereinafter set forth, equal to One Thousand (1,000) times the
aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, into which or for which each share of
Common Stock is changed or exchanged. In the event the Corporation shall at
any time declare or pay any dividend on the Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount set forth
in the preceding sentence with respect to the exchange or change of shares of
Series 1 Preferred Stock shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to
such event.
7. NO REDEMPTION. The shares of Series 1 Preferred Stock shall
not be redeemable.
8. RANK. The Series 1 Preferred Stock shall rank, with respect
to the payment of dividends and the distribution of assets, junior to all
series of any other class of the Corporation's Preferred Stock.
9. AMENDMENT. The Restated Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter
or change the powers, preferences or special rights of the Series 1 Preferred
Stock so as to affect them adversely without the affirmative vote of the
holders of at least a majority of the outstanding shares of Series 1
Preferred Stock, voting together as a single class.
(D) RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the prior or equal rights of
holders of all classes of stock at the time outstanding having prior or equal
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.
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2. REDEMPTION. The Common Stock is not redeemable upon demand of
any holder thereof or upon demand of this corporation.
3. VOTING RIGHTS. The holder of each share of Common Stock shall
have the right to one vote, and shall be entitled to notice of any
stockholders' meeting in accordance with the Bylaws 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 permitted by applicable law, this
corporation is also authorized to provide indemnification of (and advancement
of expenses to) such agents (and any other persons to which Delaware law
permits this corporation to provide indemnification) through bylaw
provisions, agreements with such agents or other persons, vote of
stockholders or disinterested directors or otherwise, in excess of the
indemnification and advancement otherwise permitted by Section 145 of the
Delaware General Corporation Law, subject only to limits created by
applicable Delaware law (statutory or non-statutory), with respect to actions
for breach of duty to the corporation, its stockholders, and others.
(C) EFFECT OF REPEAL OR MODIFICATION. Any repeal or modification of
any of the foregoing provisions of this Article V shall be prospective and
shall not adversely affect any right or protection of a director, officer,
agent or other person existing at the time of, or increase the liability of
any director of the corporation with respect to any acts or omissions of such
director occurring prior to, such repeal or modification.
ARTICLE VI
Elections of directors need not be by written ballot except and to the
extent provided in the Bylaws of the corporation. The Directors shall be
classified into three classes, as nearly equal in number as possible as
determined by the Board of Directors, with the term of office of the first class
to expire at the 2000 Annual Meeting of Stockholders, the term of office of the
second class to expire at the 2001 Annual Meeting of Stockholders and the term
of office of the third class to expire at the 2002 Annual Meeting of
Stockholders. At each Annual Meeting of Stockholders following such initial
classification and election, Directors elected to succeed those Directors whose
terms expire shall be elected for a term of office to expire at the third
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succeeding Annual Meeting of Stockholders after their election. Additional
directorships resulting from an increase in the number of Directors shall be
apportioned among the classes as equally as possible as determined by the
Board of Directors.
ARTICLE VII
No holder of shares of stock of the corporation shall have any
preemptive or other right, except as such rights are expressly provided by
contract, to purchase or subscribe for or receive any shares of any class, or
series thereof, of stock of the corporation, whether now or hereafter
authorized, or any warrants, options, bonds, debentures or other securities
convertible into, exchangeable for or carrying any right to purchase any
share of any class, or series thereof, of stock; but such additional shares
of stock and such warrants, options, bonds, debentures or other securities
convertible into, exchangeable for or carrying any right to purchase any
shares of any class, or series thereof, of stock may be issued or disposed of
by the Board of Directors to such persons, and on such terms and for such
lawful consideration as in its discretion it shall deem advisable or as the
corporation shall have by contract agreed.
ARTICLE VIII
The corporation is to have a perpetual existence.
ARTICLE IX
The corporation reserves the right to repeal, alter, amend or rescind
any provision contained in this Restated Certificate of Incorporation and/or
any provision contained in any amendment to or restatement of this Restated
Certificate of Incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred on stockholders herein are granted subject
to this reservation.
ARTICLE X
The Board of Directors may from time to time make, amend, supplement or
repeal the Bylaws by the requisite affirmative vote of Directors as set forth in
the Bylaws; provided, however, that the stockholders may change or repeal any
bylaw adopted by the Board of Directors by the requisite affirmative vote of
stockholders as set forth in the Bylaws; and, provided further, that no
amendment or supplement to the Bylaws adopted by the Board of Directors shall
vary or conflict with any amendment or supplement thus adopted by the
stockholders.
ARTICLE XI
No action shall be taken by the stockholders of the corporation except at
an annual or special meeting of stockholders called in accordance with the
Bylaws, and no action shall be taken by the stockholders by written consent.
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ARTICLE XII
Advance notice of stockholder nominations for the election of directors and
of business to be brought by stockholders before any meeting of the stockholders
of the corporation shall be given in the manner provided in the Bylaws of the
corporation.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
signed under the seal of the corporation as of this ____ day of ___________,
1999.
RHYTHMS NETCONNECTIONS INC.,
a Delaware corporation
By:
-------------------------------
Catherine Hapka, President
[SIGNATURE PAGE TO RESTATED CERTIFICATE OF INCORPORATION
OF RHYTHMS NETCONNECTIONS INC.
<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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<PAGE>
and Assistant Treasurers. Any number of offices may be held by the same person,
unless the certificate of incorporation or these bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each annual
meeting of stockholders shall elect a President and a Secretary and may also
elect Vice Presidents and a Treasurer.
Section 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers and agents of the corporation
shall be fixed by the Board of Directors.
Section 5. The officers of the corporation shall hold office until their
successors are chosen and qualified. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at all
meetings of the Board of Directors and of the stockholders at which he shall be
present. He shall have and may exercise such powers as are, from time to time,
assigned to him by the Board and as may be provided by law.
Section 7. In the absence of the Chairman of the Board, the Vice Chairman
of the Board, if any, shall preside at all meetings of the Board of Directors
and of the stockholders at which he shall be present. He shall have and may
exercise such powers as are, from time to time, assigned to him by the Board and
as may be provided by law.
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<PAGE>
THE PRESIDENT AND VICE PRESIDENT
Section 8. The President shall be the chief executive officer of the
corporation; and in the absence of the Chairman and Vice Chairman of the Board
he shall preside at all meetings of the stockholders and the Board of Directors.
He shall have general and active management of the business of the corporation
and shall see that all orders and resolutions of the Board of Directors are
carried into effect.
Section 9. He shall execute bonds, mortgages and other contracts requiring
a seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the corporation.
Section 10. In the absence of the President or in the event of his
inability or refusal to act, the Vice President, if any, (or in the event there
be more than one Vice President, the Vice Presidents in the order designated by
the directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The Secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the Board of Directors, and shall
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<PAGE>
perform such other duties as may be prescribed by the Board of Directors or
President, under whose supervision he shall be. He shall have custody of the
corporate seal of the corporation and he, or an Assistant Secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such Assistant
Secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by his
signature.
Section 12. The Assistant Secretary, or, if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the Secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 13. The Treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 14. He shall disburse the funds of the corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
corporation.
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<PAGE>
Section 15. If required by the Board of Directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
Section 16. The Assistant Treasurer, or if there shall be more than one,
the Assistant Treasurers in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the Treasurer or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the Treasurer and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled to
have a certificate, signed by, or in the name of the corporation by, the
Chairman or Vice Chairman of the Board of Directors, or the President or a Vice
President and the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary of the corporation, certifying the number of shares owned by
him in the corporation.
Certificates may be issued for partly paid shares and in such case upon the
face or back of the certificates issued to represent any such partly paid
shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
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<PAGE>
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 2. Any of or all the signatures on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing
such issue of a new certificate or certificates, the Board of Directors may, in
its discretion and as a
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<PAGE>
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or to give the
corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the corporation with respect to the certificate alleged
to have been lost, stolen or destroyed.
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<PAGE>
TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest
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<PAGE>
in such share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise provided by the laws
of Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation, subject to
the provisions of the certificate of incorporation, if any, may be declared by
the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
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<PAGE>
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by resolution
of the Board of Directors.
SEAL
Section 5. The Board of Directors may adopt a corporate seal having
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 6. The corporation shall indemnify its officers, directors,
employees and agents to the full extent permitted by the General Corporation Law
of Delaware.
ARTICLE VIII
AMENDMENT
Section 1. These bylaws may be altered, amended or repealed or new bylaws
may be adopted by the stockholders or by the Board of Directors, when such power
is conferred upon the Board of Directors by the certificate of incorporation at
any regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors if notice of
such alteration, amendment, repeal or adoption of new bylaws be contained in the
notice of such special meeting. If the power to adopt, amend or repeal bylaws
is conferred upon the Board of Directors by the certificate of incorporation it
shall not divest or limit the power of the stockholders to adopt, amend or
repeal bylaws.
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<PAGE>
CERTIFICATE OF SECRETARY
The undersigned, being the Secretary of Accelerated Connections, Inc., a
Delaware corporation, does hereby certify the foregoing to be the Bylaws of said
Corporation, as adopted by the directors of the Corporation and which remain in
full force and effect as of the date hereof.
Executed at San Diego, California effective as of February 27, 1997.
/s/ Andrea Frenz
-----------------------------------
Andrea Frenz, Secretary
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<PAGE>
AMENDMENT TO BYLAWS
OF
ACCELERATED CONNECTIONS, INC.
CERTIFICATE OF SECRETARY
The undersigned does hereby certify that:
I am the duly qualified and acting Secretary of Accelerated Connections,
Inc., a duly organized and existing Delaware corporation (the "Corporation").
The following is a true copy of the resolutions duly adopted by the
unanimous written consent of the Board of Directors of the Corporation on July
1, 1997, and approved by written consent of the stockholders of the Corporation
effective July 1, 1997, both of which appear in the minute book of the
Corporation:
1. DESIGNATION OF SIZE OF BOARD OF DIRECTORS.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
approves the following amendment of the Corporation's Bylaws (the
"Bylaws") to (i) amend and restate in its entirety Section 1 of
Articles III with the following:
"Section 1. The number of directors shall be set by
the Board of Directors. The directors shall be elected at
the annual meeting of the stockholders, except as provided
in Section 2 of this Article, and each director elected
shall hold office until his successor is elected and
qualified. Directors need not be stockholders."
2. RIGHT OF FIRST REFUSAL.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
approves the following amendment of the Corporation's Bylaws (the
"Bylaws") to (i) insert the following as a new Article VII, (ii) amend
the existing Article VII to Article VIII and any references thereto in
the Bylaws and (iii) amend the existing Article VIII to Article IX and
any references thereto in the Bylaws, such amendment to be effective
upon the closing of the sale and issuance of Series A Preferred Stock:
<PAGE>
"ARTICLE VII
RIGHT OF FIRST OFFER
No stockholder shall sell, assign, pledge, or in any manner
transfer any of the shares of stock of the corporation or any right or
interest therein, whether voluntarily or by operation of law, or by
gift or otherwise, except by a transfer which meets the requirements
hereinafter set forth in this Bylaw:
(a) If the stockholder receives from anyone a bona fide offer
acceptable to the stockholder to purchase any of his shares of stock,
then the stockholder shall first give written notice thereof to the
corporation. The notice shall name the proposed transferee and state
the number of shares to be transferred, the price per share and all
other terms and conditions of the offer.
(b) For fifteen (15) days following receipt of such notice, the
corporation shall have the option to purchase all or any lesser part
of the shares specified in the notice at the price and upon the terms
set forth in such bona fide offer. In the event the corporation
elects to purchase all the shares, it shall give written notice to the
selling stockholder of its election and settlement for said shares
shall be made as provided below in paragraph (d).
(c) In the event the corporation does not elect to acquire all
of the shares specified in the selling stockholder's notice, the
Secretary of the corporation shall, within fifteen (15) days of
receipt of said selling stockholder's notice, give written notice
thereof to the stockholders of the corporation other than the selling
stockholder. Said written notice shall state the number of shares
that the corporation has elected to purchase and the number of shares
remaining available for purchase (which shall be the same as the
number contained in said selling stockholder's notice, less any such
shares that the corporation has elected to purchase). Each of the
other stockholders shall have the option to purchase that proportion
of the shares available for purchase as the number of shares owned by
each of said other stockholders bears to the total issued and
outstanding shares of the corporation, excepting those shares owned by
the selling stockholder. A stockholder electing to exercise such
option shall, within ten (10) days after mailing of the corporation's
notice, give notice to the corporation specifying the number of shares
such stockholder will purchase. Within such ten-day period, each of
said other stockholders shall give written notice stating how many
additional shares such stockholder will purchase if additional shares
are made available. Failure to respond in writing within said ten-day
period to the notice given by the Secretary of the corporation shall
be deemed a rejection of such stockholder's right to acquire a
proportionate part of the shares of the selling stockholder. In the
event one or more stockholders do not elect to acquire the shares
available to them, said shares shall be allocated on a pro rata basis
to the stockholders who requested shares in addition to their pro rata
allotment.
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<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.
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<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.""
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<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
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<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>
AMENDMENT TO BYLAWS
OF
RHYTHMS NETCONNECTIONS INC.
Certificate of Secretary
The undersigned does hereby certify that:
I am the duly qualified and acting Assistant Secretary 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 unanimous
written consent of the Board of Directors of the Corporation on March 25, 1999,
which appears in the minute book of the Corporation:
NOW, THEREFORE, BE IT RESOLVED, that this Board hereby approves the
following as an amendment in its entirety of Article III, Section 1 of the
Bylaws of the Corporation:
"Section 1. At the 1999 Annual Meeting of Stockholders, the
Directors shall be classified into three classes, as nearly equal
in number as possible as determined by the Board of Directors,
with the term of office of the first class to expire at the 2000
Annual Meeting of Stockholders, the term of office of the second
class to expire at the 2001 Annual Meeting of Stockholders and
the term of office of the third class to expire at the 2002
Annual Meeting of Stockholders. At each Annual Meeting of
Stockholders following such initial classification and election,
Directors elected to succeed those Directors whose terms expire
shall be elected for a term of office to expire at the third
succeeding Annual Meeting of Stockholders after their election.
Additional directorships resulting from an increase in the number
of Directors shall be apportioned among the classes as equally as
possible as determined by the Board of Directors. The number of
Directors which shall constitute the whole Board shall be between
seven (7) and ten (10) Directors, and the exact number shall be
fixed by resolution of the majority of the Board of Directors,
with the number initially fixed at eight (8). The number of
Directors shall be determined by resolution of sixty-six and
two-thirds percent (66-2/3%) of the Directors then in office or
by sixty-six and two thirds percent (66-2/3%) of the stockholders
at the Annual Meeting of Stockholders, 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 Restated Certificate of
Incorporation and Bylaws of the Corporation, has never been modified or
repealed, and is now in full force and effect.
<PAGE>
IN WITNESS WHEREOF, I have executed this Amendment to Bylaws and affixed
the seal of the Corporation on the 25th day of March, 1999.
/s/ Katrina Thompson
--------------------------------------
Katrina Thompson, Assistant Secretary
2
<PAGE>
RESTATED BYLAWS
OF
RHYTHMS NETCONNECTIONS INC.
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office shall be in the
City of Dover, County of Kent, State of Delaware.
SECTION 2. OTHER OFFICES. 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. PLACE OF MEETINGS. All meetings of the stockholders for the
election of Directors shall be held in the City of Englewood, State of Colorado,
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 Colorado 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 Colorado, as shall be stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
SECTION 2. ANNUAL MEETING.
(a) The annual meeting of the stockholders of the corporation,
for the purpose of election of Directors and for such other business as may
lawfully come before it, shall be held on such date and at such time as may be
designated from time to time by the Board of Directors.
(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To
be properly brought before an annual meeting, business must be: (A) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (B) otherwise properly brought before the
meeting by or at the direction of the Board of Directors, or (C) otherwise
properly brought before the meeting by a stockholder. For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the corporation.
To be timely, a stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the corporation no later than the date
specified in the corporation's proxy statement released to stockholders in
connection with the previous year's annual meeting of stockholders, which date
shall be not less than one hundred twenty (120) calendar days in advance of the
date of such proxy statement; provided, however, that in the event that no
annual meeting was held in the previous year or the
<PAGE>
date of the annual meeting has been changed by more than thirty (30) days
from the date contemplated at the time of the previous year's proxy
statement, notice by the stockholder to be timely must be so received a
reasonable time before the solicitation is made. A stockholder's notice to
the Secretary shall set forth as to each matter the stockholder proposes to
bring before the annual meeting: (i) a brief description of the business
desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and address, as
they appear on the corporation's books, of the stockholder proposing such
business, (iii) the class and number of shares of the corporation which are
beneficially owned by the stockholder, (iv) any material interest of the
stockholder in such business and (v) ay other information that is required to
be provided by the stockholder pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity
as a proponent to a stockholder proposal. In addition to the foregoing, in
order to include information with respect to a stockholder proposal in the
proxy statement and form of proxy for a stockholder's meeting, stockholders
must provide notice as required by the regulations promulgated under the 1934
Act to the extent such regulations require notice that is different from the
notice required above. Notwithstanding anything in these Bylaws to the
contrary, no business shall be conducted at any annual meeting except in
accordance with the procedures set forth in this paragraph (b) of this
Section 2. The chairman of the annual meeting shall, if the facts warrant,
determine and declare at the meeting that business was not properly brought
before the meeting and in accordance with the provisions of this paragraph
(b), and, if he should so determine, he shall so declare at the meeting that
any such business not properly brought before the meeting shall not be
transacted.
(c) Only persons who are nominated in accordance with the
procedures set forth in this paragraph (c) shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors or by any stockholder of the corporation entitled to vote
in the election of Directors at the meeting who complies with the notice
procedures set forth in this paragraph (c). Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the corporation in accordance with
the provisions of paragraph (b) of this Section 2. Such stockholder's notice
shall set forth (i) as to each person, if any, whom the stockholder proposes to
nominate for election or re-election as a Director: (A) the name, age, business
address and residence address of such person, (B) the principal occupation or
employment of such person, (C) the class and number of shares of the corporation
that are beneficially owned by such person, (D) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nominations are to be made by the stockholder, and (E) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for election of Directors, or is otherwise required, in each case
pursuant to Regulation 14A under the 1934 Act (including without limitation such
person's written consent to being named in the proxy statement, if any, as a
nominee and to serving as a Director if elected); and (ii) as to such
stockholder giving notice, the information required to be provided pursuant to
subitems (ii), (iii) and (iv) of paragraph (b) of this Section 2. At the
request of the Board of Directors, any person nominated by a stockholder for
election as a Director shall furnish to the Secretary of the corporation that
information required to be set forth in the stockholder's notice
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of nomination which pertains to the nominee. No person shall be eligible for
election as a Director of the corporation unless nominated in accordance with
the procedures set forth in this paragraph (c). The chairman of the meeting
shall, if the facts warrant, determine and declare at the meeting that a
nomination was not made in accordance with the procedures prescribed by these
Bylaws, and if he should so determine, he shall so declare at the meeting,
and the defective nomination shall be disregarded.
SECTION 3. NOTICE OF ANNUAL MEETING. 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. VOTING LIST. The officer who has charge of the stock
ledger of the corporation shall prepare and make, or have prepared and made,
at least ten (10) 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 (10) 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. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, as amended from time to time, may only be
called as provided in this Section 5 by the President, Chief Executive
Officer or Chairman of the Board and shall be called by the President or
Secretary at the request in writing of a majority of the Board of Directors.
Such request shall state the purpose or purposes of the proposed meeting.
The place, date and time of any special meeting shall be determined by the
Board of Directors. Such determination shall include the record date for
determining the stockholders having the right of and to vote at such meeting.
SECTION 6. NOTICE OF SPECIAL MEETING. 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. ACTION AT SPECIAL MEETING. Business transacted at any
special meeting of stockholders shall be limited to the purposes stated in
the notice.
SECTION 8. QUORUM AND ADJOURNMENTS.
(a) 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, as amended from time to time. If, however,
such quorum shall not be present or represented at any meeting of the
stockholders, the stockholders
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entitled to vote thereat, present in person or represented by proxy, shall
have the 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 (30) 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.
(b) 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
statutes or of the Certificate of Incorporation, as amended from time to
time, a different vote is required, in which case such express provision
shall govern and control the decision of such question.
SECTION 9. VOTING RIGHTS. Unless otherwise provided in the
Certificate of Incorporation, as amended from time to time, each stockholder
shall at every meeting of the stockholders be entitled to one (1) 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 (3)
years from its date, unless the proxy provides for a longer period.
SECTION 10. ACTION WITHOUT MEETING. No action shall be taken by the
stockholders of the corporation except at an annual or special meeting of
stockholders called in accordance with these Bylaws, and no action shall be
taken by the stockholders by written consent.
ARTICLE III
DIRECTORS
SECTION 1. CLASSES, NUMBER, TERM OF OFFICE AND QUALIFICATION. The
Directors shall be classified into three classes, as nearly equal in number as
possible as determined by the Board of Directors, with the term of office of the
first class to expire at the 2000 Annual Meeting of Stockholders, the term of
office of the second class to expire at the 2001 Annual Meeting of Stockholders
and the term of office of the third class to expire at the 2002 Annual Meeting
of Stockholders. At each Annual Meeting of Stockholders, Directors elected to
succeed those Directors whose terms expire shall be elected for a term of office
to expire at the third succeeding Annual Meeting of Stockholders after their
election. Additional directorships resulting from an increase in the number of
Directors shall be apportioned among the classes as equally as possible as
determined by the Board of Directors. The number of Directors which shall
constitute the whole Board shall be between seven (7) and ten (10) Directors,
and the exact number shall be fixed by resolution of sixty-six and two-thirds
percent (66-2/3%) of the Directors then in office or by sixty-six and two-thirds
percent (66-2/3%) of the stockholders at the annual meeting of the stockholders,
with the number initially fixed at eight (8). Each Director elected shall hold
office until his successor is elected and qualified. Directors need not be
stockholders.
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SECTION 2. VACANCIES. Vacancies may be filled only by a majority of
the Directors then in office, though less than a quorum, or by a sole
remaining Director. Each Director so chosen shall hold office until a
successor is duly elected and shall qualify or until his earlier death,
resignation or removal. 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, 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 to replace the Directors chosen by the Directors then in office.
SECTION 3. POWERS. 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, as amended from time
to time, or by these Bylaws directed or required to be exercised or done by
the stockholders.
SECTION 4. REGULAR AND SPECIAL MEETINGS. The Board of Directors of
the corporation may hold meetings, both regular and special, either within or
without the State of Colorado.
SECTION 5. ANNUAL MEETING. The annual meeting of each newly elected
Board of Directors shall be held without notice other than this Bylaw
immediately after, and at the same place as, the annual meeting of
stockholders. In the event the annual meeting of any newly elected Board of
Directors shall not be held immediately after, and at the same place as, the
annual meeting of 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.
SECTION 6. NOTICE OF REGULAR MEETINGS. 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. NOTICE OF SPECIAL MEETINGS. Special meetings of the
Board may be called by the Chief Executive Officer or President on no less
than forty-eight (48) hours notice to each Director either personally, or by
telephone, mail, telegram or facsimile; special meetings shall be called by
the Chief Executive Officer, 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
Chief Executive Officer, President or Secretary in like manner and on like
notice on the written request of the sole Director. A written waiver of
notice, signed by the person entitled thereto, whether before or after the
time of the meeting stated therein, shall be deemed equivalent to notice.
SECTION 8. QUORUM. 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, as
amended from time to time. If a quorum shall not be present at any meeting of
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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.
SECTION 9. ACTION WITHOUT MEETING. Unless otherwise restricted by
the Certificate of Incorporation, as amended from time to time, 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. MEETINGS BY TELEPHONE CONFERENCE CALLS. Unless otherwise
restricted by the Certificate of Incorporation, as amended from time to time,
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.
SECTION 11. COMMITTEES. 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 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,
as amended from time to time, 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, as amended from
time to time, 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.
Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
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SECTION 12. FEES AND COMPENSATION. Unless otherwise restricted by
the Certificate of Incorporation, as amended from time to time, 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.
SECTION 13. REMOVAL. Subject to any limitations imposed by law or
the Certificate of Incorporation, as amended from time to time, the Board of
Directors, or any individual Director, may be removed from office at any time
only with cause by the affirmative vote of the holders of at least a majority
of shares entitled to vote at an election of Directors.
ARTICLE IV
NOTICES
SECTION 1. NOTICE. Whenever, under the provisions of the statutes
or of the Certificate of Incorporation, as amended from time to time, 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 telephone, telegram and facsimile.
SECTION 2. WAIVER OF NOTICE. Whenever any notice is required to be
given under the provisions of the statutes or of the Certificate of
Incorporation, as amended from time to time, 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. ENUMERATION. The officers of the corporation shall be
chosen by the Board of Directors and shall be a Chief Executive Officer, a
Chief Financial Officer 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 choose a President, one or more Vice
Presidents and one or more Assistant Secretaries. Any number of offices may
be held by the same person, unless the Certificate of Incorporation, as
amended from time to time, or these Bylaws otherwise provide.
The compensation of all officers and agents of the corporation
shall be fixed by the Board of Directors, and no officer shall be prevented
from receiving such compensation by virtue of his also being a Director of
the corporation.
SECTION 2. ELECTION OR APPOINTMENT. The Board of Directors at its
first meeting after each annual meeting of stockholders shall choose a Chief
Executive Officer, Chief Financial
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Officer and a Secretary and may choose a President, one or more Vice
Presidents and one or more Assistant Secretaries.
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 3. TENURE, REMOVAL AND VACANCIES. 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.
SECTION 4. CHAIRMAN OF THE BOARD. 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. The Chairman of the Board shall
have and may exercise such powers as are, from time to time, assigned by the
Board and as may be provided by law.
SECTION 5. VICE CHAIRMAN OF THE BOARD. 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. The Vice Chairman of the Board shall have and may exercise
such powers as are, from time to time, assigned by the Board and as may be
provided by law.
SECTION 6. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of
the corporation shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and the officers
of the corporation. The Chief Executive Officer shall preside at all
meetings of the stockholders and, in the absence or nonexistence of a
Chairman or Vice Chairman of the Board at all meetings of the Board of
Directors. The Chief Executive Officer shall have the general powers and
duties of management usually vested in the Chief Executive Officer of a
corporation, including general supervision, direction and control of the
business and supervision of other officers of the corporation, and shall have
such other powers and duties as may be prescribed by the Board of Directors
or these Bylaws.
The Chief Executive Officer shall, without limitation, have the
authority to 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 7. PRESIDENT. Subject to such supervisory powers as may be
given by these Bylaws or the Board of Directors to the Chairman of the Board
or the Chief Executive Officer, if there be such officers, the President
shall have general supervision, direction and control of the business and
supervision of other officers of the corporation, and shall have such other
powers and duties as may be prescribed by the Board of Directors or these
Bylaws. In the event a Chief Executive Officer shall not be appointed, the
President shall have the duties of such office.
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SECTION 8. VICE PRESIDENTS. The Vice President, or if there shall
be more than one, the Vice Presidents in the order determined by the Board of
Directors, shall, in the absence or disability of the President, act with all
of the powers and be subject to all the restrictions of the President. The
Vice Presidents shall also perform such other duties and have such other
powers as the Board of Directors, the President or these Bylaws may, from
time to time, prescribe.
SECTION 9. SECRETARY. The Secretary shall attend all meetings of
the Board of Directors, all meetings of the committees thereof and all
meetings of the stockholders and record all the proceedings of the meetings
in a book or books to be kept for that purpose. Under the Chief Executive
Officer's or President's supervision, the Secretary shall give, or cause to
be given, all notices required to be given by these Bylaws or by law; shall
have such powers and perform such duties as the Board of Directors, the Chief
Executive Officer, the President or these Bylaws may, from time to time,
prescribe; and shall have custody of the seal of the corporation. The
Secretary, or an Assistant Secretary, shall have authority to affix the seal
of the corporation to any instrument requiring it and when so affixed, it may
be attested by his or her 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 or her signature.
SECTION 10. ASSISTANT SECRETARY. The Assistant Secretary, if any, or
if there be more than one, the Assistant Secretaries in the order determined
by the Board of Directors, shall, in the absence, disability or refusal to
act of the Secretary, 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, the Chief Executive Officer, the President, the
Secretary or these Bylaws may, from time to time, prescribe.
SECTION 11. CHIEF FINANCIAL OFFICER. The Chief Financial Officer
shall act as Treasurer and 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.
The Chief Financial Officer 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 or her transactions as Treasurer and of
the financial condition of the corporation.
If required by the Board of Directors, the Chief Financial Officer
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 12. OTHER OFFICERS, ASSISTANT OFFICERS AND AGENTS. Officers,
assistant officers and agents, if any, other than those whose duties are
provided for in these Bylaws, shall have
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such authority and perform such duties as may from time to time be prescribed
by the Board of Directors, the Chief Executive Officer or the President.
SECTION 13. ABSENCE OR DISABILITY OF OFFICERS. In the case of the
absence or disability of any officer of the corporation and of any person
hereby authorized to act in such officer's place during such officer's
absence or disability, the Board of Directors may delegate the powers and
duties of such officer to any officer or to any Director, or to any other
person who it may select.
ARTICLE VI
CERTIFICATES OF STOCK
SECTION 1. CERTIFICATES OF STOCK. 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 Chief Financial
Officer or an Assistant Chief Financial Officer, 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.
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 qualifications, 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. EXECUTION OF CERTIFICATES. Any or all of 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.
SECTION 3. LOST CERTIFICATES. 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 condition precedent to the
issuance thereof, require the owner of such lost,
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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.
SECTION 4. TRANSFER OF STOCK. 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.
SECTION 5. FIXING RECORD DATE. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholder or any adjournment thereof, 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 (60) nor
less than ten (10) days before the date of such meeting, nor more than sixty
(60) 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.
SECTION 6. REGISTERED STOCKHOLDERS. 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 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
INDEMNIFICATION
SECTION 1. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS. The
corporation shall indemnify its Directors and executive officers to the
fullest extent not prohibited by the Delaware General Corporation Law;
provided, however, that the corporation may limit the extent of such
indemnification by individual contracts with its Directors and executive
officers; and, provided, further, that the corporation shall not be required
to indemnify any Director or executive officer in connection with any
proceeding (or part thereof) initiated by such person or any proceeding by
such person against the corporation or its Directors, officers, employees or
other agents unless (i) such indemnification is expressly required to be made
by law, (ii) the proceeding was authorized by the Board of Directors of the
corporation, and (iii) such indemnification is provided by the corporation,
in its sole discretion, pursuant to the powers vested in the corporation
under the Delaware General Corporation Law.
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SECTION 2. INDEMNIFICATION OF OTHER OFFICERS, EMPLOYEES AND OTHER
AGENTS. The corporation shall have power to indemnify its other officers,
employees and other agents as set forth in the Delaware General Corporation
Law.
SECTION 3. GOOD FAITH.
(a) For purposes of any determination under this Bylaw,
a Director or officer shall be deemed to have acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, to
have had no reasonable cause to believe that any conduct was unlawful, if
such Director's or officer's action is based on information, opinions,
reports and statements, including financial statements and other financial
data, in each case prepared or presented by:
(1) one or more officers or employees of the
corporation whom the Director or executive officer believed
to be reliable and competent in the matters presented;
(2) counsel, independent accountants or other persons
as to matters which the Director or executive officer
believed to be within such person's professional competence;
and
(3) with respect to a Director, a committee of the
Board upon which such Director does not serve, as to matters
within such Committee's designated authority, which
committee the Director believes to merit confidence; so long
as, in each case, the Director or executive officer acts
without knowledge that would cause such reliance to be
unwarranted.
(b) The termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the person did not act in good faith
and in a manner which was reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal proceeding,
that the person had reasonable cause to believe that his or her consent was
unlawful.
(c) The provisions of this Section 3 shall not be deemed to
be exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth by the Delaware
General Corporation Law.
SECTION 4. EXPENSES. The corporation shall advance, prior to the final
disposition of any proceeding, promptly following request therefor, all expenses
incurred by any Director or officer in connection with such proceeding upon
receipt of an undertaking by or on behalf of such person to repay said amounts
if it should be determined ultimately that such person is not entitled to be
indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
Section 4 of this Bylaw, no advance shall be made by the corporation if a
determination is reasonably and promptly made (i) by the Board of Directors by a
majority vote of a quorum consisting of
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Directors who were not parties to the proceeding, or (ii) if such quorum is
not obtainable, or, even if obtainable, a quorum of disinterested Directors
so directs, by independent legal counsel in a written opinion, that the facts
known to the decision-making party at the time such determination is made
demonstrate clearly and convincingly that such person acted in bad faith or
in a manner that such person did not believe to be in or not opposed to the
best interests of the corporation.
SECTION 5. ENFORCEMENT. Without the necessity of entering into an
express contract, all rights to indemnification and advances to Directors and
officers under this Bylaw shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the Director or officer. Any right to indemnification or
advances granted by this Bylaw to a Director or officer shall be enforceable
by or on behalf of the person holding such right in any court of competent
jurisdiction if (i) the claim for indemnification or advances is denied, in
whole or in part, or (ii) no disposition of such claim is made within ninety
(90) days of request therefor. The claimant in such enforcement action, if
successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his or her claim. The corporation shall be entitled to raise
as a defense to any such action that the claimant has not met the standards
of conduct that make it permissible under the Delaware General Corporation
Law for the corporation to indemnify the claimant for the amount claimed.
Neither the failure of the corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant
is proper in the circumstances because he or she has met the applicable
standard of conduct set forth in the Delaware General Corporation Law, nor an
actual determination by the corporation (including its Board of Directors,
independent legal counsel or its stock-holders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
SECTION 6. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any
person by this Bylaw shall not be exclusive of any other right which such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, as amended from time to time, Bylaws,
agreement, vote of stockholders or disinterested Directors or otherwise, both
as to action in his official capacity and as to action in another capacity
while holding office. The corporation is specifically authorized to enter
into individual contracts with any or all of its Directors, officers,
employees or agents respecting indemnification and advances, to the fullest
extent not prohibited by the Delaware General Corporation Law.
SECTION 7. SURVIVAL OF RIGHTS. The rights conferred on any person
by this Bylaw shall continue as to a person who has ceased to be a Director,
officer, employee or other agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
SECTION 8. INSURANCE. To the fullest extent permitted by the
Delaware General Corporation Law, the corporation, upon approval by the Board
of Directors, may purchase insurance on behalf of any person required or
permitted to be indemnified pursuant to this Bylaw.
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SECTION 9. AMENDMENTS. Any repeal or modification of this Bylaw
shall only be prospective and shall not affect the rights under this Bylaw in
effect at the time of the alleged occurrence of any action or omission to act
that is the cause of any proceeding against any agent of the corporation.
SECTION 10. SAVING CLAUSE. If this Bylaw or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each Director and officer to the
full extent not prohibited by any applicable portion of this Bylaw that shall
not have been invalidated, or by any other applicable law.
SECTION 11. CERTAIN DEFINITIONS. For the purposes of this Bylaw, the
following definitions shall apply:
(a) The term "proceeding" shall be broadly construed and
shall include, without limitation, the investigation, preparation,
prosecution, defense, settlement, arbitration and appeal of, and the giving
of the testimony in, any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative.
(b) The term "expenses" shall be broadly construed and
shall include, without limitation, court costs, attorneys' fees, witness
fees, fines, amounts paid in settlement or judgment and any other costs and
expenses of any nature or kind incurred in connection with any proceeding.
(c) The term the "corporation" shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger
which, if its separate existence had continued, would have had power and
authority to indemnify its Directors, officers, and employees or agents, so
that any person who is or was a Director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such
constituent corporation as a Director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall
stand in the same position under the provisions of this Bylaw with respect to
the resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(d) References to a "Director," "officer," "employee,"
or "agent" of the corporation shall include, without limitation, situations
where such person is serving at the request of the corporation as a Director,
officer, employee, trustee or agent of another corporation, partnership,
joint venture, trust or other enterprise.
(e) References to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and references
to "serving at the request of the corporation" shall include any service as a
Director, officer, employee or agent of the corporation which imposes duties
on, or involves services by, such Director, officer, employee, or agent with
respect to an employee benefit plan, its participants, or beneficiaries; and
a person who acted in good faith and in a manner he reasonably believed to be
in the interest of the partic-ipants and beneficiaries of an
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employee benefit plan shall be deemed to have acted in a manner "not opposed
to the best interests of the corporation" as referred to in this Bylaw.
ARTICLE VIII
LOANS TO OFFICERS
SECTION 1. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other
employee of the corporation or of its subsidiaries, including any officer or
employee who is a Director of the Corporation or its subsidiaries, whenever,
in the judgment of the Board of Directors, such loan, guarantee or assistance
may reasonably be expected to benefit the corporation. The loan, guarantee
or other assistance may be with or without interest and may be unsecured, or
secured in such manner as the Board of Directors shall approve, including,
without limitation, a pledge of shares of stock of the corporation. Nothing
in this Bylaw shall be deemed to deny, limit or restrict the powers of
guaranty or warranty of the corporation at common law or under any statute.
ARTICLE IX
GENERAL PROVISIONS
SECTION 1. DECLARATION OF DIVIDENDS. Dividends upon the capital
stock of the corporation, subject to the provisions of the Certificate of
Incorporation, as amended from time to time, 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, as
amended from time to time.
SECTION 2. DIVIDEND RESERVE. 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.
SECTION 3. EXECUTION OF CORPORATE INSTRUMENTS. 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.
SECTION 4. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
SECTION 5. CORPORATE SEAL. 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.
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ARTICLE X
AMENDMENTS
SECTION 1. AMENDMENTS.
(a) Except as otherwise set forth in Section 9 of
Article VII of these Bylaws, the Bylaws may be altered or amended or new
Bylaws adopted by the affirmative vote of a majority of the voting power of
all of the then-outstanding shares of capital stock of the corporation
entitled to vote generally in the election of Directors (the "Voting Stock").
The Board of Directors shall also have the power, if such power is conferred
upon the Board of Directors by the Certificate of Incorporation, as amended
from time to time, to adopt, amend or repeal Bylaws by a vote of the majority
of the Board of Directors unless a greater or different vote is required
pursuant to the provisions of the Bylaws, the Certificate of Incorporation or
any applicable provision of law.
(b) Notwithstanding any other provisions of these Bylaws
or any provision of law which might otherwise permit a lesser vote or no
vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, the
Certificate of Incorporation, as amended from time to time, or any Preferred
Stock Designation (as the term is defined in the Certificate of
Incorporation, as amended), the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of the Voting Stock, voting together as a single
class, shall be required to alter, amend or repeal this paragraph (b) or
Section 2, Section 5 or Section 10 of Article II or Section 1, Section 2 or
Section 13 of Article III of these Bylaws.
(c) Notwithstanding any other provisions of these Bylaws
or any provision of law which might otherwise permit a lesser vote or no
vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, the
Certificate of Incorporation, as amended from time to time, or any Preferred
Stock Designation (as the term is defined in the Certificate of
Incorporation, as amended from time to time), the affirmative vote of at
least sixty-six and two-thirds percent (66-2/3%) of the Directors, shall be
required to alter, amend or repeal this paragraph (c) or Section 2, Section 5
or Section 10 of Article II or Section 1, Section 2 or Section 13 of Article
III of these Bylaws.
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CERTIFICATE OF SECRETARY
The undersigned, being the Secretary of Rhythms NetConnections Inc., a
Delaware corporation, does hereby certify the foregoing to be the Bylaws of said
Corporation, as adopted by the requisite vote or votes of the stockholders and
Directors of the Corporation and which remain in full force and effect as of the
date hereof.
Executed at Englewood, Colorado effective as of ____________________,
1999.
----------------------------------------
Scott Chandler
<PAGE>
Exhibit 4.8
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, GATX CAPITAL
CORPORATION and its assignees are entitled to subscribe for and purchase 19,905
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 $10.55 (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 March 31, 1999, 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
<PAGE>
purposes as the record holder(s) of, the shares represented thereby (and such
shares 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
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<PAGE>
by multiplying the number of Shares purchasable immediately prior to such
adjustment in the 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:
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<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
transferred (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.
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<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 (the "Warrant
Registration Rights Agreement") among the Company and the Initial Purchasers (as
defined therein), with the following exceptions:
(1) the holder will have no shelf registration rights; and
(2) the holder's "piggy-back" registration rights shall be
junior in priority to the "piggy-back" registration rights granted to the
holders under the Warrant Registration Rights Agreement.
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
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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
(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:
6
<PAGE>
(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 provision of, or constitute a default under, any material
indenture, mortgage, contract or other instrument of which the
7
<PAGE>
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.
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
8
<PAGE>
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.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK;
SIGNATURE PAGE FOLLOWS]
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<PAGE>
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/ Scott C. Chandler
--------------------------------------
Title Chief Financial Officer
----------------------------------
Address: 6933 South Revere Parkway
Suite 100
Englewood, CO 80112
10
<PAGE>
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 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) 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.
11
<PAGE>
(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 reflect the issuance of only the number of
shares of Common Stock (and convertible or exchangeable securities
12
<PAGE>
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 (as adjusted for
subsequent stock splits, stock dividends and the like) issued or issuable upon
exercise of warrants (the "Warrants") granted to purchasers of units (the
"Units") consisting of 13-2% Senior Discount Notes due 2008 and such Warrants,
which Units were issued on or about May 5, 1998.
13
<PAGE>
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)
14
<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
See Exhibit 3.1 to Registration Statement on Form S-1
<PAGE>
Exhibit 4.9
WARRANT PURCHASE AGREEMENT
This Warrant Purchase Agreement (this "Agreement") is made as of
April 6, 1999, by and between Rhythms NetConnections, Inc., a Delaware
corporation (the "Company"), and MCI WorldCom Venture Fund, Inc. ("MCI
WorldCom").
RECITAL
MCI WorldCom desires to purchase from the Company, and the Company
desires to sell and issue to MCI WorldCom, a Warrant in substantially the same
form as EXHIBIT A attached hereto and subject to the terms and conditions set
forth herein (the "Warrant"), such Warrant to initially purchase up to 136,996
shares of the Company's Common Stock (the "Common Stock").
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. PURCHASE AND SALE OF THE WARRANT.
1.1 PURCHASE AND SALE OF THE WARRANT. Subject to the terms and
conditions of this Agreement, MCI WorldCom agrees to purchase at the Closing and
the Company agrees to sell and issue to MCI WorldCom at the Closing a Warrant to
purchase shares of Common Stock as set forth by the terms of this Agreement and
the Warrant in substantially the same form as attached hereto as EXHIBIT A at a
purchase price equal to $0.001 times the number of shares that are subject to
the Warrant (the "Purchase Price").
1.2 CLOSING.
(a) The purchase and sale of the Warrant shall occur at the
offices of Brobeck, Phleger & Harrison LLP, 550 West C Street, Suite 1300,
San Diego, California, at 10:00 a.m. on April 6, 1999, or at such other time
and place as the Company and MCI WorldCom shall mutually agree in writing
(the "Closing").
(b) At the Closing, the Company shall deliver to MCI WorldCom the
Warrant that MCI WorldCom is purchasing against payment by check or wire
transfer of the respective Purchase Price.
2. REPRESENTATIONS AND WARRANTIES OF MCI WORLDCOM. MCI WorldCom hereby
represents and warrants to and for the benefit of the Company, with knowledge
that the Company is relying thereon in entering into this Agreement and issuing
the Warrant to MCI WorldCom, as follows:
2.1 PURCHASE ENTIRELY FOR OWN ACCOUNT. By MCI WorldCom's execution of
this Agreement, MCI WorldCom hereby confirms that the Warrant and the Common
Stock issuable upon exercise of the Warrant (collectively, and also including
any further underlying securities, the "Securities") shall be acquired for
investment for MCI WorldCom's own account,
<PAGE>
not as a nominee or agent, and not with a view to the resale or distribution of
any part thereof, and that MCI WorldCom has no present intention of selling,
granting any participation in, or otherwise distributing the same. By executing
this Agreement, MCI WorldCom further represents that MCI WorldCom does not have
any contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participation to such person or to any third person, with
respect to any of the Securities. MCI WorldCom represents that it has full power
and authority to enter into this Agreement.
2.2 INVESTMENT EXPERIENCE. MCI WorldCom is an investor in securities
of companies in the development stage and acknowledges that it is able to fend
for itself, can bear the economic risk of its investment and has such knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Securities.
2.3 ACCREDITED INVESTOR. MCI WorldCom is an "accredited investor"
within the meaning of SEC Rule 501 of Regulation D, as now in effect.
2.4 RESTRICTED SECURITIES. MCI WorldCom understands that the
Securities it is and shall be 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, MCI WorldCom
represents that it is familiar with Rule 144 promulgated under the Act, as now
in effect, and understands the resale limitations imposed thereby and by the
Act.
2.5 LEGENDS. MCI WorldCom understands that the certificates evidencing
the Securities may bear one or all of the following legends:
(a) The securities evidenced by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act") or the
securities laws of any state of the United States. The securities evidenced by
this certificate may not be offered, sold or transferred for value directly or
indirectly, in the absence of such registration under the Act and qualification
under applicable state laws, or pursuant to an exemption from registration under
the Act and qualification under applicable state laws, the availability of which
is to be established to the reasonable satisfaction of the Company.
(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 California Corporations Code.
(c) A legend giving notice of Section 4.
3. RESTRICTIONS ON DISPOSITION. Without in any way limiting the
representations set forth in Section 2 above, MCI WorldCom 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 3, and in addition thereto, one of the following conditions is
satisfied:
-2-
<PAGE>
3.1 SECURITIES REGISTERED. 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.
3.2 REGISTRATION NOT REQUIRED. MCI WorldCom shall have (i) notified
the Company of the proposed disposition and shall have furnished the Company
with a detailed statement of the circumstances surrounding the proposed
disposition, and (ii) if reasonably requested by the Company, furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such securities 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.
3.3 OTHER PERMITTED TRANSFERS. The disposition is by MCI WorldCom
which is a partnership to a partner of such partnership or a retired partner of
such partnership who retires after the date hereof, or to the estate of any such
partner or retired partner or the transfer by gift, will or intestate succession
of any partner to his spouse or to the siblings, lineal descendants including
adopted children or ancestors of such partner or his spouse, if, prior to such
transfer, the transferee agrees in writing to be subject to the terms hereof to
the same extent as if he were the original party hereunder. Notwithstanding any
of the foregoing, transferability of the Warrant is further restricted by its
terms. No transferee shall be required as a condition to any transfer of
securities by MCI WorldCom, to agree to be bound by this Section 3.3 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. MARKET STAND-OFF AGREEMENT. During the period of duration (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, MCI WorldCom 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 transferees or 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 this Section 4 shall be
applicable only to the first such registration statement of the Company pursuant
to which Common Stock (or other securities) of the Company are to be sold on its
behalf to the public in an underwritten offering, and (b) all officers and
directors of the Company enter into similar agreements. In order to enforce the
foregoing covenant, the Company may impose stop-transfer instructions with
respect to the securities of MCI WorldCom (and the shares or securities of every
other person subject to the foregoing restriction) until the end of such period.
5. GENERAL PROVISIONS.
5.1 CONSTRUCTION. This Agreement shall be governed, construed and
enforced in accordance with the internal laws of the State of Delaware, without
giving effect to its conflicts of laws principles.
5.2 ENTIRE AGREEMENT. This Agreement, together with the agreements and
documents referred to herein, constitute the entire agreement among the parties
hereto with
-3-
<PAGE>
respect to the subject matter hereof and supersede all prior and contemporaneous
negotiations, agreements and understandings.
5.3 NOTICES. All payments, notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given at the earlier of (i) the time of actual delivery or (ii) on the
third business day following the date deposited with the United States Postal
Service, postage prepaid, certified with return receipt requested, to the
parties hereto at the addresses set forth on the signature pages hereto or at
such other address as shall be given in writing by a party to the other parties
hereto.
5.4 SUCCESSORS AND ASSIGNS. This Agreement, and the rights and
obligations of each of the parties hereunder, may not be assigned by MCI
WorldCom without the prior written consent of the Company. Subject to the
foregoing sentence, this Agreement shall inure to the benefit of, and shall be
binding upon, the parties hereto and their respective successors and assigns.
5.5 SEVERABILITY. If any term, covenant or condition of this Agreement
is held to be invalid, void or otherwise unenforceable by any court of competent
jurisdiction, the remainder of this Agreement shall not be affected thereby and
each term, covenant and condition of this Agreement shall be valid and
enforceable to the fullest extent permitted by law.
5.6 MODIFICATION. 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 MCI WorldCom.
5.7 ATTORNEYS' FEES. 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 an award of its reasonable attorneys' fees, costs and disbursements
in addition to any other relief to which such party may be entitled.
5.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-4-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement to be
effective as of the date first written above.
COMPANY: RHYTHMS NETCONNECTIONS, INC., a
Delaware corporation
By: /s/ Catherine Hapka
-----------------------------------------
Catherine Hapka, President and
Chief Executive Officer
Address: 6933 South Revere Parkway
Englewood, CO 80112-3931
MCI WORLDCOM: MCI WORLDCOM VENTURE FUND, INC.
By: /s/ Susan Mayer
---------------------------------------
Its: President
---------------------------------------
Address: 1801 Pennsylvania Avenue, N.W.
-------------------------------------------
Washington, D.C. 20006
-------------------------------------------
[SIGNATURE PAGE TO WARRANT PURCHASE AGREEMENT]
<PAGE>
EXHIBIT A
FORM OF WARRANT
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 April __, 1999
136,996 Shares of Common Stock of
Rhythms NetConnections Inc.
THIS CERTIFIES that, for the per share purchase price equal to the
price per share paid for shares of Common Stock ("Common Stock") of Rhythms
NetConnections Inc., a Delaware corporation (the "Company") in the Company's
initial public offering of such securities (such price as from time to time to
be adjusted as provided herein is called the "Warrant Price"), MCI WorldCom
Venture Fund, Inc. or its registered assigns (the "Holder") is entitled to
subscribe for and purchase from the Company, up to 136,996 shares (subject to
adjustment as provided herein) of fully paid and non-assessable Common Stock,
subject to the provisions and upon the terms and conditions hereinafter set
forth at the Warrant Price, at or prior to 5:00 p.m. Pacific time on April __,
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
<PAGE>
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
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 shall
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)
-2-
<PAGE>
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
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
-3-
<PAGE>
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 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,
-4-
<PAGE>
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, 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
-5-
<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 pursuant to Rule
144. Each new certificate evidencing the Warrant and/or Warrant Shares so
-6-
<PAGE>
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.
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
-7-
<PAGE>
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: April __, 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:
----------------------------------
Address:
-------------------------------------
-------------------------------------
<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).
Exhibit A-1
<PAGE>
EXHIBIT 4.10
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 April 6, 1999
136,996 Shares of Common Stock of
Rhythms NetConnections Inc.
THIS CERTIFIES that, for the per share purchase price equal to the price per
share paid for shares of Common Stock ("Common Stock") of Rhythms NetConnections
Inc., a Delaware corporation (the "Company") in the Company's initial public
offering of such securities (such price as from time to time to be adjusted as
provided herein is called the "Warrant Price"), MCI WorldCom Venture Fund, Inc.
or its registered assigns (the "Holder") is entitled to subscribe for and
purchase from the Company, up to 136,996 shares (subject to adjustment as
provided herein) of fully paid and non-assessable Common Stock, subject to the
provisions and upon the terms and conditions hereinafter set forth at the
Warrant Price, at or prior to 5:00 p.m. Pacific time on April 5, 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 shall
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,
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
5
<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
/s/ Catherine Hapka
Dated: April 6, 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: /s/ Susan Mayer
---------------------------------------
Its: President
--------------------------------------
Address: 1801 Pennsylvania Avenue, N.W.
--------------------------------------
Washington, D.C. 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>
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 April 6, 1999
180,000 Shares of Common Stock of
Rhythms NetConnections Inc.
THIS CERTIFIES that, for the purchase price of $6.70 per share, U.S.
Telesource, 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 180,000 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 $6.70
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
April 5, 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 Warrant has expired or has been exercised in
full, a new Warrant representing the number of
<PAGE>
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 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 shall be mde 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
market value of the resulting fractional share on the Conversion Date (as
defined below). Shares
-2-
<PAGE>
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 with another corporation, or a sale of
all or substantially all of the Company's assets to another
-3-
<PAGE>
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, distribution or right and stating the amount and
character of such dividend, distribution or right,
-4-
<PAGE>
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
(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
-5-
<PAGE>
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 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
-6-
<PAGE>
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.
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
-7-
<PAGE>
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: April 6, 1999 /s/ Catherine 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.
U.S. TELESOURCE, INC.
By: /s/ Marc B. Weisberg
-----------------------------------
Its: President & Chief Executive Officer
-----------------------------------
Address: 700 Qwest Tower
555 17th Street
Denver, CO 80202
<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>
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR OFFERED FOR
SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE
SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE
AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
STOCK SUBSCRIPTION WARRANT
TO PURCHASE COMMON STOCK OF
RHYTHMS NETCONNECTIONS, INC. (THE "COMPANY")
<TABLE>
<S> <C>
NUMBER OF SHARES 75,000
OF WARRANT ------
PRICE PER SHARE $10.55
------
EXPIRATION DATE APRIL 5, 2002
-------------
</TABLE>
THIS CERTIFIES THAT for value received, CISCO SYSTEMS CAPITAL
CORPORATION, a Nevada corporation, or its registered assigns (hereinafter
called the "Holder"), is entitled to purchase from the Company, at any time
during the Term of this Warrant, seventy-five thousand (75,000) shares of
common stock, $0.001 par value, of the Company (the "Common Stock"), at the
Warrant Price, payable as provided herein. The exercise of this Warrant
shall be subject to the provisions, limitations and restrictions herein
contained, and may be exercised in whole or in part.
SECTION 1. DEFINITIONS.
For all purposes of this Warrant, the following terms shall have the
meanings indicated:
"AGREEMENT" shall mean the Master Agreement to Lease Equipment, dated as
of April 5, 1999, between the Company, as lessee, and the Holder, as lessor.
"COMMON STOCK" shall mean and include the Company's authorized common
stock, $0.001 par value, as constituted at the date hereof.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"TERM OF THIS WARRANT" shall mean the period beginning on the date of
initial issuance hereof and ending on the third anniversary of such date of
initial issuance.
<PAGE>
"WARRANT PRICE" shall mean $10.55 per share, subject to adjustment in
accordance with Section 5 hereof.
"WARRANTS" shall mean this Warrant and any other Warrant or Warrants
issued in connection with the Agreement to the original holder of this
Warrant, or any transferees from such original holder or this Holder.
"WARRANT SHARES" shall mean shares of Common Stock purchased or
purchasable by the Holder of this Warrant upon the exercise hereof.
SECTION 2. EXERCISE OF WARRANT.
2.1 PROCEDURE FOR EXERCISE OF WARRANT. To exercise this Warrant in
whole or in part (but not as to any fractional share of Common Stock), the
Holder shall deliver to the Company at its office referred to in Section 13
hereof at any time and from time to time during the Term of this Warrant: (i)
the Notice of Exercise in the form attached hereto, (ii) cash, certified or
official bank check payable to the order of the Company, wire transfer of
funds to the Company's account, or cancellation of any indebtedness of the
Company to the Holder (or any combination of any of the foregoing) in the
amount of the Warrant Price for each share being purchased, and (iii) this
Warrant. Notwithstanding any provisions herein to the contrary, if the
Current Market Price (as defined in Section 5) is greater than the Warrant
Price (at the date of calculation, as set forth below), in lieu of exercising
this Warrant as hereinabove permitted, the Holder may elect to receive shares
of Common Stock equal to the value (as determined below) of this Warrant (or
the portion thereof being canceled) by surrender of this Warrant at the
office of the Company referred to in Section 13 hereof, together with the
Notice of Exercise, in which event the Company shall issue to the Holder that
number of shares of Common Stock computed using the following formula:
CS = WCS x (CMP-WP)
--------------
CMP
Where
CS equals the number of shares of Common Stock to be issued to the
Holder
WCS equals the number of shares of Common Stock purchasable under the
Warrant or, if only a portion of the Warrant is being exercised,
the portion of the Warrant being exercised (at the date of such
calculation)
CMP equals the Current Market Price (at the date of such calculation)
WP equals the Warrant Price (as adjusted to the date of such
calculation)
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 such other name or names as may be
designated by the Holder, shall be delivered to the Holder hereof within a
reasonable time, not exceeding twenty (20) days, after the rights represented
by this Warrant shall have been so exercised; and, unless this Warrant has
expired, a new Warrant representing the number
<PAGE>
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 hereof 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 the Warrant was surrendered and payment of the Warrant
Price and any applicable taxes was made, irrespective of the date of delivery
of such certificate, except that, if the date of such surrender and payment
is a date when 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.
2.2 TRANSFER RESTRICTION LEGEND. Each certificate for Warrant Shares
shall bear the following legend (and any additional legend required by (i)
any applicable state securities laws and (ii) any securities exchange upon
which such Warrant Shares may, at the time of such exercise, be listed) on
the face thereof unless at the time of exercise such Warrant Shares shall be
registered under the Securities Act:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be sold or transferred in the absence of such
registration or an exemption therefrom under said Act."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon
completion of a public distribution under a registration statement of the
securities represented thereby) shall also bear such legend unless, in the
opinion of counsel for the holder thereof (which counsel shall be reasonably
satisfactory to counsel for the Company) the securities represented thereby
are not, at such time, required by law to bear such legend.
SECTION 3. COVENANTS AS TO COMMON STOCK. The Company covenants and agrees
that all shares of Common Stock that may be issued upon the exercise of the
rights represented by this Warrant shall, upon issuance, be validly issued,
fully paid and nonassessable, and free from all taxes, liens and charges with
respect to the issue thereof. The Company further covenants and agrees that
it shall pay when due and payable any and all federal and state taxes (other
than any income taxes applicable to the Holder) which may be payable in
respect of the issue of this Warrant or any Common Stock or certificates
therefor issuable upon the exercise of this Warrant. The Company further
covenants and agrees that the Company shall at all times have authorized and
reserved, free from preemptive rights, a sufficient number of shares of
Common Stock to provide for the exercise of the rights represented by this
Warrant. The Company further covenants and agrees that if any shares of
capital stock to be reserved for the purpose of the issuance of shares upon
the exercise of this Warrant require registration with or approval of any
governmental authority under any federal or state law before such shares may
be validly issued or delivered upon exercise, then the Company shall in good
faith and as expeditiously as possible endeavor to secure such registration
or approval, as the case may be. If and so long as the Common Stock issuable
upon the exercise of this Warrant is listed on any national securities
exchange, the Company shall, if permitted by the rules of such exchange, use
its best efforts to list and keep listed on such exchange, upon official
notice of issuance, all shares of such Common Stock issuable upon exercise of
this Warrant.
<PAGE>
SECTION 4. ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the
Warrant Price as provided in Section 5, the Holder shall thereafter be
entitled to purchase, at the Warrant Price resulting from such adjustment,
the number of shares (calculated to the nearest tenth of a share) obtained by
multiplying the Warrant Price in effect immediately prior to such adjustment
by the number of shares purchasable pursuant hereto immediately prior to such
adjustment and dividing the product thereof by the Warrant Price resulting
from such adjustment.
SECTION 5. ADJUSTMENT OF WARRANT PRICE. The Warrant Price shall be subject
to adjustment from time to time as follows
(i) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is increased by a stock dividend payable
in shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, following the record date fixed for the determination of holders
of Common Stock entitled to receive such stock dividend, subdivision or
split-up, the Warrant Price shall be appropriately decreased so that the
number of shares of Common Stock issuable upon the exercise hereof shall be
increased in proportion to such increase in outstanding shares.
(ii) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase so that the
number of shares of Common Stock issuable upon the exercise hereof shall be
decreased in proportion to such decrease in outstanding shares.
(iii) In case, at any time during the Term of this Warrant, the Company
shall declare a cash dividend upon its Common Stock payable otherwise than
out of earnings or earned surplus or shall distribute to holders of its
Common Stock shares of its capital stock (other than Common Stock), stock or
other securities of other persons, evidences of indebtedness issued by the
Company or other persons, assets (excluding cash dividends and distributions)
or options or rights (excluding options to purchase and rights to subscribe
for Common Stock or other securities of the Company convertible into or
exchangeable for Common Stock), then, in each such case, immediately
following the record date fixed for the determination of the holders of
Common Stock entitled to receive such dividend or distribution, the Warrant
Price in effect thereafter shall be determined by multiplying the Warrant
Price in effect immediately prior to such record date by a fraction of which
the numerator shall be an amount equal to the difference of (x) the Current
Market Price of one share of Common Stock minus (y) the fair market value (as
determined by the Board of Directors of the Company, whose determination
shall be conclusive) of the amount of cash, stock, securities, evidences of
indebtedness, assets, options or rights, as the case may be, so distributed
in respect of one share of Common Stock, and of which the denominator shall
be such Current Market Price.
(iv) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest one-tenth (1/10) of a share, as the case may
be.
(v) For the purpose of any computation pursuant to this Section 5,
the Current Market Price at any date of one share of Common Stock shall be
deemed to be the average of the daily closing prices for the 10 consecutive
business days ending on the last business day before the day in
<PAGE>
question (as adjusted for any stock dividend, split, combination or
reclassification that took effect during such 10 business day period). The
closing price for each day shall be the last reported sales price or, in case
no such reported sales took place on such day, the average of the last
reported bid and asked prices, in either case on the principal national
securities exchange on which the Common Stock is listed or admitted to
trading or as reported by Nasdaq (or if the Common Stock is not at the time
listed or admitted for trading on any such exchange or if prices of the
Common Stock are not reported by Nasdaq then such price shall be equal to the
average of the last reported bid and asked prices on such day as reported by
The National Quotation Bureau Incorporated or any similar reputable quotation
and reporting service, if such quotation is not reported by The National
Quotation Bureau Incorporated); provided, however, that if the Common Stock
is not traded in such manner that the quotations referred to in this clause
(v) are available for the period required hereunder, the Current Market Price
shall be determined in good faith by the Board of Directors of the Company
or, if such determination cannot be made, by a nationally recognized
independent investment banking firm selected by the Board of Directors of the
Company (or if such selection cannot be made, by a nationally recognized
independent investment banking firm selected by the American Arbitration
Association in accordance with its rules).
(vi) Whenever the Warrant Price shall be adjusted as provided in this
Section 5, the Company shall prepare a statement showing the facts requiring
such adjustment and the Warrant Price that shall be in effect after such
adjustment. The Company shall cause a copy of such statement to be sent by
mail, first class postage prepaid, to each Holder of this Warrant at its, his
or her address appearing on the Company's records. Where appropriate, such
copy may be given in advance and may be included as part of the notice
required to be mailed under the provisions of subsection (viii) of this
Section 5.
(vii) Adjustments made pursuant to clauses (i), (ii) and (iii) above
shall be made on the date such dividend, subdivision, split-up, combination
or distribution, as the case may be, is made, and shall become effective at
the opening of business on the business day next following the record date
for the determination of stockholders entitled to such dividend, subdivision,
split-up, combination or distribution.
(viii) In the event the Company shall propose to take any action of the
types described in clauses (i), (ii), or (iii) of this Section 5, the Company
shall forward, at the same time and in the same manner, to the Holder of this
Warrant such notice, if any, which the Company shall give to the holders of
capital stock of the Company.
(ix) In any case in which the provisions of this Section 5 shall
require that an adjustment shall become effective immediately after a record
date for an event, the Company may defer until the occurrence of such event
issuing to the Holder of all or any part of this Warrant which is exercised
after such record date and before the occurrence of such event the additional
shares of capital stock issuable upon such exercise by reason of the
adjustment required by such event over and above the shares of capital stock
issuable upon such exercise before giving effect to such adjustment exercise;
provided, however, that the Company shall deliver to such Holder a due bill
or other appropriate instrument evidencing such Holder's right to receive
such additional shares upon the occurrence of the event requiring such
adjustment.
<PAGE>
SECTION 6. OWNERSHIP.
6.1 OWNERSHIP OF THIS WARRANT. The Company may deem and treat the
person in whose name this Warrant is registered as the holder and owner
hereof (notwithstanding any notations of ownership or writing hereon made by
anyone other than the Company) for all purposes and shall not be affected by
any notice to the contrary until presentation of this Warrant for
registration of transfer as provided in this Section 6.
6.2 TRANSFER AND REPLACEMENT. This Warrant and all rights hereunder
are transferable in whole or in part upon the books of the Company by the
Holder hereof in person or by duly authorized attorney, and a new Warrant or
Warrants, of the same tenor as this Warrant but registered in the name of the
transferee or transferees (and in the name of the Holder, if a partial
transfer is effected) shall be made and delivered by the Company upon
surrender of this Warrant duly endorsed, at the office of the Company
referred to in Section 13 hereof. Upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft or destruction, and, in such
case, of indemnity or security reasonably satisfactory to it, and upon
surrender of this Warrant if mutilated, the Company shall make and deliver a
new Warrant of like tenor, in lieu of this Warrant; provided that if the
Holder hereof is an instrumentality of a state or local government or an
institutional holder or a nominee for such an instrumentality or
institutional holder an irrevocable agreement of indemnity by such Holder
shall be sufficient for all purposes of this Section 6, and no evidence of
loss or theft or destruction shall be necessary. This Warrant shall be
promptly cancelled by the Company upon the surrender hereof in connection
with any transfer or replacement. Holder shall not transfer this Warrant and
the rights hereunder except in compliance with federal and state securities
laws.
SECTION 7. MERGERS, CONSOLIDATION, SALES. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed
sale of all or substantially all of its assets to another person or entity,
or any proposed reorganization or reclassification of the capital stock of
the Company, then, as a condition of such consolidation, merger, sale,
reorganization or reclassification, the Company shall give 20 days' prior
written notice thereof to the Holder hereof and lawful and adequate provision
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, in lieu of the shares of the Common Stock of the Company immediately
theretofore purchasable hereunder, such shares of stock, securities or assets
as may (by virtue of such consolidation, merger, sale, reorganization or
reclassification) be issued or payable with respect to or in exchange for the
number of shares of such Common Stock purchasable hereunder immediately
before such consolidation, merger, sale, reorganization or reclassification.
In any such case appropriate provision shall be made with respect to the
rights and interests of the Holder of this Warrant 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.
SECTION 8. NOTICE OF DISSOLUTION OR LIQUIDATION. In case of any
distribution of the assets of the Company in dissolution or liquidation
(except under circumstances when the foregoing Section 7 shall be
applicable), the Company shall give notice thereof to the Holder hereof and
shall make no distribution to shareholders until the expiration of thirty
(30) days from the date of mailing of the aforesaid notice and, in any case,
the Holder hereof may exercise this Warrant within thirty (30) days
<PAGE>
from the date of the giving of such notice, and all rights herein granted not
so exercised within such thirty-day period shall thereafter become null and
void.
SECTION 9. NOTICE OF EXTRAORDINARY DIVIDENDS. If the Board of Directors of
the Company shall declare any dividend or other distribution on its Common
Stock except out of earned surplus or by way of a stock dividend payable in
shares of its Common Stock, the Company shall mail notice thereof to the
Holder hereof not less than thirty (30) days prior to the record date fixed
for determining shareholders entitled to participate in such dividend or
other distribution, and the Holder hereof shall not participate in such
dividend or other distribution unless this Warrant is exercised prior to such
record date. The provisions of this Section 9 shall not apply to
distributions made in connection with transactions covered by Section 7.
SECTION 10. FRACTIONAL SHARES. Fractional shares shall not be issued upon
the exercise of this Warrant but in any case where the Holder would, except
for the provisions of this Section 10, be entitled under the terms hereof to
receive a fractional share upon the complete exercise of this Warrant, the
Company shall, upon the exercise of this Warrant for the largest number of
whole shares then called for, pay a sum in cash equal to the excess of the
value of such fractional share (determined in such reasonable manner as may
be prescribed in good faith by the Board of Directors of the Company) over
the Warrant Price for such fractional share.
SECTION 11. SPECIAL ARRANGEMENTS OF THE COMPANY. The Company covenants and
agrees that during the Term of this Warrant, unless otherwise approved by the
Holder of this Warrant, this Warrant shall be binding upon any corporation or
other person or entity succeeding to the Company by merger, consolidation or
acquisition of all or substantially all of the Company's assets.
SECTION 12. REGISTRATION RIGHTS; ETC. 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
Section 2.1 of the Warrant Registration Rights Agreement, dated as of May 5,
1998 (the "Warrant Registration Rights Agreement") among the Company and the
Initial Purchasers (as defined therein), except that the Holder's
"piggy-back" registration rights shall be junior in priority to any
"piggyback" registration rights granted to the holders under the Warrant
Registration Rights Agreement and any securities of other persons entitled to
"piggy'back" registration rights pursuant to contractual commitments of the
Company existing on or prior to the date hereof.
SECTION 13. NOTICES. Any notice or other document required or permitted to
be given or delivered to the Holder shall be delivered at, or sent by
certified or registered mail to, the Holder at 170 West Tasman Drive, San
Jose, California 95134-1706, attn: Worldwide Financial Services/Loan
Administration or to such other address as shall have been furnished to the
Company in writing by the Holder. Any notice or other document required or
permitted to be given or delivered to the Company shall be delivered at, or
sent by certified or registered mail to, the Company at 7337 South Revere
Parkway, Englewood, Colorado 80112 or to such other address as shall have
been furnished in writing to the Holder by the Company. Any notice so
addressed and mailed by registered or certified mail shall be deemed to be
given when so mailed. Any notice so addressed and otherwise delivered shall
be deemed to be given when actually received by the addressee.
<PAGE>
SECTION 14. NO RIGHTS AS STOCKHOLDER; LIMITATION OF LIABILITY. This Warrant
shall not entitle the Holder to any of the rights of a shareholder of the
Company except upon exercise in accordance with the terms hereof. No
provision hereof, in the absence of affirmative action by the Holder to
purchase shares of Common Stock, and no mere enumeration herein of the rights
or privileges of the Holder, shall give rise to any liability of the Holder
for the Warrant Price hereunder or as a shareholder of the Company, whether
such liability is asserted by the Company or by creditors of the Company.
SECTION 15. LAW GOVERNING. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF
THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF STATE OF DELAWARE WITHOUT GIVING EFFECT TO THE CONFLICT OF
LAW PRINCIPLES THEREOF.
SECTION 16. COMPLIANCE WITH ACT; DISPOSITION OF WARRANT OR WARRANT SHARES.
16.1 COMPLIANCE WITH ACT. The Holder of this Warrant, by acceptance
hereof, agrees that this Warrant, and the Warrant 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 Warrant Shares
except under circumstances which will not result in a violation of the
Securities Act or any applicable state securities laws. Upon exercise of
this Warrant, unless the Warrant Shares being acquired are registered under
the Securities Act and any applicable state securities laws or an exemption
from such registration is available, the Holder hereof shall confirm in
writing that the Warrant Shares so purchased are being acquired for
investment and not with a view toward distribution or resale in violation of
the Securities Act and shall confirm such other matters related thereto as
may be reasonably requested by the Company. This Warrant and all Warrant
Shares issued upon exercise of this Warrant (unless registered under the
Securities Act and any applicable state securities laws) shall be stamped or
imprinted with a legend in substantially the following form set forth in
Section 2.2 above.
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:
<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 Securities Act.
(2) The Holder understands that this Warrant has not been registered
under the Securities 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 Securities 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 Securities Act.
16.2 DISPOSITION OF WARRANT OR WARRANT SHARES. With respect to any
offer, sale or other disposition of this Warrant or any Warrant Shares
acquired pursuant to the exercise of this Warrant prior to registration of
such Warrant or Warrant 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 Securities Act as then in effect or any federal or state
securities law then in effect) of this Warrant or the Warrant Shares and
indicating whether or not under the Securities Act certificates for this
Warrant or the Warrant 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 Warrant
Shares, all in accordance with the terms of the notice delivered to the
Company. If a determination has been made pursuant to this Section 16.2 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 Warrant Shares may, as to such federal
laws, be offered, sold or otherwise disposed of in accordance with Rule 144
or 144A under the Securities 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 Warrant
Shares thus transferred (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.
<PAGE>
16.3 APPLICABILITY OF RESTRICTIONS. Neither any restrictions of any
legend described in this Warrant nor the requirements of Section 16.2 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 the original Holder.
SECTION 17. MISCELLANEOUS.
17.1 AMENDMENTS. This Warrant and any provision hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by
both parties (or any respective predecessor in interest thereof). The
headings in this Warrant are for purposes of reference only and shall not
affect the meaning or construction of any of the provisions hereof
17.2 DEFINITIONS. All capitalized terms used herein and not otherwise
defined herein shall have the meanings ascribed to them in the Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer this 5th day of April, 1999.
Rhythms NetConnections, Inc.
By: /s/ Scott C. Chandler
-------------------------------
Title: Chief Financial Officer
----------------------------
-10-
<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
The undersigned hereby exercises the right to purchase _________ shares of
Common Stock which the undersigned is entitled to purchase by the terms of
the within Warrant according to the conditions thereof, and herewith
[check one]
/ / makes payment of $__________ therefor; or
/ / directs the Company to issue ______ shares, and to withhold ____ shares
in lieu of payment of the Warrant Price, as described in Section 2.1 of
the Warrant.
All shares to be issued pursuant hereto shall be issued in the name of and the
initial address of such person to be entered on the books of the Company shall
be:
The shares are to be issued in certificates of the following denominations:
- -----------------------------------
[Type Name of Holder]
By:
-------------------------------
Title:
----------------------------
Dated:
----------------------------
<PAGE>
FORM OF ASSIGNMENT
(ENTIRE)
[To be signed only upon transfer of entire Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED ___________________________ hereby sells, assigns and
transfers unto _______________________________ all rights of the undersigned
under and pursuant to the within Warrant, and the undersigned does hereby
irrevocably constitute and appoint _____________________ Attorney to transfer
the said Warrant on the books of the Company, with full power of substitution.
- -----------------------------------
[Type Name of Holder]
By:
- -----------------------------------
Title:
- -----------------------------------
Dated:
- -----------------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name as written
upon the face of the within Warrant in every particular, without alteration or
enlargement or any change whatsoever.
<PAGE>
FORM OF ASSIGNMENT
(PARTIAL)
[To be signed only upon partial transfer of Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
transfers unto _______________________________ (i) the rights of the
undersigned to purchase ___ shares of Common Stock under and pursuant to the
within Warrant, and (ii) on a non-exclusive basis, all other rights of the
undersigned under and pursuant to the within Warrant, it being understood
that the undersigned shall retain, severally (and not jointly) with the
transferee(s) named herein, all rights assigned on such non-exclusive basis.
The undersigned does hereby irrevocably constitute and appoint
__________________________ Attorney to transfer the said Warrant on the books
of the Company, with full power of substitution.
- -----------------------------------
[Type Name of Holder]
By:
-------------------------------
Title:
----------------------------
Dated:
----------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name as written
upon the face of the within Warrant in every particular, without alteration or
enlargement or any change whatsoever.
<PAGE>
RHYTHMS NETCONNECTIONS INC.
AND
AMERICAN SECURITIES TRANSFER & TRUST, INC.
(RIGHTS AGENT)
RIGHTS AGREEMENT
DATED AS OF APRIL 2, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 1. Certain Definitions. . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Appointment of Rights Agent. . . . . . . . . . . . . . . . . . . 5
Section 3. Issue of Rights Certificates.. . . . . . . . . . . . . . . . . . 5
Section 4. Form of Rights Certificates. . . . . . . . . . . . . . . . . . . 7
Section 5. Countersignature and Registration. . . . . . . . . . . . . . . . 7
Section 6. Transfer, Split-Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights. . 9
Section 8. Cancellation and Destruction of Rights Certificates. . . . . . .10
Section 9. Reservation and Availability of Preferred Stock. . . . . . . . .11
Section 10. Preferred Stock Record Date. . . . . . . . . . . . . . . . . . .12
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.. . .19
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Section 14. Fractional Rights and Fractional Shares. . . . . . . . . . . . .22
Section 15. Rights of Action.. . . . . . . . . . . . . . . . . . . . . . . .23
Section 16. Agreement of Rights Holders. . . . . . . . . . . . . . . . . . .24
Section 17. Rights Certificate Holder Not Deemed a Stockholder.. . . . . . .24
Section 18. Concerning the Rights Agent. . . . . . . . . . . . . . . . . . .25
Section 19. Merger or Consolidation or Change of Name of Rights Agent. . . .25
Section 20. Duties of Rights Agent.. . . . . . . . . . . . . . . . . . . . .26
Section 21. Change of Rights Agent.. . . . . . . . . . . . . . . . . . . . .28
Section 22. Issuance of New Rights Certificates. . . . . . . . . . . . . . .28
Section 23. Redemption and Termination.. . . . . . . . . . . . . . . . . . .29
Section 24. Exchange.. . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Section 25. Notice of Certain Events.. . . . . . . . . . . . . . . . . . . .31
Section 26. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
Section 27. Supplements and Amendments.. . . . . . . . . . . . . . . . . . .32
Section 28. Successors.. . . . . . . . . . . . . . . . . . . . . . . . . . .33
Section 29. Determinations and Actions by the Board of Directors.. . . . . .33
Section 30. Benefits of This Agreement.. . . . . . . . . . . . . . . . . . .33
Section 31. Severability.. . . . . . . . . . . . . . . . . . . . . . . . . .33
Section 32. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . .34
Section 33. Counterparts.. . . . . . . . . . . . . . . . . . . . . . . . . .34
Section 34. Descriptive Headings.. . . . . . . . . . . . . . . . . . . . . .34
EXHIBITS
Exhibit A - Form of Certificate of Designation of Series 1 Junior
Participating Preferred Stock
Exhibit B - Form of Rights Certificate
Exhibit C - Summary of Rights to Purchase Shares of Series 1 Preferred Stock
</TABLE>
(i)
<PAGE>
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of April 2, 1999, between RHYTHMS
NETCONNECTIONS INC., a Delaware corporation (the "Company"), and AMERICAN
SECURITIES TRANSFER & TRUST, INC. (the "Rights Agent").
WHEREAS, effective March 27, 1999 (the "Rights Dividend Declaration
Date"), the Board of Directors authorized and declared a distribution of one
Right (each, a "Right") for each share of Common Stock (as hereinafter
defined) and Prior Preferred Stock (as hereinafter defined) of the Company
outstanding as of the Close of Business (as hereinafter defined) on April 6,
1999 (the "Record Date"), each Right initially representing the right to
purchase one one-thousandth of a share (a "Unit") of Preferred Stock (as
hereinafter defined) upon the terms and subject to the conditions herein set
forth, and has further authorized and directed the issuance of one Right with
respect to each share of Common Stock that shall become outstanding (except
that no additional Rights shall be issued with respect to shares of Common
Stock that become outstanding due to conversion of Prior Preferred Stock)
between the Record Date and the earliest of the Distribution Date, the
Redemption Date or the Final Expiration Date (as such terms are hereinafter
defined).
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the
following terms have the meanings indicated:
"Acquiring Person" shall mean any Person (as such term is hereinafter
defined) who or which, together with all Affiliates and Associates (as such
terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as
such term is hereinafter defined) of 15% or more of the shares of Common Stock
of the Company then outstanding but shall not include the Company, any
Subsidiary (as such term is hereinafter defined) of the Company, any employee
benefit plan of the Company or any Subsidiary of the Company, or any entity
holding shares of Common Stock for or pursuant to the terms of any such plan.
Notwithstanding the foregoing:
(i) no Person shall become an "Acquiring Person" as the result of an
acquisition of shares of Common Stock by the Company which, by reducing the
number of shares outstanding, increases the proportionate number of shares
beneficially owned by such Person to 15% or more of the shares of Common Stock
of the Company then outstanding; PROVIDED, HOWEVER, that if a Person shall
become the Beneficial Owner of 15% or more of the shares of Common Stock of the
Company then outstanding by reason of share purchases by the Company and shall,
after such share purchases by the Company, become the Beneficial Owner of any
additional shares of Common Stock of the Company (or, in the case of the members
of the Investor Group, become the Beneficial Owner of any additional shares of
Common Stock of the Company), then such Person shall be deemed to be an
"Acquiring Person" hereunder; and
(ii) if the Board of Directors of the Company determines in good faith
that a Person who would otherwise be an "Acquiring Person" as defined pursuant
to the foregoing provisions of this paragraph (a), has become such
inadvertently, and such Person divests as promptly as practicable a sufficient
number of shares of Common Stock so that such Person would no longer
<PAGE>
be an "Acquiring Person" (as defined pursuant to the foregoing provisions of
this paragraph (a)), then such Person shall not be deemed to be an "Acquiring
Person" for any purpose of this Agreement.
"Adjustment Shares" has the meaning set forth in Section 11(a)(ii).
"Affiliate" and "Associate" shall have the respective meanings ascribed to
such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange
Act (as such term is hereinafter defined).
A Person shall be deemed the "Beneficial Owner" of, and shall be deemed to
"beneficially own," any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly, for purposes of Section
13(d) of the Exchange Act and Rule 13d-3 thereunder (or any comparable or
successor law or regulation); or
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has (A) the right to acquire (whether such
right is exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding (whether or not in writing, other
than customary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities), or upon the
exercise of conversion rights, exchange rights, rights (other than the Rights),
warrants or options, or otherwise; PROVIDED, HOWEVER, that a Person shall not be
deemed the Beneficial Owner of, or to beneficially own, securities tendered
pursuant to a tender or exchange offer made by or on behalf of such Person or
any of such Person's Affiliates or Associates until such tendered securities are
accepted for purchase or exchange; or (B) the right to vote pursuant to any
agreement, arrangement or understanding; PROVIDED, FURTHER, HOWEVER, that a
Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own,"
any security under this subparagraph (ii) as a result of an agreement,
arrangement or understanding to vote such security if such agreement,
arrangement or understanding: (x) arises solely from a revocable proxy given in
response to a public proxy or consent solicitation made pursuant to, and in
accordance with, the applicable provisions of the Exchange Act and the Exchange
Act Regulations, and (y) is not reportable by such Person on Schedule 13D under
the Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such Person
(or any of such Person's Affiliates or Associates) has any agreement,
arrangement or understanding, (whether or not in writing, other than
customary agreements with and between underwriters and selling group members
with respect to a bona fide public offering of securities), for the purpose
of acquiring, holding, voting (except to the extent contemplated by the
proviso to subparagraph (i) of this paragraph (e)) or disposing of any
securities of the Company; provided, however, that in no case shall an
officer or director of the Company be deemed (A) the Beneficial Owner of any
securities beneficially owned by another officer or director of the Company
solely by reason of actions undertaken by such persons in their capacity as
officers or directors of the Company or (B) the Beneficial Owner of
securities held of record by the trustee of any employee benefit plan of the
Company or any Subsidiary of the Company for the benefit of any employee of
the Company or any
2.
<PAGE>
Subsidiary of the Company, other than the officer or director, by reason of
any influence that such officer or director may have over the voting of the
securities held in the plan;
Notwithstanding anything in this definition of "Beneficial Owner" and
"beneficially own" to the contrary, the phrase "then outstanding," when used
with reference to a Person who is the Beneficial Owner of securities of the
Company, shall mean the number of such securities then issued and outstanding
together with the number of such securities not then actually issued and
outstanding which such Person would be deemed to beneficially own hereunder.
"Business Day" shall mean any day other than a Saturday, a Sunday, or a day
on which banking institutions in the State of Colorado or the state in which the
principal office of the Rights Agent is located are authorized or obligated by
law or executive order to close.
"Close of Business" on any given date shall mean 5:00 P.M., Colorado time,
on such date; provided, however, that if such date is not a Business Day it
shall mean 5:00 P.M., Colorado time, on the next succeeding Business Day.
"Common Stock" when used with reference to the Company shall mean the
shares of common stock, par value $0.001, of the Company. "Common Stock"
when used with reference to any Person other than the Company shall mean the
capital stock (or other equity interest) with the greatest voting power of
such other Person or, if such other Person is a Subsidiary of another Person,
the Person or Persons which ultimately control such first-mentioned Person.
"Company" shall have the meaning set forth in the recitals to this
Agreement.
"current per share market price" shall have the meaning set forth in
Section 11(d)(i) hereof.
"Current Value" shall have the meaning set forth in Section 11(a)(iii)
hereof.
"Distribution Date" shall have the meaning set forth in Section 3(a)
hereof.
"equivalent preferred shares" shall have the meaning set forth in Section
11(b) hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exchange Act Regulations" shall mean the General Rules and Regulations
under the Exchange Act.
"Exchange Ratio" shall have the meaning set forth in Section 24 hereof.
"Expiration Date" shall have the meaning set forth in Section 7(a) hereof.
"Final Expiration Date" shall have the meaning set forth in Section 7(a)
hereof.
"NASDAQ" shall have the meaning set forth in Section 11(d) hereof.
"Person" shall mean any individual, firm, corporation or other entity, and
shall include any successor (by merger or otherwise) of such entity.
3.
<PAGE>
"Preferred Stock" shall mean shares of Series 1 Preferred Stock, par value
$0.001, of the Company having the rights and preferences set forth in the Form
of Certificate of Designation attached to this Agreement as Exhibit A.
"preferred stock equivalents" shall have the meaning set forth in Section
11(a)(iii) hereof.
"Prior Preferred Stock" shall mean shares of Series A, B, C and D Preferred
Stock, par value $0.001, of the Company.
"Purchase Price" shall have the meaning set forth in Section 7(b) hereof.
"Record Date" shall have the meaning set forth in the recitals to this
Agreement.
"Redemption Date" shall have the meaning set forth in Section 7(a) hereof.
"Redemption Price" shall have the meaning set forth in Section 23(a)
hereof.
"Right" shall have the meaning set forth in the recitals to this Agreement.
"Rights Agent" shall have the meaning set forth in the recitals to this
Agreement.
"Rights Certificate" shall have the meaning set forth in Section 3(a)
hereof.
"Rights Dividend Declaration Date" shall have the meaning set forth in the
recitals to this Agreement.
"Section 11(a)(ii) Event" shall mean any event described in Section
11(a)(ii)(A), (B) or (C) hereof.
"Section 11(a)(ii) Trigger Date" shall have the meaning set forth in
Section 11(a)(iii) hereof.
"Section 13 Event" shall mean any event described in clause (x), (y) or (z)
of Section 13(a) hereof.
"Section 24(a) Exchange Ratio" has the meaning set forth in Section 24(a)
hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Shares Acquisition Date" shall mean the first date of public announcement
(which, for purposes of this definition, shall include, without limitation, a
report filed pursuant to Section 13(d) of the Exchange Act) by the Company or an
Acquiring Person that an Acquiring Person has become such.
"Spread" shall have the meaning set forth in Section 11(a)(iii) hereof.
"Subsidiary" of any Person shall mean any corporation or other entity of
which a majority of the voting power of the voting equity securities or equity
interest is owned, directly or indirectly, by such Person.
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"Summary of Rights" shall have the meaning set forth in Section 3(b)
hereof.
"Trading Day" shall have the meaning set forth in Section 11(d)(i) hereof.
"Triggering Event" shall mean any Section 11(a)(ii) Event or any Section 13
Event.
Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints
the Rights Agent to act as agent for the Company in accordance with the terms
and conditions hereof, and the Rights Agent hereby accepts such appointment.
The Company may from time to time appoint such co-Rights Agents as it may
deem necessary or desirable.
Section 3. ISSUE OF RIGHTS CERTIFICATES.
(a) Until the earlier of (i) the Close of Business on the Shares
Acquisition Date and (ii) the Close of Business on the tenth Business Day (or
such later date as may be determined by action of the Company's Board of
Directors prior to such time as any Person becomes an Acquiring Person and of
which the Company will give the Rights Agent prompt written notice) after the
date that a tender or exchange offer by any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company or any entity holding shares of Common Stock for or
pursuant to the terms of any such plan) is first published or sent or given
within the meaning of Rule 14d-4(a) of the Exchange Act Regulations or any
successor rule or of the first public announcement of the intention of any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or of any Subsidiary of the Company or any entity
holding shares of Common Stock for or pursuant to the terms of any such plan) to
commence, a tender or exchange offer, if upon consummation thereof such Person
would be the Beneficial Owner of 15% or more of the shares of Company Common
Stock then outstanding (the earlier of (i) and (ii) above being the
"Distribution Date"), (x) the Rights will be evidenced (subject to the
provisions of Section 3(b) hereof) by the certificates for shares of Common
Stock registered in the names of the holders thereof (which certificates shall
also be deemed to be Rights Certificates) and not by separate Rights
Certificates, and (y) the right to receive Rights Certificates will be
transferable only in connection with the transfer of shares of Common Stock. As
soon as practicable after the Distribution Date, the Company will notify the
Rights Agent thereof and the Company will prepare and execute, the Rights Agent
will countersign, and the Company will send or cause to be sent (and the Rights
Agent will, if requested, send) by first-class, insured, postage-prepaid mail,
to each record holder of shares of Common Stock as of the Close of Business on
the Distribution Date, at the address of such holder shown on the records of the
Company, a Rights Certificate, in substantially the form of Exhibit B hereto (a
"Rights Certificate"), evidencing one Right for each share of Common Stock so
held. As of the Distribution Date, the Rights will be evidenced solely by such
Rights Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the
Company will send a copy of a Summary of Rights to Purchase Preferred Stock,
in substantially the form of Exhibit C hereto (the "Summary of Rights"), by
first-class, postage-prepaid mail, to each record holder of shares of Common
Stock as of the Close of Business on the Record Date, at the address of such
holder shown on the records of the Company. With respect to certificates for
shares of Common Stock outstanding as of the Record Date, until the
Distribution Date, the Rights will be evidenced by such certificates
registered in the names of the holders thereof together with a copy
5.
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of the Summary of Rights attached thereto. Until the Distribution Date (or
the Expiration Date), the surrender for transfer of any certificate for
shares of Common Stock outstanding on the Record Date, with or without a copy
of the Summary of Rights attached thereto, shall also constitute the transfer
of the Rights associated with the shares of Common Stock represented thereby.
(c) Certificates for shares of Common Stock which become outstanding
(including, without limitation, reacquired shares of Common Stock referred to in
the last sentence of this paragraph (c)) after the Record Date but prior to the
earlier of the Distribution Date and the Expiration Date shall have impressed
on, printed on, written on or otherwise affixed to them the following legend:
This certificate also evidences and entitles the holder
hereof to certain rights as set forth in a Rights Agreement
between Rhythms NetConnections Inc. and American Securities
Transfer & Trust, Inc., dated as of April 2, 1999 (the
"Rights Agreement"), the terms of which are hereby
incorporated herein by reference and a copy of which is on
file at the principal executive offices of Rhythms
NetConnections Inc. Under certain circumstances, as set
forth in the Rights Agreement, such Rights will be evidenced
by separate certificates and will no longer be evidenced by
this certificate. Rhythms NetConnections Inc. will mail to
the holder of this certificate a copy of the Rights
Agreement without charge after receipt of a written request
therefor. Under certain circumstances, as set forth in the
Rights Agreement, Rights issued to any Person who becomes an
Acquiring Person (as defined in the Rights Agreement),
whether currently held by or on behalf of such person or by
any subsequent holder, may become null and void.
With respect to such certificates containing the foregoing legend, until the
earlier of the Distribution Date and the Expiration Date, the Rights associated
with the shares of Common Stock represented by such certificates shall be
evidenced by such certificates alone, and the surrender for transfer of any such
certificate shall also constitute the transfer of the Rights associated with the
shares of Common Stock represented thereby. In the event that the Company
purchases or acquires any shares of Common Stock after the Record Date but prior
to the Distribution Date, any Rights associated with such shares of Common Stock
shall be deemed cancelled and retired so that the Company shall not be entitled
to exercise any Rights associated with the shares of Common Stock which are no
longer outstanding.
Section 4. FORM OF RIGHTS CERTIFICATES.
(a) The Rights Certificates (and the forms of election to purchase Units
of Preferred Stock and of assignment to be printed on the reverse thereof) shall
be substantially the same as Exhibit B hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange or transaction reporting system on
which the Rights may from time to
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time be listed, or to conform to usage. Subject to the provisions of Section
11 and Section 22 hereof, the Rights Certificates shall entitle the holders
thereof to purchase the number of Units of Preferred Stock as shall be set
forth therein at the price per Unit of Preferred Stock set forth therein, but
the number of such Units of Preferred Stock and the Purchase Price shall be
subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant hereto that represents Rights
beneficially owned by: (i) an Acquiring Person or any Associate or Affiliate of
an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee after the Acquiring Person
becomes such or (iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently with
the Acquiring Person becoming such and receives such Rights pursuant to either
(A) a transfer (whether or not for consideration) from the Acquiring Person to
holders of equity interests in such Acquiring Person or to any Person with whom
such Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which a majority of the Board
of Directors of the Company has determined is part of a plan, arrangement or
understanding which has as a primary purpose or effect avoidance of Section 7(e)
hereof shall contain (to the extent feasible) the following legend:
The Rights represented by this Rights Certificate are or
were beneficially owned by a Person who was or became an
Acquiring Person or an Affiliate or Associate of an
Acquiring Person (as such terms are defined in the Rights
Agreement between Rhythms NetConnections Inc. and American
Securities Transfer & Trust, Inc., as Rights Agent, dated as
of April 2, 1999 (the "Rights Agreement"). Accordingly,
this Rights Certificate and the Rights represented hereby
may become null and void in the circumstances specified in
Section 7(e) of the Rights Agreement.
Section 5. COUNTERSIGNATURE AND REGISTRATION.
(a) The Rights Certificates shall be executed on behalf of the Company by
its Chairman of the Board, its President, any of its Vice Presidents, or its
Treasurer or Chief Financial Officer, either manually or by facsimile signature,
shall have affixed thereto the Company's seal or a facsimile thereof, and shall
be attested by the Secretary or an Assistant Secretary of the Company, either
manually or by facsimile signature. The Rights Certificates shall be manually
countersigned by the Rights Agent and shall not be valid for any purpose unless
countersigned. In case any officer of the Company who shall have signed any of
the Rights Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Rights Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the person who signed such Rights Certificates had not ceased to be such officer
of the Company; and any Rights Certificate may be signed on behalf of the
Company by any person who, at the actual date of the execution of such Rights
Certificate, shall be a proper officer of the Company to sign such Rights
Certificate, although at the date of the execution of this Rights Agreement any
such person was not such an officer.
7.
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(b) Following the Distribution Date, the Rights Agent will keep or cause
to be kept, at its office designated for such purpose, books for registration
and transfer of the Rights Certificates issued hereunder. Such books shall show
the names and addresses of the respective holders of the Rights Certificates,
the number of Rights evidenced on its face by each of the Rights Certificates
and the date of each of the Rights Certificates.
Section 6. TRANSFER, SPLIT-UP, COMBINATION AND EXCHANGE OF RIGHTS
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES.
(a) Subject to the provisions of Sections 4(b), 7(e) and 14 hereof, at any
time after the Close of Business on the Distribution Date, and at or prior to
the Close of Business on the Expiration Date, any Rights Certificate or Rights
Certificates may be transferred, split up, combined or exchanged for another
Rights Certificate or Rights Certificates, entitling the registered holder to
purchase a like number of Units of Preferred Stock (or, following a Triggering
Event, other securities, cash or other assets, as the case may be) as the Rights
Certificate or Rights Certificates surrendered then entitled such holder to
purchase. Any registered holder desiring to transfer, split up, combine or
exchange any Rights Certificate or Rights Certificates shall make such request
in writing delivered to the Rights Agent, and shall surrender the Rights
Certificate or Rights Certificates to be transferred, split up, combined or
exchanged at the office of the Rights Agent designated for such purpose.
Neither the Rights Agent nor the Company shall be obligated to take any action
whatsoever with respect to the transfer of any such surrendered Rights
Certificate until the registered holder shall have completed and signed the
certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request. Thereupon the
Rights Agent shall, subject to Sections 4(b), 7(e) and 14 hereof, countersign
and deliver to the person entitled thereto a Rights Certificate or Rights
Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Rights Certificate if mutilated, the Company will make and deliver a new
Rights Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Rights Certificate so lost, stolen, destroyed
or mutilated.
Section 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF
RIGHTS.
(a) Except as provided in Sections 23(c) and 7(e), the registered holder
of any Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein) in whole or in part at any time after the
Distribution Date upon surrender of the Rights Certificate, with the form of
election to purchase and certification on the reverse side thereof duly
executed, to the Rights Agent at the office of the Rights Agent designated for
such purpose, together with payment of the Purchase Price for each Unit of
Preferred Stock as to which the Rights are
8.
<PAGE>
exercised, at or prior to the earliest of (i) the Close of Business on the
tenth anniversary hereof (the "Final Expiration Date"), (ii) the time at
which the Rights are redeemed as provided in Section 23 hereof (the
"Redemption Date"), or (iii) the time at which such Rights are exchanged as
provided in Section 24 hereof (the earlier of (i), (ii) and (iii) being the
"Expiration Date").
(b) The Purchase Price for each Unit of Preferred Stock pursuant to the
exercise of a Right shall initially be $115, shall be subject to adjustment from
time to time as provided in Sections 11 and 13 hereof and shall be payable in
lawful money of the United States of America in accordance with paragraph (c)
below.
(c) Upon receipt of a Rights Certificate representing exercisable Rights,
with the form of election to purchase duly executed, accompanied by payment of
the Purchase Price for the number of Units of Preferred Stock (or other
securities or property, as the case may be) to be purchased and an amount equal
to any applicable transfer tax required to be paid by the holder of such Rights
Certificate in accordance with Section 9 hereof in cash, or by certified check
or cashier's check payable to the order of the Company, the Rights Agent shall,
subject to Section 20(k) hereof, thereupon promptly (i) (A) requisition from any
transfer agent of the Preferred Stock (or make available, if the Rights Agent is
the transfer agent for the Preferred Stock) a certificate or certificates for
the number of Units of Preferred Stock to be purchased and the Company hereby
irrevocably authorizes its transfer agent to comply with all such requests or
(B) if the Company shall have elected to deposit the total number of Units of
Preferred Stock issuable upon exercise of the Rights hereunder with a depositary
agent, requisition from the depositary agent of a depositary receipt or
depositary receipts representing such number of Units of Preferred Stock as are
to be purchased (in which case certificates for the Units of Preferred Stock
represented by such receipt or receipts shall be deposited by the transfer agent
with the depositary agent) and the Company hereby directs the depositary agent
to comply with such request, (ii) when appropriate, requisition from the Company
the amount of cash to be paid in lieu of issuance of fractional shares in
accordance with Section 14 hereof, (iii) after receipt of such certificates or
depositary receipts, cause the same to be delivered to or upon the order of the
registered holder of such Rights Certificate, registered in such name or names
as may be designated by such holder and (iv) when appropriate, after receipt
thereof, deliver such cash to or upon the order of the registered holder of such
Rights Certificate. The payment of the Purchase Price (as such amount may be
reduced (including to zero) pursuant to Section 11(a)(iii) hereof) may be made
in cash or by certified bank check or bank draft payable to the order of the
Company. In the event that the Company is obligated to issue other securities
of the Company, pay cash and/or distribute other property pursuant to Section
11(a) hereof, the Company will make all arrangements necessary so that such
other securities,cash and/or other property are available for distribution by
the Rights Agent, if and when appropriate.
(d) In case the registered holder of any Rights Certificate shall exercise
less than all the Rights evidenced thereby, a new Rights Certificate evidencing
a number of Rights equivalent to the number of Rights remaining unexercised
shall be issued by the Rights Agent to the registered holder of such Rights
Certificate or to such registered holder's duly authorized assigns, subject to
the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of a Triggering Event, any Rights beneficially
owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring
Person, (ii) a transferee of an Acquiring Person (or
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<PAGE>
of any such Associate or Affiliate) who becomes a transferee after the
Acquiring Person becomes such, (iii) a transferee of an Acquiring Person (or
of any such Associate or Affiliate) who becomes a transferee prior to or
concurrently with the Acquiring Person becoming such and receives such Rights
pursuant to either (A) a transfer (whether or not for consideration) from the
Acquiring Person to holders of equity interests in such Acquiring Person or
to any Person with whom the Acquiring Person has any continuing agreement,
arrangement or understanding regarding the transferred Rights or (B) a
transfer which the a majority of the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect the avoidance of this Section 7(e) or (iv) any
subsequent transferee shall become null and void without any further action
and no holder of such Rights shall have any rights whatsoever with respect to
such Rights, whether under any provision of this Agreement or otherwise. The
Company shall use all reasonable efforts to ensure that the provisions of
this Section 7(e) and Section 4(b) hereof are complied with, but shall have
no liability to any holder of Rights Certificates or to any other Person as a
result of its failure to make any determinations with respect to an Acquiring
Person or any of such Acquiring Person's Affiliates, Associates or
transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section 7 unless such registered holder shall have (i)
completed and signed the certificate contained in the form of election to
purchase set forth on the reverse side of the Rights Certificate surrendered for
such exercise and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
Section 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All
Rights Certificates surrendered for the purpose of exercise, transfer, split
up, combination or exchange shall, if surrendered to the Company or to any of
its agents, be delivered to the Rights Agent for cancellation or in cancelled
form, or, if surrendered to the Rights Agent, shall be cancelled by it, and
no Rights Certificates shall be issued in lieu thereof except as expressly
permitted by any of the provisions of this Rights Agreement. The Company
shall deliver to the Rights Agent for cancellation and retirement, and the
Rights Agent shall so cancel and retire, any other Rights Certificate
purchased or acquired by the Company otherwise than upon the exercise
thereof. The Rights Agent shall deliver all cancelled Rights Certificates to
the Company, or shall, at the written request of the Company, destroy such
cancelled Rights Certificates, and in such case shall deliver a certificate
of destruction thereof to the Company.
Section 9. RESERVATION AND AVAILABILITY OF PREFERRED STOCK.
(a) The Company covenants and agrees that it will use its best efforts to
cause to be reserved and kept available out of and to the extent of its
authorized and unissued Units of Preferred Stock not reserved for another
purpose that will be sufficient to permit the exercise in full of all
outstanding Rights. Upon the occurrence of any events resulting in an increase
in the aggregate number of shares of Preferred Stock (or other equity securities
of the Company) issuable upon exercise of all outstanding Rights above the
number then reserved, the Company shall make appropriate increases in the number
of shares so reserved.
10.
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(b) If the Units of Preferred Stock to be issued and delivered upon the
exercise of the Rights are at any time listed on a national securities exchange
or included for quotation on any transaction reporting system, the Company shall
during the period from the Distribution Date to the Expiration Date use its best
efforts to cause all shares reserved for such issuance to be listed on such
exchange or included for quotation on any such transaction reporting system upon
official notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a Section
11(a)(ii) Event in which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with Section 11(a)(iii)
hereof, or as soon as is required by law following the Distribution Date, as the
case may be, a registration statement under the Securities Act, with respect to
the securities purchasable upon exercise of the Rights on an appropriate form,
(ii) cause such registration statement to become effective as soon as
practicable after such filing and (iii) cause such registration statement to
remain effective (with a prospectus at all times meeting the requirements of the
Securities Act) until the earlier of (A) the date as of which the Rights are no
longer exercisable for such securities and (B) the Expiration Date. The Company
will also take such action as may be appropriate under, or to ensure compliance
with, the securities or "blue sky" laws of the various states in connection with
the exercisability of the Rights. Notwithstanding any provision of this
Agreement to the contrary, the Rights shall not be exercisable in any
jurisdiction, unless the requisite qualification in such jurisdiction shall have
been obtained, or an exemption therefrom shall be available and until a
registration statement has been declared effective.
(d) The Company covenants and agrees that it will take all such action as
may be necessary to ensure that all Units of Preferred Stock (and, following the
occurrence of a Triggering Event, any other securities that may be delivered
upon exercise of Rights) shall, at the time of delivery of the certificates for
such Units of Preferred Stock (subject to payment of the Purchase Price), be
duly and validly authorized and issued and fully paid and non-assessable.
(e) The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Rights Certificates or of
any Units of Preferred Stock upon the exercise of Rights. The Company shall
not, however, be required to pay any transfer tax which may be payable in
respect of any transfer or delivery of Rights Certificates to a person other
than, or the issuance or delivery of certificates or depositary receipts for
Units of Preferred Stock in a name other than that of, the registered holder of
the Rights Certificate evidencing Rights surrendered for exercise or to issue or
to deliver any certificates or depositary receipts for Units of Preferred Stock
upon the exercise of any Rights until any such tax shall have been paid (any
such tax being payable by the holder of such Rights Certificate at the time of
surrender) or until it has been established to the Company's reasonable
satisfaction that no such tax is due.
Section 10. PREFERRED STOCK RECORD DATE. Each person in whose name any
certificate for Units of Preferred Stock (or, following the occurrence of a
Triggering Event, other securities) is issued upon the exercise of Rights shall
for all purposes be deemed to have become the holder of record of the Units of
Preferred Stock (or, following the occurrence of a Triggering Event, other
securities) represented thereby on, and such certificate shall be dated, the
date upon which the Rights Certificate evidencing such Rights was duly
surrendered and payment of the Purchase
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Price (and any applicable transfer taxes) was made; provided, however, that
if the date of such surrender and payment is a date upon which the Preferred
Stock (or, following the occurrence of a Triggering Event, other securities)
transfer books of the Company are closed, such person shall be deemed to have
become the record holder of such shares on, and such certificate shall be
dated, the next succeeding Business Day on which the Preferred Stock transfer
books of the Company are open; provided further, however, that if delivery of
Units of Preferred Stock is delayed pursuant to Section 9(c), such Persons
shall be deemed to have become the record holders of such Units of Preferred
Stock only when such Units first become deliverable. Prior to the exercise
of the Rights evidenced thereby, the holder of a Rights Certificate shall not
be entitled to any rights of a stockholder of the Company with respect to
securities for which the Rights shall be exercisable, including, without
limitation, the right to vote, to receive dividends or other distributions or
to exercise any preemptive rights, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided herein. Prior
to the exercise of the Rights evidenced thereby, the holder of a Rights
Certificate shall not be entitled to any rights of a holder of a Unit of
Preferred Stock for which the Rights shall be exercisable, including, without
limitation, the right to vote, to receive dividends or other distributionsor
to exercise any preemptive rights, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided herein.
Section 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES OR NUMBER OF
RIGHTS. The Purchase Price, the number and kinds of securities covered by each
Right and the number of Rights outstanding are subject to adjustment from time
to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Stock payable in shares
of Preferred Stock, (B) sub-divide the outstanding shares of Preferred Stock,
(C) combine the outstanding Preferred Stock into a smaller number of shares
Preferred Stock or (D) issue any shares of its capital stock in a
reclassification of the Preferred Stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the continuing
or surviving corporation), except as otherwise provided in this Section 11(a),
the Purchase Price in effect at the time of the record date for such dividend or
of the effective date of such subdivision, combination or reclassification, and
the number and kind of shares of capital stock issuable on such date, shall be
proportionately adjusted so that the holder of any Rights exercised after such
time shall be entitled to receive the aggregate number and kind of shares of
capital stock which, if such Rights had been exercised immediately prior to such
date and at a time when the Preferred Stock transfer books of the Company were
open, such holder would have owned upon such exercise and been entitled to
receive by virtue of such dividend, subdivision, combination or
reclassification; provided, however, that in no event shall the consideration to
be paid upon the exercise of one Right be less than the aggregate par value of
the shares of capital stock of the Company issuable upon exercise of one Right.
If an event occurs which would require an adjustment under both this Section
11(a)(i) and Section 11(a)(ii), the adjustment provided for in this Section
11(a)(i) shall be in addition to, and shall be made prior, to any adjustment
required pursuant to Section 11(a)(ii).
(ii) Subject to Section 24 of this Agreement, in the event that
(A) any Acquiring Person or any Associate or Affiliate of any Acquiring
Person, at any time after the date of this Agreement, directly or indirectly,
shall (1) merge into the Company or otherwise combine with the Company and
the Company shall be the continuing or surviving corporation of
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such merger or combination and shares of Company Common Stock shall remain
outstanding and unchanged, (2) in one transaction or a series of
transactions, transfer any assets to the Company or any of its Subsidiaries
in exchange (in whole or in part) for shares of Company Common Stock, for
other equity securities of the Company or any such Subsidiary, or for
securities exercisable for or convertible into shares of equity securities of
the Company or any of its Subsidiaries (whether shares of Company Common
Stock or otherwise) or otherwise obtain from the Company or any of its
Subsidiaries, with or without consideration, any additional shares of such
equity securities or securities exercisable for or convertible into such
equity securities other than pursuant to a pro rata distribution to all
holders of shares of Company Common Stock, (3) sell, purchase, lease,
exchange, mortgage, pledge, transfer or otherwise acquire or dispose of, in
one transaction or a series of transactions, to, from or with the Company or
any of its Subsidiaries or any employee benefit plan maintained by the
Company or any of its Subsidiaries or any trustee or fiduciary with respect
to such plan acting in such capacity, assets (including securities) on terms
and conditions less favorable to the Company or such Subsidiary or plan than
those that could have been obtained in arm's-length negotiations with an
unaffiliated third party, other than pursuant to a transaction set forth in
Section 13(a) hereof, (4) sell, purchase, lease, exchange, mortgage, pledge,
transfer or otherwise acquire or dispose of, in one transaction or a series
of transactions, to, from or with the Company or any of its Subsidiaries or
any employee benefit plan maintained by the Company or any of its
Subsidiaries or any trustee or fiduciary with respect to such plan acting in
such capacity (other than transactions, if any, consistent with those engaged
in, as of the date hereof, by the Company and such Acquiring Person or such
Associate or Affiliate), 50% or more of the Company's assets (including
securities or intangible assets) other than pursuant to a transaction set
forth in Section 13(a) hereof, (5) receive, or any designee, agent or
representative of such Acquiring Person or any Affiliate or Associate of such
Acquiring Person shall receive, any compensation from the Company or any of
its Subsidiaries other than compensation for full-time employment as a
regular employee at rates in accordance with the Company's (or its
Subsidiaries') past practices, or (6) receive the benefit, directly or
indirectly (except proportionately as a holder of shares of Company Common
Stock or as required by law or governmental regulation), of any loans,
advances, guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided by the Company or any of its
Subsidiaries or any employee benefit plan maintained by the Company or any of
its Subsidiaries or any trustee or fiduciary with respect to such plan acting
in such capacity; or (B) any Person shall become an Acquiring Person, unless
the event causing the Person to become an Acquiring Person is a transaction
set forth in Section 13(a); or (C) during such time as there is an Acquiring
Person, there shall be any reclassification of securities (including any
reverse stock split), or recapitalization of the Company, or any merger or
consolidation of the Company with any of its Subsidiaries or any other
transaction or series of transactions involving the Company or any of its
Subsidiaries, other than a transaction or transactions to which the
provisions of Section 13(a) apply (whether or not with or into or otherwise
involving an Acquiring Person), which has the effect, directly or indirectly,
of increasing by more than 1% the proportionate share of the outstanding
shares of any class of equity securities of the Company or any of its
Subsidiaries that is directly or indirectly beneficially owned by any
Acquiring Person or any Person or any Associate or Affiliate of any Acquiring
Person;
then promptly following the occurrence of an event described in Section
11(a)(ii)(A), (B) or (C) (a "Section 11(a)(ii) Event"), proper provision
shall be made so that each holder of a Right,
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except as provided in Section 7(e) hereof, shall thereafter have the right to
receive for each Right, upon exercise thereof in accordance with the terms of
this Agreement and payment of the then-current Purchase Price, in lieu of the
number of Units of Preferred Stock for which a Right was exercisable
immediately prior to the first occurrence of a Section 11(a)(ii) Event, such
number of Units of Preferred Stock as shall equal the result obtained by
multiplying the then-current Purchase Price by the then number of Units of
Preferred Stock for which a Right was exercisable (or would have been
exercisable if the Distribution Date had occurred) immediately prior to the
first occurrence of a Triggering Event, and dividing that product by 50% of
the current per share market price (determined pursuant to Section 11(d)
hereof) for shares of Common Stock on the date of occurrence of the
Triggering Event (such number of Units of Preferred Stock being hereinafter
referred to as the "Adjustment Shares").
(iii) In the event that the number of Units of Preferred Stock which
are authorized by the Company's Amended and Restated Certificate of
Incorporation but not outstanding or reserved for issuance for purposes other
than upon exercise of the Rights are not sufficient to permit the exercise in
full of the Rights, or if any necessary regulatory approval for such issuance
has not been obtained by the Company, the Company shall, in lieu of issuing
Units of Preferred Stock in accordance with Section 11(a)(ii) hereof: (A)
determine the excess of (1) the value of the Units of Preferred Stock issuable
upon the exercise of a Right (the "Current Value") over (2) the Purchase Price
(such excess being referred to as the "Spread") and (B) with respect to each
Right, make adequate provision to substitute for such Units of Preferred Stock,
upon exercise of the Rights, (1) cash, (2) a reduction in the Purchase Price,
(3) other equity securities of the Company (including, without limitation,
Common Stock or shares or units of shares of any series of preferred stock which
the Board of Directors of the Company has deemed to have the same value as the
Units of Preferred Stock (such shares or units of preferred stock are herein
called "preferred stock equivalents")), except to the extent that the Company
has not obtained any necessary regulatory approval for such issuance, (4) debt
securities of the Company, except to the extent that the Company has not
obtained any necessary regulatory approval for such issuance, (5) other assets
or (6) any combination of the foregoing, having an aggregate value equal to the
Current Value, where such aggregate value has been determined by the Board of
Directors of the Company based upon the advice of a nationally recognized
investment banking firm selected by the Board of Directors of the Company;
PROVIDED, HOWEVER, if the Company shall not have made adequate provision to
deliver value pursuant to clause (B) above within thirty (30) days following the
later of (x) occurrence of a Section 11(a)(ii) Event, and (y) the date on which
the Company's right of redemption pursuant to Section 23(a) expires (the later
of (x) and (y) being referred to herein as the "Section 11(a)(iii) Trigger
Date"), then the Company shall be obligated to deliver, upon the surrender for
exercise of a Right and without requiring payment of the Purchase Price, Units
of Preferred Stock (to the extent available), except to the extent that the
Company has not obtained any necessary regulatory approval for such issuance,
and then, if necessary, cash, which Units and/or cash have an aggregate value
equal to the Spread.
(b) In the event that the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Units of Preferred
Stock entitling them (for a period expiring within 45 calendar days after
such record date) to subscribe for or purchase Units of Preferred Stock (or
shares having the same rights, privileges and preferences as the Preferred
Stock ("equivalent preferred stock")) or securities convertible into Units of
Preferred Stock or
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equivalent preferred stock at a price per Unit of Preferred Stock or
equivalent preferred share (or having a conversion price per share, if a
security convertible into Units of Preferred Stock or equivalent preferred
stock) less than the then current per share market price of a Unit of
Preferred Stock (as determined pursuant to Section 11(d)) on such record
date, the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to
such record date by a fraction, the numerator of which shall be the number of
Units of Preferred Stock outstanding on such record date plus the number of
Units of Preferred Stock which the aggregate offering price of the total
number of Units of Preferred Stock and/or equivalent preferred stock so to be
offered (and/or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at such current market price and
the denominator of which shall be the number of Units of Preferred Stock
outstanding on such record date plus the number of additional Units of
Preferred Stock and/or equivalent preferred stock to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible). In case such subscription price may be
paid in a consideration part or all of which shall be in a form other than
cash, the value of such consideration shall be as determined in good faith by
a majority of the Board of Directors of the Company, whose determination
shall be described in a statement filed with the Rights Agent and shall be
binding on the Rights Agent and the holders of the Rights. Units of Preferred
Stock owned by or held for the account of the Company shall not be deemed
outstanding for the purpose of any such computation. Such adjustment shall
be made successively whenever such a record date is fixed; and in the event
that such rights, options or warrants are not so isued, the Purchase Price
shall be adjusted to be the Purchase Price which would then be in effect if
such record date had not been fixed.
(c) In case the Company shall fix a record date for a distribution to
all holders of Units of Preferred Stock (including any such distribution made
in connection with a consolidation or merger in which the Company is the
continuing or surviving corporation) of evidences of indebtedness, cash
(other than a regular quarterly cash dividend) assets (other than a dividend
payable in Units of Preferred Stock but including any dividend payable in
equity securities other than Preferred Stock) or subscription rights or
warrants (excluding those referred to in Section 11(d) hereof), the Purchase
Price to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to such record
date by a fraction, the numerator of which shall be the then current per
share market price (as determined pursuant to Section 11(d)) of the Preferred
Stock on such record date, less the fair market value (as determined in good
faith by a majority of the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent
and shall be binding on the Rights Agent and the holder of rights) of the
cash, assets or evidences of indebtedness to be distributed or of such
subscription rights or warrants distributable in respect of a share of
Preferred Stock and the denominator of which shall be such current per share
market price (as determined pursuant to Section 11(d)) of a share of
Preferred Stock. Such adjustments shall be made successively whenever such a
record date is fixed; and in the event that such distribution is not so made,
the Purchase Price shall again be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the "current
per share market price" of any security (a "Security" for the purpose of this
Section 11(d)(i)) on any date shall be deemed to be the average of the daily
closing prices per share of such Security for the
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thirty (30) consecutive Trading Days (as such term is hereinafter defined)
immediately prior to such date; provided, however, that in the event that the
"current per share market price" of the Security is determined during a
period following the announcement by the issuer of such Security of (A) a
dividend or distribution on such Security payable in shares of such Security
or securities convertible into such shares, or (B) any subdivision,
combination or reclassification of such Security and prior to the expiration
of thirty (30) Trading Days after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the "current per share market
price" shall be appropriately adjusted to reflect the "current market price"
per share equivalent of such Security. The closing price for each day shall
be the last sale price, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the Nasdaq
National Market System ("NASDAQ") or, if the Security is not listed or
admitted to trading on the NASDAQ, as reported in the principal consolidated
transaction reporting system with respect to securities listed on the
principal national securities exchange on which the Security is listed or
admitted to trading or, if the Security is not listed or admitted to trading
on any national securities exchange, the last quoted price or, if not so
quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the NASDAQ or such other system then
in use, or, if on any such date the Security is not quoted by any such
organization, the average of the closing bid and asked prices as furnished by
a professional market maker making a market in the Security selected by a
majority of the Board of Directors. If on any such date no market maker is
making a market in the Security, the "current per share market price" of such
Security on such date as determined in good faith by the Board of Directors
of the Company as provided for above shall be used. The term "Trading Day"
shall mean a day on which the principal national securities exchange on which
the Security is listed or admitted to trading is open for the transaction of
business or, if the Security is not listed or admitted to trading on any
national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the "current per
share market price" of the Preferred Stock shall be determined in accordance
with the method set forth in Section 11(d)(i). If the "current per share market
price" of the Preferred Stock cannot be determined in the manner provided above
or if the Preferred Stock is not publicly held or listed or traded in a manner
described in clause (i) of this Section 11(d), the "current per share market
price" of the Preferred Stock shall be conclusively deemed to be an amount equal
to $1,000 (as such amount may be appropriately adjusted for such events as stock
splits, stock dividends and recapitalizations with respect to shares of Company
Common Stock occurring after the date of this Agreement) multiplied by the
current market price per share of Company Common Stock. If shares of neither
the Company Common Stock nor Preferred Stock is publicly held or so listed or
traded, "current per share market price" of the Preferred Stock shall mean the
fair value per share as determined in good faith by the Board of Directors of
the Company whose determination shall be described in a statement filed with the
Rights Agent and shall be binding on the Rights Agent and the holders of the
Rights.
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the
Purchase Price; provided, however, that any adjustments which by reason of
this Section 11(e) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
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Section 11 shall be made to the nearest cent or to the nearest one
one-thousandth of a share of Preferred Stock or one one-hundredth of any
other share or security as the case may be. Notwithstanding the first
sentence of this Section 11(e), any adjustment required by this Section 11
shall be made no later than the earlier of (i) three years from the date of
the transaction which requires such adjustment or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a)(ii)
hereof, the holder of any Rights thereafter exercised shall become entitled to
receive any shares of capital stock of the Company other than Units of Preferred
Stock, thereafter the number of such other shares so receivable upon exercise of
any Rights and the Purchase Price thereof shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Preferred Stock contained in Section 11(a), (b),
(c), (d), (e), (g), (h), (i), (j), (k), (l) and (m), and the provisions of
Sections 7, 9, 10, 13 and 14 with respect to the Preferred Stock shall apply on
like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of Units of Preferred Stock
purchasable from time to time hereunder upon exercise of the Rights, all subject
to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of Units of Preferred
Stock (calculated to the nearest one-millionth of a share of Preferred Stock)
obtained by dividing (i) the product obtained by multiplying (x) the number of
Units of Preferred Stock covered by a Right immediately prior to this adjustment
by (y) the Purchase Price in effect immediately prior to such adjustment of the
Purchase Price by, (ii) the Purchase Price in effect immediately after such
adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of Units of Preferred Stock purchasable upon the
exercise of a Right. Each of the Rights outstanding after such adjustment of
the number of Rights shall be exercisable for the number of Units of
Preferred Stock for which a Right was exercisable immediately prior to such
adjustment. Each Right held of record prior to such adjustment of the number
of Rights shall become that number of Rights (calculated to the nearest one
one-thousandth) obtained by dividing the Purchase Price in effect immediately
prior to adjustment of the Purchase Price by the Purchase Price in effect
immediately after adjustment of the Purchase Price. The Company shall make a
public announcement of its election to adjust the number of Rights,
indicating the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. This record date may be the date on
which the Purchase Price is adjusted or any day thereafter, but, if the
Rights Certificates have been issued, shall be at least ten days later than
the date of the public announcement. If Rights Certificates have been
issued, upon each adjustment of the number of Rights pursuant to this Section
11(i), the Company shall, as promptly as practicable, cause to be distributed
to holders of record of Rights Certificates on such record date Rights
Certificates evidencing, subject to Section 14 hereof, the additional Rights
to which such holders shall be entitled as a result of such adjustment, or,
at the option of the Company, shall cause to be
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distributed to such holders of record in substitution and replacement for the
Rights Certificates held by such holders prior to the date of adjustment, and
upon surrender thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates to be so distributed shall be issued,
executed and counter-signed in the manner provided for herein and shall be
registered in the names of the holders of record of Rights Certificates on
the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the
number of Units of Preferred Stock issuable upon the exercise of the Rights, the
Rights Certificates theretofore and thereafter issued may continue to express
the Purchase Price per Unit and the number of Units of Preferred Stock which
were expressed in the initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below the then par value of the number of Units of Preferred
Stock issuable upon exercise of the Rights, the Company shall take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue fully paid and nonassessable number of
Units of Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Company may elect to defer until the occurrence of such event the
issuing to the holder of any Rights exercised after such record date of that
number of Units of Preferred Stock and other capital stock or securities of the
Company, if any, issuable upon such exercise over and above the Units of
Preferred Stock and other capital stock or securities of the Company, if any,
issuable upon such exercise on the basis of the Purchase Price in effect prior
to such adjustment; provided, however, that the Company shall deliver to such
holder a due bill or other appropriate instrument evidencing such holder's right
to receive such additional shares (fractional or otherwise) upon the occurrence
of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any (i) consolidation or subdivision of the Preferred Stock, (ii)
issuance wholly for cash of any Unit of Preferred Stock at less than the current
market price, (iii) issuance wholly for cash of Preferred Stock or securities
which by their terms are convertible into or exchangeable for Preferred Stock,
(iv) dividends on Preferred Stock payable in Preferred Stock or (v) issuance of
rights, options or warrants referred to in this Section 11, hereafter made by
the Company to holders of Units of its Preferred Stock shall not be taxable to
such stockholders.
(n) The Company shall not, at any time after the Distribution Date, (i)
consolidate with any other Person (other than a Subsidiary of the Company in
a transaction which complies with Section 11(o)), (ii) merge with or into any
other Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o)), or (iii) sell or transfer (or permit any
Subsidiary to sell or transfer), in one transaction, or a series of
transactions, assets or earning power aggregating more than 50% of the assets
or earning power of the Company and its Subsidiaries (taken as a whole) to
any other Person or Persons (other than the Company and/or any of its
Subsidiaries in one or more transactions each of which complies with Section
11(o)), if
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(x) at the time of or immediately after such consolidation, merger or sale
there are any rights, warrants or other instruments or securities outstanding
or agreements in effect which would substantially diminish or otherwise
eliminate the benefits intended to be afforded by the Rights or (y) prior to,
simultaneously with or immediately after such consolidation, merger or sale,
the Person which constitutes, or would constitute the "Principal Party" for
purposes of Section 13(a) shall have distributed or otherwise transferred to
its stockholders or other persons holding an equity interest in such Person
Rights previously owned by such Person or any of its Affiliates and
Associates; provided, however, this Section 11(n) shall not affect the
ability of any Subsidiary of the Company to consolidate with, merge with or
into, or sell or transfer assets or earning power to, any other Subsidiary of
the Company.
(o) After the Distribution Date, the Company shall not, except as
permitted by Section 23 or Section 26, take (or permit any Subsidiary to take)
any action if at the time such action is taken it is reasonably foreseeable that
such action will diminish substantially or otherwise eliminate the benefits
intended to be afforded by the Rights.
(p) In the event that, at any time after the date of this Agreement and
prior to the Distribution Date, the Company shall (i) declare or pay any
dividend on outstanding shares of Common Stock payable in shares of Common
Stock or (ii) effect a subdivision, combination or consolidation of the
Common Stock (by reclassification or otherwise than by payment of dividends
in shares of Common Stock) into a greater or lesser number of shares of
Common Stock, then in any such case the number of Units of Preferred Stock
purchasable after such event upon proper exercise of each Right shall be
determined by multiplying the number of Units of Preferred Stock so
purchasable immediately prior to such event by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately before
such event and the denominator of which is the number of shares of Common
Stock outstanding immediately after such event. The adjustments provided for
in this Section 11(p) shall be made successively whenever such a dividend is
declared or paid or such a subdivision, combination or consolidation is
effected.
Section 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF
SHARES. Whenever an adjustment is made as provided in Sections 11 and 13
hereof, the Company shall promptly (a) prepare a certificate setting forth
such adjustment, and a brief statement of the facts accounting for such
adjustment, (b) file with the Rights Agent and with each transfer agent for
the shares of Common Stock or Units of Preferred Stock a copy of such
certificate and (c) mail a brief summary thereof to each holder of a Rights
Certificate in accordance with Section 25 hereof. Notwithstanding the
foregoing sentence, the failure by the Company to make such certification or
give such notice shall not affect the validity of or the force or effect of
the requirement for such adjustment. The Rights Agent shall be fully
protected in relying on any such certificate and on any adjustment contained
therein and shall not be deemed to have knowledge of such adjustment unless
and until it shall have received such certificate.
Section 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR
EARNING POWER.
(a) Except as provided in Section 13(b) hereof, in the event that,
following a Shares Acquisition Date, directly or indirectly, (x) the Company
shall consolidate with, or merge with and into, any other Person (other than
a Subsidiary of the Company in a transaction which complies with Section
11(o)), and the Company shall not be the continuing or surviving
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corporation of such consolidation or merger, (y) any Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o))
shall consolidate with the Company, or merge with and into the Company and
the Company shall be the continuing or surviving corporation of such
consolidation or merger and, in connection with such consolidation or merger,
all or part of the shares of Common Stock shall be changed into or exchanged
for stock or other securities of any other Person or cash or any other
property, or (z) the Company shall sell or otherwise transfer (or one or more
of its Subsidiaries shall sell or otherwise transfer) to any Person or
Persons (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o)), in one or more transactions, directly or
indirectly, assets or earning power aggregating 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole), (any
such event being a "Section 13 Event"), then, and in each such case, proper
provision shall be made so that: (i) each holder of a Right, except as
provided in Section 7(e), shall thereafter have the right to receive, upon
the exercise thereof at the then current Purchase Price, such number of
validly authorized and issued, fully paid and non-assessable shares of Common
Stock of the Principal Party (as such term is hereinafter defined), which
shares shall not be subject to any liens, encumbrances, rights of first
refusal, transfer restrictions or other adverse claims, as shall be equal to
the result obtained by (1) multiplying the then current Purchase Price by the
number of Units of Preferred Stock for which a Right is exercisable
immediately prior to the first occurrence of a Section 13 Event (or, if a
Section 11(a)(ii) Event has occurred prior to the first occurrence of a
Section 13 Event, multiplying the number of such Units of Preferred Stock for
which a Right would be exercisable hereunder but for the occurrence of such
Section 11(a)(ii) Event by the Purchase Price which would be in effect
hereunder but for such first occurrence) and (2) dividing that product
(which, following the direct occurrence of a Section 13 Event, shall be the
"Purchase Price" for all purposes of this Agreement) by 50% of the current
per share market price (determined pursuant to Section 11(d)) of the shares
of Common Stock of such Principal Party on the date of consummation of such
Section 13 Event; (ii) such Principal Party shall thereafter be liable for,
and shall assume, by virtue of such Section 13 Event, all the obligations and
duties of the Company pursuant to this Agreement; (iii) the term "Company"
shall, for all purposes of this Agreement, thereafter be deemed to refer to
such Principal Party, it being specifically intended that the provisions of
Section 11 shall apply only to such Principal Party following the first
occurrence of a Section 13 Event; (iv) such Principal Party shall take such
steps (including, but not limited to, the reservation of a sufficient number
of shares of its Common Stock) in connection with the consummation of any
such transaction as may be necessary to ensure that the provisions of this
Agreement shall thereafter be applicable to its shares of Common Stock
thereafter deliverable upon the exercise of the Rights; and (v) the
provisions of Section 11(a)(ii) shall be of no further effect following the
first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean:
(i) in the case of any transaction described in clause (x) or (y)
of the first sentence of Section 13(a), (A) the Person that is the issuer of
any securities into which shares of Company Common Stock are converted in
such merger or consolidation, or, if there is more than one such issuer, the
issuer of shares of Common Stock that has the highest aggregate current
market price (determined pursuant to Section 11(d)) and (B) if no securities
are so issued, the Person that is the other party to such merger or
consolidation, or, if there is more than one such
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Person, the Person the Common Stock of which has the highest aggregate
current market price (determined pursuant to Section 11(d)); and
(ii) in the case of any transaction described in clause (z) of the
first sentence of Section 13(a), the Person that is the party receiving the
largest portion of the assets or earning power transferred pursuant to such
transaction or transactions, or, if each Person that is a party to such
transaction or transactions receives the same portion of the assets or earning
power transferred pursuant to such transaction or transactions or if the Person
receiving the largest portion of the assets or earning power cannot be
determined, whichever Person the Common Stock of which has the highest aggregate
current market price (determined pursuant to Section 11(d)); provided, however,
that in any such case, (1) if the Common Stock of such Person is not at such
time and has not been continuously over the preceding twelve-month period
registered under Section 12 of the Exchange Act ("Registered Common Stock"), or
such Person is not a corporation, and such Person is a direct or indirect
Subsidiary of another Person that has Registered Common Stock outstanding,
"Principal Party" shall refer to such other Person; (2) if the Common Stock of
such Person is not Registered Common Stock or such Person is not a corporation,
and such Person is a direct or indirect Subsidiary of another Person but is not
a direct or indirect Subsidiary of another Person which has Registered Common
Stock outstanding, "Principal Party" shall refer to the ultimate parent entity
of such first-mentioned Person; (3) if the Common Stock of such Person is not
Registered Common Stock or such Person is not a corporation, and such Person is
directly or indirectly controlled by more than one Person, and one or more of
such other Persons has Registered Common Stock outstanding, "Principal Party"
shall refer to whichever of such other Persons is the issuer of the Registered
Common Stock having the highest aggregate current per share market price
(determined pursuant to Section 11(d)); and (4) if the Common Stock of such
Person is not Registered Common Stock or such Person is not a corporation, and
such Person is directly or indirectly controlled by more than one Person, and
none of such other Persons has Registered Common Stock outstanding, "Principal
Party" shall refer to whichever ultimate parent entity is the corporation having
the greatest stockholders' equity or, if no such ultimate parent entity is a
corporation, shall refer to whichever ultimate parent entity is the entity
having the greatest net assets.
(c) The Company shall not consummate any such consolidation, merger, sale
or transfer unless the Principal Party shall have a sufficient number of
authorized shares of Common Stock which have not been issued or reserved for
issuance to permit the exercise in full of the Rights in accordance with this
Section 13, and unless prior thereto the Company and such Principal Party shall
have executed and delivered to the Rights Agent a supplemental agreement
providing for the terms set forth in paragraphs (a) and (b) of this Section 13
and further providing that the Principal Party will:
(i) (A) file on an appropriate form, as soon as practicable
following the execution of such agreement, a registration statement under
the Securities Act with respect to the shares of Common Stock that may be
acquired upon exercise of the Rights, (B) cause such registration statement
to remain effective (and to include a prospectus complying with the
requirements of the Securities Act) until the Expiration Date, and (C) as
soon as practicable following the execution of such agreement take such
action as may be required to ensure that any acquisition of such shares of
Common Stock upon the exercise of the Rights complies with any applicable
state securities or "blue sky" laws; and
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(ii) deliver to holders of the Rights historical financial statements
for the Principal Party and each of its Affiliates which comply in all
respects with the requirements for registration on Form 10 under the
Exchange Act.
(d) In case the Principal Party which is to be a party to a transaction
referred to in this Section 13 has a provision in any of its authorized
securities or in its Certificate of Incorporation or Bylaws or other
instrument governing its corporate affairs, which provision would have the
effect of (i) causing such Principal Party to issue, in connection with, or
as a consequence of, the consummation of a transaction referred to in this
Section 13, shares of Common Stock of such Principal Party at less than the
then current market price per share (determined pursuant to Section 11(d)) or
securities exercisable for, or convertible into, shares of Common Stock of
such Principal Party at less than such then current marker price (other than
to holders of Rights pursuant to this Section 13) or (ii) providing for any
special payment, tax or similar provisions in connection with the issuance of
the shares of Common Stock of such Principal Party pursuant to the provisions
of this Section 13, then, in such event, the Company shall not consummate any
such transaction unless prior thereto the Company and such Principal Party
shall have executed and delivered to the Rights Agent a supplemental
agreement providing that the provision in question of such Principal Party
shall have been cancelled, waived or amended, or that the authorized
securities shall be redeemed, so that the applicable provision will have no
effect in connection with, or as a consequence of, the consummation of the
proposed transaction.
(e) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers. In the
event that a Section 13 Event shall occur at any time after the occurrence of
a Section 11(a)(ii) Event, the Rights which have not theretofore been
exercised shall thereafter become exercisable in the manner described in
Section 13(a).
Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractions of Rights or
to distribute Rights Certificates which evidence fractional Rights. In lieu
of such fractional Rights, there shall be paid to the registered holders of
the Rights Certificates with regard to which such fractional Rights would
otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole Right. For the purposes of this Section
14(a), the current market value of a whole Right shall be the closing price
of the Rights for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable. The closing price for
any day shall be the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the NASDAQ or, if the Rights are not listed or admitted to trading
on the NASDAQ, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Rights are listed or admitted to trading or,
if the Rights are not listed or admitted to trading on any national
securities exchange, the last quoted price or, if not so quoted, the average
of the high bid and low asked prices in the over-the-counter market, as
reported by NASDAQ or such other system then in use or, if on any such date
the Rights are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker
making a market in the Rights selected by the Directors. If on any such date
no such market maker is making a market in the Rights, the
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fair value of the Rights on such date as determined in good faith by the
Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of Preferred
Stock (other than fractions which are integral multiples of one
one-thousandth of a share of Preferred Stock) upon exercise of the Rights or
to distribute certificates which evidence fractional Preferred Stock (other
than fractions which are integral multiples of one one-thousandth of a share
of Preferred Stock). Fractions of Preferred Stock in integral multiples of
one one-thousandth of a share of Preferred Stock may, at the election of the
Company, be evidenced by depositary receipts, pursuant to an appropriate
agreement between the Company and a depositary selected by it; PROVIDED,
HOWEVER, that such agreement shall provide that the holders of such
depositary receipts shall have all the rights, privileges and preferences to
which they are entitled as beneficial owners of the Preferred Stock
represented by such depositary receipts. In lieu of fractional shares of
Preferred Stock that are not integral multiples of one one-thousandth of a
share of Preferred Stock, the Company shall pay to the registered holders of
Rights Certificates at the time such Rights are exercised as herein provided
an amount in cash equal to the same fraction of the current market value of
one a share of Preferred Stock as determined pursuant to Section 11(d).
(c) The holder of a Right by the acceptance of the Right expressly
waives such holder's right to receive any fractional Rights or any fractional
shares upon exercise of a Right (except as provided above).
Section 15. RIGHTS OF ACTION. All rights of action in respect of
this Agreement, excepting the rights of action given to the Rights Agent
under Section 18 hereof, are vested in the respective registered holders of
the Rights Certificates (and, prior to the Distribution Date, the registered
holders of certificates representing shares of Common Stock); and any
registered holder of any Rights Certificate (or, prior to the Distribution
Date, a certificate representing shares of Common Stock), without the consent
of the Rights Agent or of the holder of any other Rights Certificate (or,
prior to the Distribution Date, of a certificate representing shares of
Common Stock), may, in such holder's own behalf and for such holder's own
benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect of,
such holder's right to exercise the Rights evidenced by such Rights
Certificate in the manner provided in such Rights Certificate and in this
Agreement. Without limiting the foregoing or any remedies available to the
holders of Rights, it is specifically acknowledged that the holders of Rights
would not have an adequate remedy at law for any breach of this Agreement and
will be entitled to specific performance of the obligations hereunder, and
injunctive relief against actual or threatened violations of the obligations
of any Person subject to this Agreement.
Section 16. AGREEMENT OF RIGHTS HOLDERS. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of shares of the Company's Common Stock;
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(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the office of the Rights Agent designated for such purpose, duly endorsed or
accompanied by a proper instrument of transfer;
(c) subject to Sections 6(a) and 7(f) hereof, the Company and the
Rights Agent may deem and treat the person in whose name the Rights
Certificate (or, prior to the Distribution Date, the associated Common Stock
certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on
the Rights Certificates or the associated Common Stock certificate made by
anyone other than the Company or the Rights Agent) for all purposes
whatsoever, and neither the Company nor the Rights Agent shall be affected by
any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary, neither
the Company nor the Rights Agent shall have any liability to any holder of a
Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated
or enacted by any governmental authority, prohibiting or otherwise
restraining performance of such obligation; provided, however, the Company
must use its best efforts to have any such order, decree or ruling lifted or
otherwise overturned as soon as possible.
Section 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Units of Preferred
Stock or any other securities of the Company which may at any time be
issuable upon the exercise of the Rights represented thereby, nor shall
anything contained herein or in any Rights Certificate be construed to confer
upon the holder of any Rights Certificate, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to
give or withhold consent to any corporate action, or to receive notice of
meetings or other actions affecting stockholders (except as provided in
Section 25 hereof), or to receive dividends or subscription rights, or
otherwise, until the Right or Rights evidenced by such Rights Certificate
shall have been exercised in accordance with the provisions hereof.
Section 18. CONCERNING THE RIGHTS AGENT. The Company agrees to pay
to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its
reasonable expenses and counsel fees and other disbursements incurred in the
administration and execution of this Agreement and the exercise and
performance of its duties hereunder. The Company also agrees to indemnify
the Rights Agent for, and to hold it harmless against, any loss, liability,
or expense, incurred without gross negligence, or willful misconduct on the
part of the Rights Agent, for any action taken, suffered or omitted by the
Rights Agent in connection with the execution, acceptance and administration
of this Agreement and the exercise and performance hereunder of its duties,
including the costs and expenses of defending against and appealing any claim
of liability in the premises. The indemnity provided herein shall survive
the termination of this Agreement and the expiration of the Rights. The
costs and expenses incurred in enforcing this right of indemnification shall
be paid by the Company.
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The Rights Agent may conclusively rely upon and shall be protected
and shall incur no liability for, or in respect of any action taken, suffered
or omitted by it in connection with, its administration of this Agreement and
the exercise and performance of its duties hereunder in reliance upon any
Rights Certificate or certificate for Units of Preferred Stock or shares of
Common Stock or for other securities of the Company, instrument of assignment
or transfer, power of attorney, endorsement, affidavit, letter, notice,
direction, consent, certificate, statement, or other paper or document
believed by it to be genuine and to be signed, executed and, where necessary,
verified or acknowledged, by the proper person or persons, or otherwise upon
the advice of counsel as set forth in Section 20 hereof.
Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT.
(a) Any corporation into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any corporation succeeding to the
stock transfer or corporate trust business of the Rights Agent or any
successor Rights Agent, shall be the successor to the Rights Agent under this
Agreement without the execution or filing of any paper or any further act on
the part of any of the parties hereto, provided that such corporation would
be eligible for appointment as a successor Rights Agent under the provisions
of Section 21 hereof. In case at the time such successor Rights Agent shall
succeed to the agency created by this Agreement any of the Rights
Certificates shall have been countersigned but not delivered, any such
successor Rights Agent may adopt the countersignature of the predecessor
Rights Agent and deliver such Rights Certificates so counter-signed; and in
case at that time any of the Rights Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Rights
Certificates either in the name of the predecessor Rights Agent or in the
name of the successor Rights Agent; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates
and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Rights Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature under its
prior name and deliver Rights Certificates so countersigned; and in case at
that time any of the Rights Certificates shall not have been countersigned,
the Rights Agent may countersign such Rights Certificates either in its prior
name or in its changed name; and in all such cases such Rights Certificates
shall have the full force provided in the Rights Certificates and in this
Agreement.
Section 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions and no implied duties or obligations shall be read into this
Agreement against the Rights Agent, by all of which the Company and the
holders of Rights Certificates, by their acceptance thereof, shall be bound:
(a) Before the Rights Agent acts or refrains from acting, it may
consult with legal counsel of its choice (who may be legal counsel for the
Company), and the advice or opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action
taken, suffered or omitted by it in good faith and in accordance with such
advice or opinion.
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(b) Whenever in the administration, exercise and performance of its
duties under this Agreement the Rights Agent shall deem it necessary or
desirable that any fact or matter be proved or established by the Company
prior to taking, suffering or omitting any action hereunder, such fact or
matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by any one of the Chairman of the Board, the Chief
Executive Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company and delivered to the Rights Agent; and such
certificate shall be full authorization to the Rights Agent for any action
taken, suffered or omitted in good faith by it under the provisions of this
Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own gross negligence or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Rights
Certificates (except its countersignature thereof) or be required to verify
the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.
(e) The Rights Agent shall not be under any liability or responsibility
in respect of the legality, validity or enforceability of this Agreement or
the execution and delivery hereof (except the due execution hereof by the
Rights Agent) or in respect of the legality, validity or enforceability or
the execution of any Rights Certificate (except its counter-signature thereof
and has actual knowledge of such change or adjustment); nor shall it be
liable or responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Rights Certificate; nor shall
it be responsible for any change in the exercisability of the Rights
(including the Rights becoming void pursuant to Section 11(a)(ii) hereof) or
any adjustment in the terms of the Rights (including the manner, method or
amount thereof) provided for in Section 3, 11, 13, 23 or 24, or the
ascertaining of the existence of facts that would require any such change or
adjustment (except with respect to the exercise of Rights evidenced by Rights
Certificates after receipt of the certificate described in Section 12 hereof
or has actual knowledge of such change or adjustment); nor shall it by any
act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Units of Preferred Stock to be issued
pursuant to this Agreement or any Rights Certificate or as to whether any
Preferred Stock will, when issued, be validly authorized and issued, fully
paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all
such further and other acts, instruments and assurances as may reasonably be
required by the Rights Agent for the carrying out or performing by the Rights
Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the administration, exercise and performance of
its duties hereunder from any one of the Chairman of the Board, the Chief
Executive Officer, the President, any Vice President, the Secretary or the
Treasurer of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and it shall not be responsible
or liable for any action taken, suffered or omitted by it in good faith in
accordance with instructions of any such officer or for any delay in acting
while waiting for those instructions. Any application by the Rights
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Agent for written instructions from the Company may, at the option of the
Rights Agent, set forth in writing any action proposed to be taken or omitted
by the Rights Agent under this Rights Agreement and the date on and/or after
which such action shall be taken or such omission shall be effective. The
Rights Agent shall not be liable for any action taken by, or omission of, the
Rights Agent in accordance with a proposal included in any such application
on or after the date specified in such application (which date shall not be
less than five (5) Business Days after the date any officer of the Company
actually received such application, unless any such officer shall have
consented in writing to an earlier date) unless, prior to taking any such
action (or the effective date in the case of an omission), the Rights Agent
shall have received written instructions in response to such application
specifying the action to be taken or omitted.
(h) The Rights Agent and any stockholder, director, officer or employee
of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction
in which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights
Agent under this Agreement. Nothing herein shall preclude the Rights Agent
from acting in any other capacity for the Company or for any other legal
entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by
or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting from any
such act, default, neglect or misconduct, provided reasonable care was
exercised in the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder or in the exercise of its
rights if the Rights Agent in good faith believes that repayment of such
funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise, transfer, split up, combination or exchange, the
certification on the form of assignment or form of election to purchase, as
the case may be, that the Rights evidenced by the Rights Certificate are not
owned by an Acquiring Person, or an Affiliate or Associate thereof, has
either not been completed or in any manner indicates any other response
thereto, the Rights Agent shall not take any further action with respect to
such requested exercise, transfer, split up, combination or exchange, without
first consulting with the Company.
Section 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under
this Agreement upon thirty (30) days' notice in writing mailed to the Company
and to each transfer agent of the Common Stock or Preferred Stock (as to
which the Rights Agent has received prior written notice) by registered or
certified mail, and the Company shall mail notice thereof to the holders of
the Rights Certificates by first-class mail. The Company may remove the
Rights Agent or any successor Rights Agent upon thirty (30) days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case
may be, and to each transfer agent of the Common Stock or Preferred Stock (as
to which the Rights Agent has received prior written notice) by registered or
certified mail, and to the holders
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of the Rights Certificates by first-class mail. If the Rights Agent shall
resign or be removed or shall otherwise become incapable of acting, the
Company shall appoint a successor to the Rights Agent. If the Company shall
fail to make such appointment within a period of thirty (30) days after
giving notice of such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Rights Agent
or by the holder of a Rights Certificate (who shall, with such notice, submit
such holder's Rights Certificate for inspection by the Company), then the
registered holder of any Rights Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any
successor Rights Agent, whether appointed by the Company or by such a court,
shall be a corporation organized and doing business under the laws of the
United States or of any state of the United States, in good standing,
authorized under such laws to exercise corporate trust or stock transfer
powers, and subject to supervision or examination by federal or state
authority and which has at the time of its appointment as Rights Agent a
combined capital and surplus of at least $50 million. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties
and responsibilities as if it had been originally named as Rights Agent
without further act or deed; but the predecessor Rights Agent shall deliver
and transfer to the successor Rights Agent any property at the time held by
it hereunder, and execute and deliver any further assurance, conveyance, act
or deed necessary for the purpose. Not later than the effective date of any
such appointment the Company shall file notice thereof in writing with the
predecessor Rights Agent and each transfer agent of the Common Stock or
Preferred Stock, and mail a notice thereof in writing to the registered
holders of the Rights Certificates. Failure to give any notice provided for
in this Section 21, however, or any defect therein, shall not affect the
legality or validity of the resignation or removal of the Rights Agent or the
appointment of the successor Rights Agent, as the case may be.
Section 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any
of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Rights Certificates evidencing Rights
in such form as may be approved by its Board of Directors to reflect any
adjustment or change in the Purchase Price and the number or kind or class of
shares or other securities or property purchasable under the Rights
Certificates made in accordance with the provisions of this Agreement. In
addition, in connection with the issuance or sale of shares of Common Stock
following the Distribution Date and prior to the Expiration Date, the Company
(a) shall, with respect to shares of Common Stock so issued or sold pursuant
to the exercise of stock options or under any employee benefit plan or
arrangement or upon the exercise, conversion or exchange of securities of the
Company currently outstanding or issued at any time in the future by the
Company and (b) may, in any other case, if deemed necessary or appropriate by
the Board of Directors of the Company, issue Rights Certificates representing
the appropriate number of Rights in connection with such issuance or sale;
PROVIDED, HOWEVER, that (i) no such Rights Certificate shall be issued and
this sentence shall be null and void AB INITIO if, and to the extent that,
such issuance or this sentence would create a significant risk of or result
in material adverse tax consequences to the Company or the Person to whom
such Rights Certificate would be issued or would create a significant risk of
or result in such options' or employee plans' or arrangements' failing to
qualify for otherwise available special tax treatment and (ii) no such Rights
Certificate shall be issued if, and to the extent that, appropriate
adjustment shall otherwise have been made in lieu of the issuance thereof.
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Section 23. REDEMPTION AND TERMINATION.
(a) The Company may, at its option, upon approval by a majority of the
Board of Directors, at any time prior to the earlier of (i) the Shares
Acquisition Date, or (ii) the Final Expiration Date redeem all but not less
than all the then outstanding Rights at a redemption price of $0.001 per
Right, appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof (such redemption price
being hereinafter referred to as the "Redemption Price"), and the Company
may, at its option, pay the Redemption Price either in cash, shares of Common
Stock (based on the current per share market price thereof (as determined
pursuant to Section 11(d) hereof) at the time of redemption), or any other
form of consideration deemed appropriate by the Board of Directors. The
redemption of the Rights by the Board of Directors may be made effective at
such time on such basis and with such conditions as a majority of the Board
of Directors in its sole discretion may establish.
(b) Immediately upon the action of a majority of the Board of Directors
of the Company ordering the redemption of the Rights pursuant to paragraph
(a) of this Section 23, and without any further action and without any
notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price.
The Company shall promptly give public notice of any such redemption;
provided, however, that the failure to give, or any defect in, any such
notice shall not affect the validity of such redemption. Within 10 days
after such action of a majority of the Board of Directors ordering the
redemption of the Rights, the Company shall give notice of such redemption to
the Rights Agent and shall mail a notice of redemption to all the holders of
the then outstanding Rights at their last addresses as they appear upon the
registry books of the Rights Agent or, prior to the Distribution Date, on the
registry books of the transfer agent for the Common Stock. Any notice which
is mailed in the manner herein provided shall be deemed given, whether or not
the holder receives the notice. Each such notice of redemption will state
the method by which the payment of the Redemption Price will be made.
Neither the Company nor any of its Affiliates or Associates may redeem,
acquire or purchase for value any Rights at any time in any manner other than
that specifically set forth in this Section 23 or in Section 24 hereof, and
other than in connection with the purchase of shares of Common Stock prior to
the Distribution Date.
(c) Notwithstanding anything contained in this Agreement to the
contrary, the Rights shall not be exercisable pursuant to Section 7(a) at any
time when the Rights are redeemable hereunder.
Section 24. EXCHANGE.
(a) The Company, at its option, upon approval by a majority of the
Company's Board of Directors, at any time after any Person becomes an
Acquiring Person, may exchange all or part of the then outstanding and
exercisable Rights (which shall not include Rights that have become void
pursuant to the provisions of Section 7(e) hereof) for Units of Preferred
Stock at an exchange ratio equal to, subject to adjustment to reflect stock
splits, stock dividends and similar transactions occurring after the date
hereof, that number obtained by dividing the Purchase Price by the then
current per share market price per Unit of Preferred Stock on the earlier of
(i) the date on which any Person becomes an Acquiring Person and (ii) the
date on which a tender or exchange offer by any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan maintained
by the Company or any of its Subsidiaries or any trustee or
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fiduciary with respect to such plan acting in such capacity) is first
published or sent or given within the meaning of Rule 14d-4(a) of the
Exchange Act Regulations or any successor rule, if upon consummation thereof
such Person would be the Beneficial Owner of 15% or more of the shares of
Common Stock then outstanding (such exchange ratio being hereinafter referred
to as the "Section 24(a) Exchange Ratio"). Notwithstanding the foregoing,
the Company may not effect such exchange at any time after any Person (other
than the Company, any Subsidiary of the Company, any employee benefit plan
maintained by the Company or any of its Subsidiaries, or any trustee or
fiduciary with respect to such plan acting in such capacity), together with
all Affiliates and Associates of such Person, becomes the Beneficial Owner of
50% or more of the shares of Common Stock then outstanding.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to subsection (a) of
this Section 24 and without any further action and without any notice, the
right to exercise such Rights shall terminate and the only right thereafter
of a holder of such Rights shall be to receive that number of Units of
Preferred Stock equal to the number of such Rights held by such holder
multiplied by the Section 24(a) Exchange Ratio. The Company shall promptly
give public notice of any such exchange; provided, however, that the failure
to give, or any defect in, such notice shall not affect the validity of such
exchange. The Company promptly shall mail a notice of any such exchange to
all of the holders of such Rights at their last addresses as they appear upon
the registry books of the Rights Agent. Any notice which is mailed in the
manner herein provided shall be deemed given, whether or not the holder
receives the notice. Each such notice of exchange will state the method by
which the exchange of Units of Preferred Stock for Rights will be effected
and, in the event of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange shall be effected pro rata based on the
number of Rights (other than Rights which have become void pursuant to the
provisions of Section 7(e) hereof) held by each holder of Rights.
(c) In the event that the number of shares of Preferred Stock which are
authorized by the Company's Certificate of Incorporation but not outstanding
or reserved for issuance for purposes other than upon exercise of the Rights
are not sufficient to permit any exchange of Rights as contemplated in
accordance with this Section 24, the Company shall take all such action as
may be necessary to authorize additional shares of Preferred Stock for
issuance upon exchange of the Rights or make adequate provision to substitute
(1) cash, (2) Company Common Stock or other equity securities of the Company,
(3) debt securities of the Company, (4) other assets, or (5) any combination
of the foregoing, having an aggregate value equal to the Adjustment Spread,
where such aggregate value has been determined by a majority of the Company's
Board of Directors.
(d) The Company shall not be required to issue fractions smaller than
or to distribute certificates which evidence fractions smaller than one
one-thousandth of a share of Preferred Stock. In lieu thereof, the Company
shall pay to the registered holders of the Rights Certificates with regard to
which such fractional Units would otherwise be issuable an amount in cash
equal to the same fraction of the current market value (as determined
pursuant to Section 11(d)(i) hereof) of one Unit of Preferred Stock.
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Section 25. NOTICE OF CERTAIN EVENTS.
(a) In case the Company shall propose (i) to pay any dividend payable
in stock of any class to the holders of its Preferred Stock or to make any
other distribution to the holders of its Preferred Stock (other than a
regular quarterly cash dividend), (ii) to offer to the holders of its
Preferred Stock rights or warrants to subscribe for or to purchase any
additional Units of Preferred Stock or shares of stock of any class or any
other securities, rights or options, (iii) to effect any reclassification of
its Preferred Stock (other than a reclassification involving only the
subdivision of outstanding Preferred Stock), (iv) to effect any consolidation
or merger into or with any other Person (other than a Subsidiary of the
Company in a transaction which complies with Section 11(o)), or to effect any
sale or other transfer (or to permit one or more of its Subsidiaries to
effect any sale or other transfer), in one or more transactions, of 50% or
more of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to, any other Person, (v) to effect the liquidation,
dissolution or winding up of the Company, or (vi) to declare or pay any
dividend on the Common Stock payable in shares of Common Stock or to effect a
subdivision, combination or consolidation of the shares of Common Stock (by
reclassification or otherwise than by payment of dividends in shares of
Common Stock), then, in each such case, the Company shall give to each holder
of a Rights Certificate, in accordance with Section 26 hereof, a notice of
such proposed action, which shall specify the record date for the purposes of
such stock dividend, or distribution of rights or warrants, or the date on
which such reclassification, consolidation, merger, sale, transfer,
liquidation, dissolution, or winding up is to take place and the date of
participation therein by the holders of the shares of Common Stock and/or
shares of Preferred Stock, if any such date is to be fixed, and such notice
shall be so given in the case of any action covered by claue (i) or (ii)
above at least ten (10) days prior to the record date for determining holders
of the shares of Preferred Stock for purposes of such action, and in the case
of any such other action, at least ten (10) days prior to the date of the
taking of such proposed action or the date of participation therein by the
holders of the shares of Common Stock and/or shares of Preferred Stock,
whichever shall be the earlier.
(b) In case any of the events set forth in Section 11(a)(ii) hereof
shall occur, then the Company shall as soon as practicable thereafter give to
each holder of a Rights Certificate, in accordance with Section 26 hereof, a
notice of the occurrence of such event, which notice shall describe such
event and the consequences of such event to holders of Rights under Section
11(a)(ii) hereof. In the event any Person becomes an Acquiring Person, the
Company will promptly notify the Rights Agent thereof.
Section 26. NOTICES. Notices or demands authorized by this Agreement
to be given or made by the Rights Agent or by the holder of any Rights
Certificate to or on the Company shall be sufficiently given or made if sent
by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Rights Agent) as follows:
Rhythms NetConnections Inc.
6933 South Revere Parkway
Englewood, Colorado 80112
Attention: President
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to or
31.
<PAGE>
on the Rights Agent shall be sent by registered or certified mail and shall
be deemed given upon receipt and addressed (until another address is filed in
writing with the Company) as follows:
American Securities Transfer & Trust, Inc.
1825 Lawrence Street, Suite 444
Denver, Colorado 80202-1817
Attention: Gregory D. Tubbs
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the
registry books of the Company.
Section 27. SUPPLEMENTS AND AMENDMENTS. Prior to the Distribution
Date, the Company may supplement or amend this Agreement in any respect,
without the approval of any holders of Rights, by action of its Board of
Directors, and the Rights Agent shall, if the Company so directs, execute
such supplement or amendment. From and after the Distribution Date, the
Company may from time to time supplement or amend this Agreement without the
approval of any holders of Rights, by action of its Board of Directors, in
order (i) to cure any ambiguity, (ii) to correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provisions herein, (iii) to shorten or lengthen any time period hereunder or
(iv) to change or supplement the provisions hereunder in any manner which the
Company may deem necessary or desirable and which shall not adversely affect
the interests of the holders of Rights Certificates (other than an Acquiring
Person or an Affiliate or Associate of an Acquiring Person), including,
without limitation, to change the Purchase Price, the Redemption Price, any
time periods herein specified, and any other term hereof, any such supplement
or amendment to be evidenced by a writing signed by the Company and the
Rights Agent; provided, however, that from and after such time as any Person
becomes an Acquiring Person, this Agreement shall not be amended in any
manner which would adversely affect the interests of the holders of Rights.
Upon receipt of a certificate from an appropriate officer of the Company that
the proposed supplement or amendment is consistent with this Section 27 and,
after such time as any Person has become an Acquiring Person, that the
proposed supplement or amendment does not adversely affect the interests of
the holders of Rights, the Rights Agent shall execute such supplement or
amendment.
Section 28. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS.
For all purposes of this Agreement, any calculation of the number of
shares of Common Stock outstanding at any particular time, including for
purposes of determining the particular percentage of such outstanding shares
of Common Stock of which any Person is the Beneficial Owner, shall be made in
accordance with the last sentence of Rule 13d-3(d)(1)(i) of the Exchange Act.
The Board of Directors of the Company shall have the exclusive power and
authority to administer this Agreement and to exercise all rights and powers
specifically granted to the Board of Directors, or the Company, or as may be
necessary or advisable in the administration of this Agreement, including,
without limitation, the right and power to (i) interpret the provisions
32.
<PAGE>
of this Agreement and (ii) make all determinations deemed necessary or
advisable for the administration of this Agreement (including a determination
to redeem or not redeem the Rights or to amend the Agreement). All such
actions, calculations, interpretations and determinations (including, for
purposes of clause (y) below, all omissions with respect to the foregoing),
which are done or made by the Board of Directors in good faith, shall (x) be
final, conclusive and binding on the Company, the Rights Agent, the holders
of the Rights Certificates and all other parties and (y) not subject the
Board of Directors to any liability to the holders of the Rights.]
Section 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
shall be construed to give to any person or corporation other than the
Company, the Rights Agent and the registered holders of the Rights
Certificates (and, prior to the Distribution Date, shares of Common Stock)
any legal or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the
Rights Agent and the registered holders of the Rights Certificates (and,
prior to the Distribution Date, shares of Common Stock).
Section 31. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated; provided, however, that notwithstanding anything in this
Agreement to the contrary, if any such term, provision, covenant or
restriction is held by such court or authority to be invalid, void or
unenforceable and the Board of Directors of the Company determines in its
good faith judgment that severing the invalid language from this Agreement
would adversely affect the purpose or effect of this Agreement, the right of
redemption set forth in Section 23 hereof shall be reinstated and shall not
expire until the tenth Business Day following the date of such determination
by the Board of Directors of the Company.
Section 32. GOVERNING LAW. This Agreement and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of California and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts
to be made and performed entirely within such State.
Section 33. COUNTERPARTS. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together
constitute but one and the same instrument.
Section 34. DESCRIPTIVE HEADINGS. Descriptive headings of the
several sections of this Agreement are inserted or convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
33.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and attested, all as of the day and year first above
written.
ATTEST: RHYTHMS NETCONNECTIONS INC.
By /s/ John A. Denniston By /s/ Catherine M. Hapka
------------------------------------ ------------------------------
Name: John A. Denniston Name: Catherine M. Hapka
Title: Esquire Title: President and CEO
ATTEST: AMERICAN SECURITIES TRANSFER &
TRUST, INC., as Rights Agent
By /s/ Kellie Gwinn By /s/ Laura Sisneros
------------------------------------ ------------------------------
Name: Kellie Gwinn Name: Laura Sisneros
Title: Senior Vice President Trust Title: Vice President Trust
Officer Officer
[SIGNATURE PAGE TO RIGHTS AGREEMENT]
<PAGE>
EXHIBIT A
FORM
of
CERTIFICATE OF DESIGNATION
of
SERIES 1 JUNIOR PARTICIPATING PREFERRED STOCK
of
RHYTHMS NETCONNECTIONS INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
-----------------------
Rhythms NetConnections Inc., a corporation organized and existing under
the General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation as required by Section 151 of the
General Corporation Law at a meeting duly called and held on March 27, 1999;
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of the Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the
Certificate of Incorporation, the Board of Directors hereby creates a series
of Preferred Stock, par value $0.001 per share (the "Preferred Stock"), of
the Corporation and hereby states the designation and number of shares, and
fixes the relative rights, preferences, and limitations thereof as follows:
Series 1 Junior Participating Preferred Stock:
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series 1 Junior Participating Preferred Stock" (the "Series 1
Preferred Stock") and the number of shares constituting the Series 1
Preferred Stock shall be One Million (1,000,000). Such number of shares may
be increased or decreased by resolution of the Board of Directors; PROVIDED,
that no decrease shall reduce the number of shares of Series 1 Preferred
Stock to a number less than the number of shares then outstanding plus the
number of shares reserved for issuance upon the exercise of outstanding
options, rights or warrants or upon the conversion of any outstanding
securities issued by the Corporation convertible into Series 1 Preferred
Stock.
A-1
<PAGE>
Section 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the rights of the holders of any shares of any series
of Preferred Stock (or any similar stock) ranking prior and superior to the
Series 1 Preferred Stock with respect to dividends, each holder of a share
of Series 1 Preferred Stock, in preference to the holders of shares of
Common Stock, par value $0.001 per share (the "Common Stock"), of the
Corporation, and of any other junior stock, shall be entitled to receive,
when declared by the Board of Directors out of funds legally available for
the purpose, quarterly dividends payable in cash on the last day of March,
June, September and December in each year (each such date being referred to
herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share Series 1 Preferred Stock, in an amount per share
(rounded to the nearest cent) equal to, subject to the provision for
adjustment hereinafter set forth, One Thousand (1,000) times the aggregate
per share amount of all cash dividends, and One Thousand (1,000) times the
aggregate per share amount (payable in kind) of all non-cash dividends or
other distributions, other than a dividend payable in shares of Common
Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of a
share or fraction of Series 1 Preferred Stock. In the event the
Corporation shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the amount to which holders of shares of Series 1
Preferred Stock were entitled immediately prior to such event under clause
(b) of the preceding sentence shall be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which
is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
shares of Series 1 Preferred Stock as provided in paragraph (A) of this
Section immediately after it declares a dividend or distribution on the
Common Stock (other than a dividend payable in shares of Common Stock);
provided, however, that, in the event no dividend or distribution shall
have been declared on the Common Stock during the period between any
Quarterly Distribution Date and the next subsequent Quarterly Dividend
Payment Date, a dividend of $1.15 per share of Series 1 Preferred Stock
shall nevertheless be payable on such subsequent Quarterly Dividend Payment
Date.
(C) Dividends shall begin to accrue and be cumulative on each
outstanding share of Series 1 Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue of such
share of Series 1 Participating Preferred Stock, unless the date of issue
of such share is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such share shall begin to accrue
from the date of issue of such share, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders
A-2
<PAGE>
of shares of Series 1 Preferred Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date, in either of
which events such dividends shall begin to accrue and be cumulative from
such Quarterly Dividend Payment Date. Accrued but unpaid dividends
shall not bear interest. Dividends paid on the shares of Series 1
Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at
the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series 1 Preferred Stock
entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days prior to the
date fixed for the payment thereof.
Section 3. VOTING RIGHTS. The holders of shares of Series 1 Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each share of Series 1 Preferred Stock shall entitle the holder thereof to
One Thousand (1,000) votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at any
time declare or pay any dividend on the Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of
the outstanding shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each such case the number
of votes per share to which holders of shares of Series 1 Preferred Stock
were entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock, or
by law, the holders of shares of Series 1 Preferred Stock and the holders
of shares of Common Stock and any other capital stock of the Corporation
having general voting rights shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by law,
holders of Series 1 Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled
to vote with holders of Common Stock as set forth herein) for taking any
corporate action.
Section 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series 1 Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series 1 Preferred
Stock outstanding shall have been paid in full, the Corporation shall not:
A-3
<PAGE>
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Series 1 Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up) with the
Series 1 Preferred Stock, except dividends paid ratably on the shares
of Series 1 Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts
to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Series 1 Preferred Stock, provided that the Corporation may at any
time redeem, purchase or otherwise acquire shares of any such junior
stock in exchange for shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution, liquidation or
winding up) to the Series 1 Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series 1 Preferred Stock, or any shares of
stock ranking on a parity with the Series 1 Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares
upon such terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in
good faith will result in fair and equitable treatment among the
respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph
(A) of this Section 4, purchase or otherwise acquire such shares at such
time and in such manner.
Section 5. REACQUIRED SHARES. Any shares of Series 1 Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other Certificate of Designations
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(A) Upon any liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (1) to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series 1 Preferred Stock unless, prior
thereto, the holders of shares of Series 1 Preferred Stock shall have
received One Thousand Dollars ($1,000) per share, plus an amount equal to
accrued and unpaid
A-4
<PAGE>
dividends and distributions thereon, whether or not declared, to the
date of such payment, provided that the holders of shares of Series 1
Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth,
equal to 1,000 times the aggregate amount to be distributed per share to
holders of shares of Common Stock, or (2) to the holders of shares of
stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series 1 Preferred Stock, except
distributions made ratably on the Series 1 Preferred Stock and all such
parity stock in proportion to the total amounts to which the holders of
all such shares are entitled upon such liquidation, dissolution or
winding up. In the event the Corporation shall at any time declare or
pay any dividend on the Common Stock payable in shares of Common Stock,
or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) into a greater
or lesser number of shares of Common Stock, then in each such case the
aggregate amount to which holders of shares of Series 1 Preferred Stock
were entitled immediately prior to such event under the proviso in
clause (1) of the preceding sentence shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares
of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstandng immediately prior to such event.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full to the Series 1 Liquidation Preference
and the liquidation preferences of all other series of Preferred Stock, if
any, which rank on a parity with the Series 1 Participating Preferred
Stock, then such remaining assets shall be distributed ratably to the
holders of such parity shares in proportion to their respective liquidation
preferences. In the event, however, that there are not sufficient assets
available to permit payment in full of the Common Adjustment, then such
remaining assets shall be distributed ratably to the holders of Common
Stock.
(C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then
in each such case the Adjustment Number in effect immediately prior to such
event shall be adjusted by multiplying such Adjustment Number by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such
event.
Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series 1 Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to One Thousand (1,000) times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of
A-5
<PAGE>
Common Stock (by reclassification or otherwise than by payment of a dividend in
shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the amount set forth in the preceding sentence
with respect to the exchange or change of shares of Series 1 Preferred Stock
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
Section 8. NO REDEMPTION. The shares of Series 1 Preferred Stock shall
not be redeemable.
Section 9. RANK. The Series 1 Preferred Stock shall rank, with respect
to the payment of dividends and the distribution of assets, junior to all
series of any other class of the Corporation's Preferred Stock.
Section 10. AMENDMENT. The Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter
or change the powers, preferences or special rights of the Series 1 Preferred
Stock so as to affect them adversely without the affirmative vote of the
holders of at least a majority of the outstanding shares of Series 1
Preferred Stock, voting together as a single class.
A-6
<PAGE>
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Corporation by its Chief Financial Officer this 2nd day of April 1999.
-----------------------------------
Name: Scott C. Chandler
Title: Chief Financial Officer
<PAGE>
EXHIBIT B
Form of Rights Certificate
Certificate No. R- ________ Rights
NOT EXERCISABLE AFTER ____________________ OR EARLIER IF
REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO
REDEMPTION AT THE OPTION OF THE COMPANY AT $.__ PER RIGHT
AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS
AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY
OWNED BY AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF
AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS
AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY
BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS
RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A
PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE
OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE
DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS
CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME
NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SUCH
AGREEMENT.](*)/
Rights Certificate
Rhythms NetConnections Inc.
This certifies that ____________________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of __________ (the "Rights Agreement"), between Rhythms
NetConnections Inc., a Delaware corporation (the "Company"), and American
Securities Transfer & Trust, Inc. (the "Rights Agent"), to purchase from the
Company at any time after the Distribution Date (as such term is defined in the
Rights Agreement) and prior to 5:00 P.M., California time, on ________________
at the office of the Rights Agent designated for such purpose, or at the office
of its successor as Rights Agent, one one-thousandth (a "Unit") of a fully paid
non-assessable share of Series 1 Junior Participating
(*) The portion of the legend in bracket shall be inserted only if
applicable and shall replace the preceding sentence.
B-1
<PAGE>
Preferred Stock, par value $.001 per share (the "Series 1 Preferred Stock") of
the Company, at a purchase price of $115 per Unit of Series 1 Preferred Stock
(the "Purchase Price"), upon presentation and surrender of this Rights
Certificate with the Form of Election to Purchase duly executed. The number of
Rights evidenced by this Rights Certificate (and the number of Units of Series 1
Preferred Stock which may be purchased upon exercise hereof) set forth above,
and the Purchase Price set forth above, are the number and Purchase Price as of
____________ based on the Series 1 Preferred Stock as constituted at such date.
As provided in the Rights Agreement, the Purchase Price and the number of Units
of Series 1 Preferred Stock which may be purchased upon the exercise of the
Rights evidenced by this Rights Certificate are subject to modification and
adjustment upon the happening of certain events.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company.
This Rights Certificate, with or without other Rights Certificates, upon
surrender at the office of the Rights Agent designated for such purpose, may be
exchanged for another Rights Certificate or Rights Certificates of like tenor
and date evidencing Rights entitling the holder to purchase a like aggregate
number of Series 1 Preferred Stock as the Rights evidenced by the Rights
Certificate or Rights Certificates surrendered shall have entitled such holder
to purchase. If this Rights Certificate shall be exercised in part, the holder
shall be entitled to receive upon surrender hereof another Rights Certificate or
Rights Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Certificate may be redeemed by the Company at a redemption price of $.001
per Right.
No fractional shares of Series 1 Preferred Stock will be issued upon the
exercise of any Rights or Rights evidenced hereby (other than fractions which
are integral multiples of one one-thousandth of a share of Series 1 Preferred
Stock, which may, at the election of the Company, be evidenced by depositary
receipts), but in lieu thereof a cash payment will be made, as provided in the
Rights Agreement.
No holder of this Rights Certificate, as such, shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of Units of Series 1
Preferred Stock or of any other securities of the Company which may at any time
be issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Rights or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
B-2
<PAGE>
This Rights Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the signature of the proper officers of the Company and its
corporate seal. Dated as of ______________.
RHYTHMS NETCONNECTIONS INC.
ATTEST:
By By
-------------------------------- -----------------------------------
Name: Name:
Title: Title:
Countersigned:
,
- -------------------------------------
as Rights Agent
By
--------------------------------
Authorized Signatory
B-3
<PAGE>
Form of Reverse Side of Rights Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED ____________________ hereby sells, assigns and transfers
unto
- -------------------------------------------------------------------------------
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ____________________
Attorney, to transfer the within Rights Certificate on the books of the
within-named Company, with full power of substitution.
Dated: __________, ____
----------------------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a participant in a Securities Transfer
Association Inc. recognized signature guarantee medallion program.
B-4
<PAGE>
CERTIFICATE
The undersigned hereby certifies that the Rights evidenced by this Rights
Certificate are not beneficially owned by an Acquiring Person or an Affiliate or
Associate thereof (as defined in the Rights Agreement).
---------------------------------------------
Signature
--------------------------------
NOTICE
The signature in the foregoing Form of Assignment must conform to the name
as written upon the face of this Rights Certificate in every particular, without
alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of Assignment is
not completed, the Company and the Rights Agent will deem the beneficial owner
of the Rights evidenced by this Rights Certificate to be an Acquiring Person or
an Affiliate or Associate thereof (as defined in the Rights Agreement) and such
Assignment will not be honored.
B-5
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Rights Certificate.)
To Rhythms NetConnections Inc.
The undersigned hereby irrevocably elects to exercise ____________________
Rights represented by this Rights Certificate to purchase the units of Series 1
Preferred Stock issuable upon the exercise of such Rights and requests that
certificates for such Series 1 Preferred Stock be issued in the name of:
Please insert social security
or other identifying number
--------------------------------------------------
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Rights
Certificate, a new Rights Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
--------------------------------------------------
(Please print name and address)
Dated: __________, ____
--------------------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a participant in a Securities Transfer
Association Inc. recognized signature guarantee medallion program.
B-6
<PAGE>
CERTIFICATE
The undersigned hereby certifies that the Rights evidenced by this Rights
Certificate are not beneficially owned by an Acquiring Person or an Affiliate or
Associate thereof (as defined in the Rights Agreement).
---------------------------------------------
Signature
-------------------------------------
NOTICE
The signature in the foregoing Form of Election to Purchase must conform to
the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of Election to
Purchase, as the case may be, is not completed, the Company and the Rights Agent
will deem the beneficial owner of the Rights evidenced by this Rights
Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as
defined in the Rights Agreement) and such Election to Purchase will not be
honored.
B-7
<PAGE>
Exhibit C
RHYTHMS NETCONNECTIONS INC.
SUMMARY OF RIGHTS TO PURCHASE
SHARES OF SERIES 1 PREFERRED STOCK
On March 27, 1999, the Board of Directors of Rhythms NetConnections Inc.
(the "Company") declared a dividend of one preferred share purchase right (a
"Right") for each outstanding share of Common Stock (the "Common Stock"), par
value $0.001 per share, and Preferred Stock (the "Preferred Stock"), par value
$0.001 per share, of the Company. The dividend is payable on April 6, 1999 (the
"Record Date") to the stockholders of record on that date. Each Right entitles
the registered holder to purchase from the Company one one-thousandth of a share
(a "Unit") of Series 1 Junior Participating Preferred Stock, par value $0.001
per share (the "Series 1 Preferred Stock"), of the Company at a price of $115
per Unit (the "Purchase Price"), subject to adjustment. The description and
terms of the Rights are set forth in a Rights Agreement dated as of April 2,
1999 (the "Rights Agreement") between the Company and American Securities
Transfer & Trust, Inc., as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") have acquired beneficial ownership of 15% or more of the outstanding
Common Stock or (ii) 10 business days (or such later date as may be determined
by action of the Board of Directors prior to such time as any Person becomes an
Acquiring Person) following the commencement of, or announcement of an intention
to make, a tender offer or exchange offer the consummation of which would result
in the beneficial ownership by a person or group of 15% or more of such
outstanding Common Stock (the earlier of such dates being called the
"Distribution Date"), the Rights will be evidenced, with respect to any of the
Common Stock certificates outstanding as of the Record Date, by such Common
Stock certificate with a copy of this Summary of Rights attached thereto.
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with the Common Stock. Until the Distribution
Date (or earlier redemption or expiration of the Rights), new Common Stock
certificates issued after the Record Date, upon transfer or new issuance of
Common Stock will contain a notation incorporating the Rights Agreement by
reference. Until the Distribution Date (or earlier redemption or expiration of
the Rights), the surrender for transfer of any certificates for Common Stock,
outstanding as of the Record Date, even without such notation or a copy of this
Summary of Rights being attached thereto, will also constitute the transfer of
the Rights associated with the Common Stock represented by such certificate. As
soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Rights Certificates") will be mailed to holders of
record of the Common Stock as of the Close of Business on the Distribution Date
and such separate Rights Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire at the close of business on April 2, 2009 (the "Final Expiration
Date"), unless the Final Expiration Date
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<PAGE>
is extended or unless the Rights are earlier redeemed or exchanged by the
Company, in each case as described below.
The Purchase Price payable, and the number of Units of Preferred Stock
or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event
of a stock dividend on, or a subdivision, combination or reclassification of,
the Preferred Stock, (ii) upon the grant to holders of the Units of Preferred
Stock of certain rights or warrants to subscribe for or purchase Units of
Preferred Stock at a price, or securities convertible into Units of Preferred
Stock with a conversion price, less than the then current market price of the
Units of Preferred Stock or (iii) upon the distribution to holders of the
Units of Preferred Stock of evidences of indebtedness or assets (excluding
regular periodic cash dividends paid out of earnings or retained earnings or
dividends payable in Units of Preferred Stock) or of subscription rights or
warrants (other than those referred to above).
The number of outstanding Rights and the number of Units of Preferred
Stock issuable upon exercise of each Right are also subject to adjustment in
the event of a stock split of the Common Stock or a stock dividend on the
Common Stock payable in Common Stock or subdivisions, consolidations or
combinations of the Common Stock occurring, in any such case, prior to the
Distribution Date.
Units of Preferred Stock purchasable upon exercise of the Rights will
not be redeemable. Each Unit of Preferred Stock will be entitled to a
dividend equal to any dividend declared per share of Common Stock. In the
event of liquidation, each Unit of Preferred Stock will be entitled to a
payment equal to any payment made per share of Common Stock. Each Unit of
Preferred Stock will have one vote, voting together with the Common Stock.
Finally, in the event of any merger, consolidation or other transaction in
which shares of Common Stock are exchanged, each Unit of Preferred Stock will
be entitled to receive an amount equal to the amount received per share of
Common Stock. These rights are protected by customary anti-dilution
provisions.
Because of the nature of the dividend, liquidation and voting rights,
the value of each Unit of Preferred Stock purchasable upon exercise of the
Rights should approximate the value of one share of Common Stock.
In the event that, after the Rights become exercisable, the Company is
acquired in a merger or other business combination transaction with an
Acquiring Person or an affiliate thereof, or 50% or more of its consolidated
assets or earning power are sold to an Acquiring Person or an affiliate
thereof, proper provision will be made so that each holder of a Right will
thereafter have the right to receive, upon exercise thereof at the then
current exercise price of the Rights, that number of shares of common stock
of the acquiring company which at the time of such transaction will have a
market value of two times the exercise price of the Rights.
In the event that any person or group of affiliated or associated
persons becomes the beneficial owner of 15% or more of the outstanding shares
of Common Stock, proper provision shall be made so that each holder of a
Right, other than Rights beneficially owned by the Acquiring Person (which
will thereafter be void), will thereafter have the right to receive upon
exercise that number of shares of Common Stock or Units of Preferred Stock
(or cash, other securities or property) having a market value of two times
the exercise price of the Rights.
C-2
<PAGE>
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 15% or more of the outstanding
shares of Common Stock and prior to the acquisition by such person or group
of 50% or more of the outstanding Common Stock, the Board of Directors of the
Company may exchange all or part of the Rights (other than Rights owned by
such person or group which have become void) for Units of Preferred Stock at
an exchange ratio of (subject to adjustment) which shall equal, subject to
adjustment to reflect stock splits, stock dividends and similar transactions
occurring after the date hereof, that number obtained by dividing the
Purchase Price by the then current per share market price per Unit of
Preferred Stock on the earlier of (i) the date on which any Person becomes an
Acquiring Person and (ii) the date on which a tender or exchange offer is
announced by any Person, if upon consummation thereof such Person would be
the Beneficial Owner of 15% or more of the shares of Company Common Stock
then outstanding.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Preferred Stock will be issued
(other than fractions which are integral multiples of one one-thousandth of a
share of Preferred Stock, which may, at the election of the Company, be
evidenced by depositary receipts) and, in lieu thereof, an adjustment in cash
will be made based on the market price of the Units of Preferred Stock on the
last trading day prior to the date of exercise.
At any time within ten (10) business days after a person or group of
affiliated or associated persons acquire beneficial ownership of 15% or more
of the outstanding Common Stock (unless the Board of Directors extend such
ten-day period), the Board of Directors of the Company may redeem the Rights
in whole, but not in part, at a price of $0.001 per Right (the "Redemption
Price"). The redemption of the rights may be made effective at such time on
such basis and with such conditions as the Board of Directors in its sole
discretion may establish. Immediately upon any redemption of the Rights, the
right to exercise the Rights will terminate and the only right of the holders
of Rights will be to receive the Redemption Price. The Rights are also
redeemable under other circumstances as specified in the Rights Agreement.
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights except that from and
after a Distribution Date no such amendment may adversely affect the
interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the
right to vote or to receive dividends.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the
Company on terms not approved by the Company's Board of Directors, except
pursuant to an offer conditioned on a substantial number of rights being
acquired. The Rights should not interfere with any merger or other business
combination approved by the Board of Directors because the Rights may be
redeemed by the Company at the Redemption Price prior to the occurrence of a
Distribution Date.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement. A copy of the
Rights Agreement is available free of charge from the Company. This summary
description of the Rights does not
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<PAGE>
purport to be complete and is qualified in its entirety by reference to the
Rights Agreement, which is hereby incorporated herein by reference.
C-4
<PAGE>
EXHIBIT 9.5
VOTING AGREEMENT
This Voting Agreement (this "Agreement") is made as of the 6th day of
April, 1999, by and among Rhythms NetConnections Inc., a Delaware corporation
(the "Company") and the parties listed on the Schedule of Investors attached
hereto as Schedule A (the "Series C Investors").
RECITALS
A. The Series C Investors desire to purchase from the Company and/or
already hold shares of the Company's Series C Preferred Stock (the "Series C
Shares"), and the Company desires to sell such Series C Shares (not currently
held) to the Series C Investors;
B. The parties desire that MCI WorldCom Venture Fund, Inc. ("MCI WorldCom")
be given the right to designate one (1) nominee to serve on the Company's Board
of Directors (the "MCI WorldCom Director");
C. The Series C Investors and the Company acknowledge that they are
entering into this Voting Agreement in consideration of the purchase of the
Series C Shares by certain of the Series C Investors pursuant to that certain
Series C Preferred Stock and Warrant Purchase Agreement dated as of the date
hereof (the "Purchase Agreement").
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. MCI WORLDCOM DIRECTOR. During the term of this Agreement, each of the
Series C Investors agrees to vote all of its Series C Shares now or hereafter
owned by it as follows:
(a) for so long as MCI WorldCom holds at least 1,000,000 Series C
Shares, (i) to elect the nominee of MCI WorldCom (the "MCI WorldCom Nominee") as
the MCI WorldCom Director and (ii) if requested by MCI WorldCom, to remove the
incumbent MCI WorldCom Nominee and elect a new MCI WorldCom Nominee as the MCI
WorldCom Director or to fill a vacancy created by death of such MCI WorldCom
Nominee or otherwise.
(b) MCI WorldCom shall designate the MCI WorldCom Nominee in writing
to the Company prior to each election of directors of the Company. The Company
shall promptly notify each of the Series C Investors of the nomination of the
MCI WorldCom Nominee by MCI WorldCom. Any vacancy occurring because of the
death, resignation, removal or disqualification of the MCI WorldCom Nominee
shall be filled according to this Section 1.
2. SUCCESSORS IN INTEREST.
(a) The provisions of this Agreement shall be binding upon the
successors in interest to any of the Series C Shares. The Company shall not
permit the transfer of any of the Series C Shares on its books or issue new
certificates representing any shares of such securities unless and until the
person(s) to whom such shares are to be transferred shall have executed a
written agreement, substantially in the form of this Agreement, pursuant to
which such person
<PAGE>
becomes a party to this Agreement, and agrees to be bound by all the provisions
hereof as if such person was a party hereunder.
(b) Each certificate representing any of the Series C Shares shall
bear a legend reading as follows:
"The shares evidenced hereby are subject to the terms
of a Voting Agreement (a copy of which may be
obtained without charge from the issuer), and by
accepting any interest in such shares the person
accepting such interest shall be deemed to agree to
and shall become bound by all the provisions of such
Voting Agreement."
3. TERMINATION. This Agreement shall terminate upon the date the Company
consummates an under-written public offering of its Common Stock under the
Securities Act of 1933, as amended.
4. AMENDMENTS AND WAIVERS. Any term hereof may be amended and the
observance of any term hereof may be waived (either generally or in a particular
instance and either retroactively or prospectively) only with the written
consent of (a) the Company and (b) the Series C Investors, or their assigns,
holding not less than 55% of the Series C Shares then outstanding. Any amendment
or waiver so effected shall be binding upon the Company and all Series C
Investors subject to the terms of this Agreement, whether or not such party,
assignee, or other stockholder entered into or approved such amendment or
waiver.
5. STOCK SPLITS, STOCK DIVIDENDS, ETC. In the event of any stock split,
stock dividend, recapitalization, reorganization, or the like, any securities
issued with respect to the Series C Shares shall become subject to this
Agreement and shall be endorsed with the legend set forth in Section 2(b)
hereof.
6. ENFORCEABILITY/SEVERABILITY. The parties hereto agree that each
provision of this Agreement shall be interpreted in such a manner as to be
effective and valid under applicable law. If any provision of this Agreement
shall nevertheless be held to be prohibited by or invalid under applicable law,
(a) such provision shall be effective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement, and (b) the parties shall, to the extent
permissible by applicable law, amend this Agreement, or enter into a voting
trust agreement under which the Series C Shares shall be transferred to the
voting trust created thereby, so as to make effective and enforceable the intent
of this Agreement.
7. GOVERNING LAW. This Agreement shall be governed by and construed under
the laws of the State of Delaware as applied to contracts among Delaware
residents entered into and to be performed entirely within Delaware.
8. 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.
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<PAGE>
9. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided in this
Agreement, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors and assigns of the parties hereto.
10. NOTICES. All notices, requests and other communications to the Company
or any of the Investors hereunder shall be in writing, shall refer specifically
to this Agreement and shall be personally delivered or sent by facsimile
transmission, overnight delivery with a nationally recognized overnight delivery
service or by registered or certified mail, return receipt requested, postage
prepaid, in each case to the respective address specified in the preamble hereof
with respect to the Company and in the Schedule of Investors attached as
Schedule A hereto with respect to the Series C Investors (or such other address
as may be specified in writing to the other parties hereto). Any notice or
communication given in conformity with this Section 10 shall be deemed to be
effective when received by the addressee, if delivered by hand or facsimile
transmission, one (1) business day after deposit with a nationally recognized
overnight delivery service and three (3) days after mailing by first class U.S.
Mail.
11. EQUITABLE REMEDIES. The Company and the Series C Investors acknowledge
and agree that the legal remedies available to the Company and the Series C
Investors in the event any party violates the covenants and agreements made in
this Agreement would be inadequate and that the Company and each of the Series C
Investors shall be entitled, without posting any bond or other security, to
temporary, preliminary, and permanent injunctive relief, specific performance
and other equitable remedies in the event of such a violation, in addition to
any other remedies which the Company or any of the Series C Investors may have
at law or in equity.
12. FURTHER ASSURANCES. Each of the parties hereto shall execute and
deliver all additional documents and instruments and shall do any and all acts
and things reasonably requested in connection with the performance of the
obligations undertaken in this Agreement and/or otherwise to effectuate in good
faith the intent of the parties.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year hereinabove first written.
THE COMPANY:
RHYTHMS NETCONNECTIONS INC.
By: /s/ Catherine Hapka
-----------------------------------
Catherine M. Hapka, President and
Chief Executive Officer
THE SERIES C INVESTORS:
U.S. TELESOURCE, INC.
By: /s/ Marc B. Weisberg
-----------------------------------
Its: President & Chief Executive Officer
-------------------------------------
Address: 700 Qwest Tower
555 17th Street
Denver, CO 80202
MCI WORLDCOM VENTURE FUND, INC.
By: /s/ Susan Mayer
-----------------------------------
Its: President
-----------------------------------
Address: 1801 Pennsylvana Avenue, N.W.
-----------------------------------
Washington, D.C. 20006
-----------------------------------
<PAGE>
SCHEDULE A
SCHEDULE OF SERIES C INVESTORS
NAME AND ADDRESS OF SERIES C INVESTORS
U.S. Telesource, Inc.
700 Qwest Tower
555 17th Street
Denver, CO 80202
MCI WorldCom Venture Fund, Inc.
1801 Pennsylvania Avenue, N.W.
- -------------------------------
Washington, D.C. 20006
- -------------------------------
<PAGE>
EXHIBIT 10.18
RHYTHMS NETCONNECTIONS INC.
1999 STOCK INCENTIVE PLAN
As Amended and Restated March 27, 1999
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1999 Stock Incentive Plan is intended to promote the interests of
Rhythms NetConnections Inc., a Delaware corporation, by providing eligible
persons in the Corporation's service with the opportunity to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Corporation as an incentive for them to remain in such service.
Capitalized terms shall have the meanings assigned to such terms in the
attached Appendix.
All share numbers in the Plan reflect the six (6)-for-five (5) stock
split effected on March 19, 1999.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity programs:
- the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock,
- the Salary Investment Option Grant Program under which
eligible employees may elect to have a portion of their base salary invested
each year in special option grants,
- the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of Common
Stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered the Corporation (or any Parent or Subsidiary),
- the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive option grants at
designated intervals over their period of continued Board service, and
- the Director Fee Option Grant Program under which
non-employee Board members may elect to have all or any portion of their
annual retainer fee otherwise payable in cash applied to a special stock
option grant.
B. The provisions of Articles One and Seven shall apply to all
equity programs under the Plan and shall govern the interests of all persons
under the Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive authority
to administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option
Grant and Stock Issuance Programs with respect to all other persons eligible
to participate in those programs may, at the Board's discretion, be vested in
the Primary Committee or a Secondary Committee, or the Board may retain the
power to administer those programs with respect to all such persons.
However, any discretionary option grants or stock issuances for members of
the Primary Committee shall be made by a disinterested majority of the Board.
B. Members of the Primary Committee or any Secondary Committee
shall serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may also at any time terminate
the functions of any Secondary Committee and reassume all powers and
authority previously delegated to such committee.
Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority
(subject to the provisions of the Plan) to establish such rules and
regulations as it may deem appropriate for proper administration of the
Discretionary Option Grant and Stock Issuance Programs and to make such
determinations under, and issue such interpretations of, the provisions of
those programs and any outstanding options or stock issuances thereunder as
it may deem necessary or advisable. Decisions of the Plan Administrator
within the scope of its administrative functions under the Plan shall be
final and binding on all parties who have an interest in the Discretionary
Option Grant and Stock Issuance Programs under its jurisdiction or any option
or stock issuance thereunder.
C. The Primary Committee shall have the sole and exclusive
authority to determine which Section 16 Insiders and other highly compensated
Employees shall be eligible for participation in the Salary Investment Option
Grant Program for one or more calendar years. However, all option grants
under the Salary Investment Option Grant Program shall be made in accordance
with the express terms of that program, and the Primary Committee shall not
exercise any discretionary functions with respect to the option grants made
under that program.
D. Service on the Primary Committee or the Secondary Committee
shall constitute service as a Board member, and members of each such
committee shall accordingly be entitled to full indemnification and
reimbursement as Board members for their service on such committee. No
member of the Primary Committee or the Secondary Committee shall be liable
for any act or omission made in good faith with respect to the Plan or any
option grants or stock issuances under the Plan.
E. Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the terms of
those programs, and no Plan Administrator shall exercise any discretionary
functions with respect to any option grants or stock issuances made under
those programs.
2.
<PAGE>
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors
who provide services to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive such grants, the time or times
when those grants are to be made, the number of shares to be covered by each
such grant, the status of the granted option as either an Incentive Option or
a Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares
and the maximum term for which the option is to remain outstanding and (ii)
with respect to stock issuances under the Stock Issuance Program, which
eligible persons are to receive such issuances, the time or times when the
issuances are to be made, the number of shares to be issued to each
Participant, the vesting schedule (if any) applicable to the issued shares
and the consideration for such shares.
D. The Plan Administrator shall have the absolute discretion
either to grant options in accordance with the Discretionary Option Grant
Program or to effect stock issuances in accordance with the Stock Issuance
Program.
E. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals who
first become non-employee Board members on or after the Underwriting Date,
whether through appointment by the Board or election by the Corporation's
stockholders, and (ii) those individuals who continue to serve as
non-employee Board members at one or more Annual Stockholders Meetings held
after the Underwriting Date. A non-employee Board member who has previously
been in the employ of the Corporation (or any Parent or Subsidiary) shall not
be eligible to receive an option grant under the Automatic Option Grant
Program at the time he or she first becomes a non-employee Board member, but
shall be eligible to receive periodic option grants under the Automatic
Option Grant Program while he or she continues to serve as a non-employee
Board member.
F. All non-employee Board members shall be eligible to
participate in the Director Fee Option Grant Program.
3.
<PAGE>
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares
repurchased by the Corporation on the open market. The number of shares of
Common Stock initially reserved for issuance over the term of the Plan shall
not exceed 8,161,944 shares. Such reserve shall consist of (i) the number of
shares estimated to remain available for issuance, as of the Plan Effective
Date, under the Predecessor Plan as last approved by the Corporation's
stockholders, including the shares subject to outstanding options under that
Predecessor Plan, (ii) plus an additional increase of approximately 5,500,000
shares to be approved by the Corporation's stockholders prior to the
Underwriting Date.
B. The number of shares of Common Stock available for issuance
under the Plan shall automatically increase on the first trading day of
January each calendar year during the term of the Plan, beginning with
calendar year 2000, by an amount equal to four percent (4%) of the total
number of shares of Common Stock outstanding on the last trading day in
December of the immediately preceding calendar year, but in no event shall
any such annual increase exceed 2,880,000 shares.
C. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances
for more than 900,000 shares of Common Stock in the aggregate per calendar
year.
D. Shares of Common Stock subject to outstanding options
(including options incorporated into this Plan from the Predecessor Plan)
shall be available for subsequent issuance under the Plan to the extent (i)
those options expire or terminate for any reason prior to exercise in full or
(ii) the options are cancelled in accordance with the cancellation-regrant
provisions of Article Two. Unvested shares issued under the Plan and
subsequently cancelled or repurchased by the Corporation at the original
issue price paid per share, pursuant to the Corporation's repurchase rights
under the Plan shall be added back to the number of shares of Common Stock
reserved for issuance under the Plan and shall accordingly be available for
reissuance through one or more subsequent option grants or direct stock
issuances under the Plan. However, should the exercise price of an option
under the Plan be paid with shares of Common Stock or should shares of Common
Stock otherwise issuable under the Plan be withheld by the Corporation in
satisfaction of the withholding taxes incurred in connection with the
exercise of an option or the vesting of a stock issuance under the Plan, then
the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is
exercised or which vest under the stock issuance, and not by the net number
of shares of Common Stock issued to the holder of such option or stock
issuance. Shares of Common Stock underlying one or more stock appreciation
rights exercised under Section IV of Article Two, Section III of Article
Three, Section II of Article Five or Section III of Article Six of the Plan
shall NOT be available for subsequent issuance under the Plan.
E. If any change is made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as
a class without the Corporation's receipt of
4.
<PAGE>
consideration, appropriate adjustments shall be made by the Plan
Administrator to (i) the maximum number and/or class of securities issuable
under the Plan, (ii) the number and/or class of securities for which any one
person may be granted stock options, separately exercisable stock
appreciation rights and direct stock issuances under the Plan per calendar
year, (iii) the number and/or class of securities for which grants are
subsequently to be made under the Automatic Option Grant Program to new and
continuing non-employee Board members, (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option under the Plan, (v) the number and/or class of securities and price
per share in effect under each outstanding option incorporated into this Plan
from the Predecessor Plan and (vi) the maximum number and/or class of
securities by which the share reserve is to increase automatically each
calendar year pursuant to the provisions of Section V.B of this Article One.
Such adjustments to the outstanding options are to be effected in a manner
which shall preclude the enlargement or dilution of rights and benefits under
such options. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive.
5.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; PROVIDED, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Seven and the documents evidencing the option, be payable in one or more
of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(iii) to the extent the option is exercised for
vested shares, through a special sale and remittance procedure
pursuant to which the Optionee shall concurrently provide irrevocable
instructions to (a) a Corporation-designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement
date, sufficient funds to cover the aggregate exercise price payable
for the purchased shares plus all applicable Federal, state and local
income and employment taxes required to be withheld by the Corporation
by reason of such exercise and (b) the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm
in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable
at such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.
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C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the
Optionee's cessation of Service for any reason shall remain
exercisable for such period of time thereafter as shall be determined
by the Plan Administrator and set forth in the documents evidencing
the option, but no such option shall be exercisable after the
expiration of the option term.
(ii) Any option held by the Optionee at the time of
death and exercisable in whole or in part at that time may be
subsequently exercised by the personal representative of the
Optionee's estate or by the person or persons to whom the option is
transferred pursuant to the Optionee's will or in accordance with the
laws of descent and distribution or by the Optionee's designated
beneficiary or beneficiaries of that option.
(iii) Should the Optionee's Service be terminated
for Misconduct, then all outstanding options held by the Optionee
shall terminate immediately and cease to be outstanding.
(iv) During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than
the number of vested shares for which the option is exercisable on the
date of the Optionee's cessation of Service. Upon the expiration of
the applicable exercise period or (if earlier) upon the expiration of
the option term, the option shall terminate and cease to be
outstanding for any vested shares for which the option has not been
exercised. However, the option shall, immediately upon the Optionee's
cessation of Service, terminate and cease to be outstanding to the
extent the option is not otherwise at that time exercisable for vested
shares.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is
to remain exercisable following the Optionee's cessation of Service
from the limited exercise period otherwise in effect for that option
to such greater period of time as the Plan Administrator shall deem
appropriate, but in no event beyond the expiration of the option term,
and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but
also with respect to one or more additional installments in which the
Optionee would have vested had the Optionee continued in Service.
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D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares,
the Corporation shall have the right to repurchase, at the exercise price paid
per share, any or all of those unvested shares. The terms upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall be
established by the Plan Administrator and set forth in the document evidencing
such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, a Non-Statutory
Option may, in connection with the Optionee's estate plan, be assigned in whole
or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for one or
more such family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate. Notwithstanding the foregoing, the Optionee may also
designate one or more persons as the beneficiary or beneficiaries of his or her
outstanding options under this Article Two, and those options shall, in
accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee's death while holding those
options. Such beneficiary or beneficiaries shall take the transferred options
subject to all the terms and conditions of the applicable agreement evidencing
each such transferred option, including (without limitation) the limited time
period during which the option may be exercised following the Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall NOT be subject to the terms of this Section
II.
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
B. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent
the Employee holds two (2) or more such options which become exercisable for the
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first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
C. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for the total number of shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully vested shares of Common Stock. However, an outstanding option shall NOT
become exercisable on such an accelerated basis if and to the extent: (i) such
option is, in connection with the Corporate Transaction, to be assumed by the
successor corporation (or parent thereof) or (ii) such option is to be replaced
with a cash incentive program of the successor corporation which preserves the
spread existing at the time of the Corporate Transaction on any shares for which
the option is not otherwise at that time exercisable and provides for subsequent
payout in accordance with the same exercise/vesting schedule applicable to those
option shares or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option grant.
B. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
PROVIDED the aggregate exercise price payable for such securities shall remain
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances
under the Plan per calendar year and (iv) the maximum number and/or class of
securities by which the share reserve is to increase automatically each calendar
year.
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E. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effect date of
such Corporate Transaction, become fully exercisable for the total number of
shares of Common Stock at the time subject to those options and may be exercised
for any or all of those shares as fully vested shares of Common Stock, whether
or not those options are to be assumed in the Corporate Transaction. In
addition, the Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the
Discretionary Option Grant Program so that those rights shall not be assignable
in connection with such Corporate Transaction and shall accordingly terminate
upon the consummation of such Corporate Transaction, and the shares subject to
those terminated rights shall thereupon vest in full.
F. The Plan Administrator shall have full power and authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall become fully exercisable for the total
number of shares of Common Stock at the time subject to those options in the
event the Optionee's Service is subsequently terminated by reason of an
Involuntary Termination within a designated period (not to exceed eighteen (18)
months) following the effective date of any Corporate Transaction in which those
options are assumed and do not otherwise accelerate. Any options so accelerated
shall remain exercisable for fully vested shares until the EARLIER of (i) the
expiration of the option term or (ii) the expiration of the one (1) year period
measured from the effective date of the Involuntary Termination. In addition,
the Plan Administrator may structure one or more of the Corporation's repurchase
rights so that those rights shall immediately terminate with respect to any
shares held by the Optionee at the time of his or her Involuntary Termination,
and the shares subject to those terminated repurchase rights shall accordingly
vest in full at that time.
G. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effect date of a
Change in Control, become fully exercisable for the total number of shares of
Common Stock at the time subject to those options and may be exercised for any
or all of those shares as fully vested shares of Common Stock. In addition, the
Plan Administrator shall have the discretionary authority to structure one or
more of the Corporation's repurchase rights under the Discretionary Option Grant
Program so that those rights shall terminate automatically upon the consummation
of such Change in Control, and the shares subject to those terminated rights
shall thereupon vest in full. Alternatively, the Plan Administrator may
condition the automatic acceleration of one or more outstanding options under
the Discretionary Option Grant Program and the termination of one or more of the
Corporation's outstanding repurchase rights under such program upon the
subsequent termination of the Optionee's Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control. Each option so
accelerated shall remain exercisable for fully vested shares until the EARLIER
of (i) the expiration of the option term or (ii) the expiration of the one (1)
year period measured from the effective date of Optionee's cessation of Service.
H. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded.
10.
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To the extent such dollar limitation is exceeded, the accelerated portion of
such option shall be exercisable as a Nonstatutory Option under the Federal
tax laws.
I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders,
the cancellation of any or all outstanding options under the Discretionary
Option Grant Program (including outstanding options incorporated from the
Predecessor Plan) and to grant in substitution new options covering the same
or different number of shares of Common Stock but with an exercise price per
share based on the Fair Market Value per share of Common Stock on the new
grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish,
to elect between the exercise of the underlying option for shares of
Common Stock and the surrender of that option in exchange for a
distribution from the Corporation in an amount equal to the excess of
(a) the Fair Market Value (on the option surrender date) of the number
of shares in which the Optionee is at the time vested under the
surrendered option (or surrendered portion thereof) over (b) the
aggregate exercise price payable for such shares.
(ii) No such option surrender shall be effective unless
it is approved by the Plan Administrator, either at the time of the
actual option surrender or at any earlier time. If the surrender is
so approved, then the distribution to which the Optionee shall be
entitled may be made in shares of Common Stock valued at Fair Market
Value on the option surrender date, in cash, or partly in shares and
partly in cash, as the Plan Administrator shall in its sole discretion
deem appropriate.
(iii) If the surrender of an option is not approved
by the Plan Administrator, then the Optionee shall retain whatever
rights the Optionee had under the surrendered option (or surrendered
portion thereof) on the option surrender date and may exercise such
rights at any time prior to the LATER of (a) five (5) business days
after the receipt of the rejection notice or (b) the last day on which
the option is otherwise exercisable in accordance with the terms of
the
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documents evidencing such option, but in no event may such rights
be exercised more than ten (10) years after the option grant date.
C. The following terms shall govern the grant and exercise of
limited stock appreciation rights:
(i) One or more Section 16 Insiders may be granted
limited stock appreciation rights with respect to their outstanding
options.
(ii) Upon the occurrence of a Hostile Take-Over, each
individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable for a
thirty (30)-day period following such Hostile Take-Over) to surrender
each such option to the Corporation. In return for the surrendered
option, the Optionee shall receive a cash distribution from the
Corporation in an amount equal to the excess of (A) the Take-Over Price
of the shares of Common Stock at the time subject to such option
(whether or not the Optionee is otherwise vested in those shares) over
(B) the aggregate exercise price payable for those shares. Such cash
distribution shall be paid within five (5) days following the option
surrender date.
(iii) At the time such limited stock appreciation
right is granted, the Plan Administrator shall pre-approve any
subsequent exercise of that right in accordance with the terms of this
Paragraph C. Accordingly, no further approval of the Plan
Administrator or the Board shall be required at the time of the actual
option surrender and cash distribution.
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ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for such calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). Each individual who files such a timely
authorization shall automatically be granted an option under the Salary
Investment Grant Program on the first trading day in January of the calendar
year for which the salary reduction is to be in effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; PROVIDED, however,
that each such document shall comply with the terms specified below.
A. EXERCISE PRICE.
1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common
Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A DIVIDED BY (B X 66-2/3%), where
X is the number of option shares,
A is the dollar amount of the reduction in the Optionee's
base salary for the calendar year to be in effect pursuant to
this program, and
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B is the Fair Market Value per share of Common Stock on the
option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each calendar month of Service in the calendar
year for which the salary reduction is in effect. Each option shall have a
maximum term of ten (10) years measured from the option grant date.
D. EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the EARLIER of (i) the expiration of the ten (10)-year option
term or (ii) the expiration of the three (3)-year period measured from the date
of such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or in accordance with the laws of descent and distribution
or by the designated beneficiary or beneficiaries of such option. Such right of
exercise shall lapse, and the option shall terminate, upon the EARLIER of (i)
the expiration of the ten (10)-year option term or (ii) the three (3)-year
period measured from the date of the Optionee's cessation of Service. However,
the option shall, immediately upon the Optionee's cessation of Service for any
reason, terminate and cease to remain outstanding with respect to any and all
shares of Common Stock for which the option is not otherwise at that time
exercisable.
III. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the
Corporate Transaction, become fully exercisable for the total number of
shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common
Stock. Each such outstanding option shall terminate immediately following
the Corporate Transaction, except to the extent assumed by the successor
corporation (or parent thereof) in such Corporate Transaction. Any option so
assumed and shall remain exercisable for the fully-vested shares until the
EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date of the
Optionee's cessation of Service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall immediately become fully exercisable for the total number of shares
of Common Stock at the time subject to such option and may be exercised for any
or all of those shares as fully-vested shares of Common Stock. The option shall
remain so exercisable until the EARLIEST to occur of (i) the expiration of the
ten
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(10)-year option term, (ii) the expiration of the three (3)-year period
measured from the date of the Optionee's cessation of Service, (iii) the
termination of the option in connection with a Corporate Transaction or (iv)
the surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. The Primary Committee shall, at the time the option
with such limited stock appreciation right is granted under the Salary
Investment Option Grant Program, pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph C. Accordingly, no further
approval of the Primary Committee or the Board shall be required at the time of
the actual option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, PROVIDED the aggregate exercise price
payable for such securities shall remain the same.
E. The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
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ARTICLE FOUR
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below. Shares of Common Stock may also be
issued under the Stock Issuance Program pursuant to share right awards which
entitle the recipients to receive those shares upon the attainment of designated
performance goals.
A. PURCHASE PRICE.
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. VESTING PROVISIONS.
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program shall be
determined by the Plan Administrator and incorporated into the Stock Issuance
Agreement. Shares of Common Stock may also be issued under the Stock Issuance
Program pursuant to share right awards which entitle the recipients to receive
those shares upon the attainment of designated performance goals.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to
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the Participant's unvested shares of Common Stock and (ii) such escrow
arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
6. Outstanding share right awards under the Stock Issuance
Program shall automatically terminate, and no shares of Common Stock shall
actually be issued in satisfaction of those awards, if the performance goals
established for such awards are not attained. The Plan Administrator, however,
shall have the discretionary authority to issue shares of Common Stock under one
or more outstanding share right awards as to which the designated performance
goals have not been attained.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.
B. The Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock
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subject to those terminated rights shall immediately vest, in the event the
Participant's Service should subsequently terminate by reason of an
Involuntary Termination within a designated period (not to exceed eighteen
(18) months) following the effective date of any Corporate Transaction in
which those repurchase rights are assigned to the successor corporation (or
parent thereof).
C. The Plan Administrator shall also have the discretionary
authority to structure one or more of the Corporation's repurchase rights under
the Stock Issuance Program so that those rights shall automatically terminate in
whole or in part, and the shares of Common Stock subject to those terminated
rights shall immediately vest, in the event the Participant's Service should
subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Change in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held in
escrow by the Corporation until the Participant's interest in such shares vests
or may be issued directly to the Participant with restrictive legends on the
certificates evidencing those unvested shares.
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ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made on the dates specified
below:
1. Each individual who is first elected or appointed as a
non-employee Board member at any time on or after the Underwriting Date shall
automatically be granted, on the date of such initial election or
appointment, a Non-Statutory Option to purchase 28,800 shares of Common
Stock, provided that individual has not previously been in the employ of the
Corporation or any Parent or Subsidiary.
2. On the date of each Annual Stockholders Meeting held after
the Underwriting Date, each individual who is to continue to serve as an
Eligible Director, whether or not that individual is standing for re-election to
the Board at that particular Annual Meeting, shall automatically be granted a
Non-Statutory Option to purchase 7,200 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 7,200 share option grants
any one Eligible Director may receive over his or her period of Board service,
and non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) or who have otherwise received one or
more stock option grants from the Corporation prior to the Underwriting Date
shall be eligible to receive one or more such annual option grants over their
period of continued Board service.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be
immediately exercisable for any or all of the option shares. However, any
shares purchased under the option shall be subject to repurchase by the
Corporation, at the exercise price paid per share, upon the Optionee's cessation
of Board service prior to vesting in those shares. Each initial 28,800 share
grant shall vest, and the Corporation's repurchase right shall lapse, in a
series of six (6) successive equal semi-annual installments upon the Optionee's
completion of each six (6)-month period of service as a Board member over the
thirty-six (36)-month period measured from the
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option grant date. Each annual 7,200 share automatic option shall vest, and
the Corporation's repurchase right shall lapse, in two (2) successive equal
semi-annual installments upon the Optionee's completion of each six (6)-month
period of Board service measured from the option grant date.
E. LIMITED TRANSFERABILITY OF OPTIONS. Each option under this
Article Five may, in connection with the Optionee's estate plan, be assigned in
whole or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for one or
more such family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate. The Optionee may also designate one or more persons as
the beneficiary or beneficiaries of his or her outstanding options under this
Article Three, and those options shall, in accordance with such designation,
automatically be transferred to such beneficiary or beneficiaries upon the
Optionee's death while holding those options. Such beneficiary or beneficiaries
shall take the transferred options subject to all the terms and conditions of
the applicable agreement evidencing each such transferred option, including
(without limitation) the limited time period during which the option may be
exercised following the Optionee's death.
F. TERMINATION OF BOARD SERVICE. The following provisions shall
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's
death, the personal representative of the Optionee's estate or the
person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and
distribution or by the designated beneficiary or beneficiaries of such
option) shall have a twelve (12)-month period following the date of
such cessation of Board service in which to exercise each such option.
(ii) During the twelve (12)-month exercise period, the
option may not be exercised in the aggregate for more than the number
of vested shares of Common Stock for which the option is exercisable
at the time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at
the time subject to the option shall immediately vest so that such
option may, during the twelve (12)-month exercise period following
such cessation of Board service, be exercised for all or any portion
of those shares as fully-vested shares of Common Stock.
(iv) In no event shall the option remain exercisable
after the expiration of the option term. Upon the expiration of the
twelve (12)-month exercise period or (if earlier) upon the expiration
of the option term, the option
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shall terminate and cease to be outstanding for any vested shares for
which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Board service for any
reason other than death or Permanent Disability, terminate and cease to
be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
II. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of
Common Stock at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject
to such option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Immediately following the consummation
of the Corporate Transaction, each automatic option grant shall terminate and
cease to be outstanding, except to the extent assumed by the successor
corporation (or parent thereof).
B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
for all of the shares of Common Stock at the time subject to such option and may
be exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.
C. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction or Change in
Control.
D. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. Stockholder approval
of the Plan shall constitute pre-approval of the grant of each such limited
cash-out right and the subsequent exercise of that right in accordance with the
terms of this Paragraph D. Accordingly, no approval or consent of the Board or
any Plan Administrator shall be required at the time of the actual option
surrender and cash distribution.
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the
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number and class of securities which would have been issuable to the Optionee
in consummation of such Corporate Transaction had the option been exercised
immediately prior to such Corporate Transaction. Appropriate adjustments
shall also be made to the exercise price payable per share under each
outstanding option, PROVIDED the aggregate exercise price payable for such
securities shall remain the same.
The grant of options under the Automatic Option Grant Program shall in no
way affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option
grants made under the Discretionary Option Grant Program.
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ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years for which the Director Fee Option Grant
Program is to be in effect. For each such calendar year the program is in
effect, each non-employee Board member may elect to apply all or any portion of
the annual retainer fee otherwise payable in cash for his or her service on the
Board for that year to the acquisition of a special option grant under this
Director Fee Option Grant Program. Such election must be filed with the
Corporation's Chief Financial Officer prior to first day of the calendar year
for which the annual retainer fee which is the subject of that election is
otherwise payable. Each non-employee Board member who files such a timely
election shall automatically be granted an option under this Director Fee Option
Grant Program on the first trading day in January in the calendar year for which
the annual retainer fee which is the subject of that election would otherwise be
payable in cash.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. EXERCISE PRICE.
1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common
Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A DIVIDED BY (B X 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the
non-employee Board member's election, and
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B is the Fair Market Value per share of Common Stock on the
option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become
exercisable in a series of twelve (12) equal monthly installments upon the
Optionee's completion of each month of Board service over the twelve (12)-month
period measured from the grant date. Each option shall have a maximum term of
ten (10) years measured from the option grant date.
D. LIMITED TRANSFERABILITY OF OPTIONS. Each option under this
Article Six may, in connection with the Optionee's estate plan, be assigned in
whole or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for one or
more such family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate. The Optionee may also designate one or more persons as
the beneficiary or beneficiaries of his or her outstanding options under this
Article Three, and those options shall, in accordance with such designation,
automatically be transferred to such beneficiary or beneficiaries upon the
Optionee's death while holding those options. Such beneficiary or beneficiaries
shall take the transferred options subject to all the terms and conditions of
the applicable agreement evidencing each such transferred option, including
(without limitation) the limited time period during which the option may be
exercised following the Optionee's death.
E. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
F. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as
a Board member cease by reason of death or Permanent Disability, then each
option held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully-vested shares until the EARLIER of (i) the expiration of the ten
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service.
Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program,
then each such option may be exercised, for any or all of the shares for
which the option is exercisable at the time of the Optionee's cessation of
Board service (less any shares subsequently purchased by Optionee prior
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to death), by the personal representative of the Optionee's estate or by the
person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and distribution or
by the designated beneficiary or beneficiaries of such option. Such right of
exercise shall lapse, and the option shall terminate, upon the EARLIER of (i)
the expiration of the ten (10)-year option term or (ii) the three (3)-year
period measured from the date of the Optionee's cessation of Board service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under
this Director Fee Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the
Corporate Transaction, become fully exercisable for the total number of
shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common
Stock. Each such outstanding option shall terminate immediately following
the Corporate Transaction, except to the extent assumed by the successor
corporation (or parent thereof) in such Corporate Transaction. Any option so
assumed and shall remain exercisable for the fully-vested shares until the
EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date of the
Optionee's cessation of Board service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall immediately become fully exercisable for the total number of shares of
Common Stock at the time subject to such option and may be exercised for any or
all of those shares as fully-vested shares of Common Stock. The option shall
remain so exercisable until the EARLIEST to occur of (i) the expiration of the
ten (10)-year option term, (ii) the expiration of the three (3)-year period
measured from the date of the Optionee's cessation of Board service, (iii) the
termination of the option in connection with a Corporate Transaction or (iv)
the surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to each surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. Stockholder approval of the Plan shall constitute
pre-approval of the grant of each such limited cash-out right and the subsequent
exercise of that right in accordance with the terms of this Paragraph C.
Accordingly, no approval or consent of the Board or any Plan Administrator shall
be required at the time of the actual option surrender and cash distribution.
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D. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option
grants made under the Discretionary Option Grant Program.
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ARTICLE SEVEN
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to
pay the option exercise price under the Discretionary Option Grant Program or
the purchase price of shares issued under the Stock Issuance Program by
delivering a full-recourse, interest bearing promissory note payable in one
or more installments. The terms of any such promissory note (including the
interest rate and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion. In no event may the maximum credit
available to the Optionee or Participant exceed the sum of (i) the aggregate
option exercise price or purchase price payable for the purchased shares plus
(ii) any Federal, state and local income and employment tax liability
incurred by the Optionee or the Participant in connection with the option
exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Taxes incurred by such
holders in connection with the exercise of their options or the vesting of their
shares. Such right may be provided to any such holder in either or both of the
following formats:
STOCK WITHHOLDING: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the
exercise of such Non-Statutory Option or the vesting of such shares, a
portion of those shares with an aggregate Fair Market Value equal to the
percentage of the Taxes (not to exceed one hundred percent (100%)) designated
by the holder.
STOCK DELIVERY: The election to deliver to the Corporation,
at the time the Non-Statutory Option is exercised or the shares vest, one or
more shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes)
with an aggregate Fair Market Value equal to the percentage of the Taxes (not
to exceed one hundred percent (100%)) designated by the holder.
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately on the Plan Effective
Date. However, the Salary Investment Option Grant Program and the Director Fee
Option Grant
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Program shall not be implemented until such time as the Primary Committee may
deem appropriate. Options may be granted under the Discretionary Option
Grant at any time on or after the Plan Effective Date. However, no options
granted under the Plan may be exercised, and no shares shall be issued under
the Plan, until the Plan is approved by the Corporation's stockholders. If
such stockholder approval is not obtained within twelve (12) months after the
Plan Effective Date, then all options previously granted under this Plan
shall terminate and cease to be outstanding, and no further options shall be
granted and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan,
and no further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Plan Effective Date. All options outstanding under
the Predecessor Plan on the Plan Effective Date shall be incorporated into the
Plan at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision of
the Plan shall be deemed to affect or otherwise modify the rights or obligations
of the holders of such incorporated options with respect to their acquisition of
shares of Common Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated from
the Predecessor Plan which do not otherwise contain such provisions.
D. The Plan shall terminate upon the EARLIEST to occur of
(i) January 31, 2009, (ii) the date on which all shares available for issuance
under the Plan shall have been issued as fully-vested shares or (iii) the
termination of all outstanding options in connection with a Corporate
Transaction. Should the Plan terminate on January 31, 2009, then all option
grants and unvested stock issuances outstanding at that time shall continue to
have force and effect in accordance with the provisions of the documents
evidencing such grants or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
B. The Plan was amended by the Board on March 27, 1999 in order
to (i) increase the number of shares of Common Stock initially reserved for
issuance of the term of the Plan from 7,440,000 shares to 8,161,944 shares,
such reserve consisting of the number of shares estimated to remain available
for issuance, as of the Plan Effective Date, under the Predecessor Plan plus
an additional increase of 6,000,000 shares, (ii) increase the Plan's
automatic share increase percentage from two percent (2%) to four percent
(4%) of the total number of shares of Common Stock outstanding on the last
trading day in December of the immediately preceding calendar year and (iii)
increase the maximum annual share increase permitted under the Plan from
1,440,000 shares to 2,880,000 shares. These amendments were approved by the
Corporation's stockholders as of April 1, 1999.
C. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs
and shares of Common Stock may be issued under the Stock Issuance Program that
are in each instance in excess of the number of shares then available for
issuance under the Plan, provided any excess shares actually issued under those
programs shall be held in escrow until there is obtained stockholder approval of
an amendment sufficiently increasing the number of shares of Common Stock
available for issuance under the Plan. If such stockholder approval is not
obtained within twelve (12) months after the date the first such excess
issuances are made, then (i) any
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unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price
paid for any excess shares issued under the Plan and held in escrow, together
with interest (at the applicable Short Term Federal Rate) for the period the
shares were held in escrow, and such shares shall thereupon be automatically
cancelled and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant any
right to continue in Service for any period of specific duration or interfere
with or otherwise restrict in any way the rights of the Corporation (or any
Parent or Subsidiary employing or retaining such person) or of the Optionee or
the Participant, which rights are hereby expressly reserved by each, to
terminate such person's Service at any time for any reason, with or without
cause.
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APPENDIX
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option
grant program in effect under the Plan.
B. BOARD shall mean the Corporation's Board of Directors.
C. CHANGE IN CONTROL shall mean a change in ownership or control of
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders, or
(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (A) who were still in office at
the time the Board approved such election or nomination.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's common stock.
F. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.
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G. CORPORATION shall mean Rhythms NetConnections Inc., a Delaware
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Rhythms NetConnections Inc. which shall by appropriate
action adopt the Plan.
H. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock
option grant in effect for non-employee Board members under Article Six of the
Plan.
I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary
option grant program in effect under the Plan.
J. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible
to participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Articles One and Five.
K. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. EXERCISE DATE shall mean the date on which the Corporation shall
have received written notice of the option exercise.
M. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in
question, as such price is reported by the National Association of
Securities Dealers on the Nasdaq National Market. If there is no
closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question on the
Stock Exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no
closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
(iii) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal
to the price per share at which the Common Stock is to be sold in the
initial public offering pursuant to the Underwriting Agreement.
N. HOSTILE TAKE-OVER shall mean the acquisition, directly or
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or
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indirectly controls, is controlled by, or is under common control with, the
Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the
1934 Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities pursuant
to a tender or exchange offer made directly to the Corporation's stockholders
which the Board does not recommend such stockholders to accept.
O. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
P. INVOLUNTARY TERMINATION shall mean the termination of the Service
of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or
discharge by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following
(A) a change in his or her position with the Corporation which
materially reduces his or her duties and responsibilities or the level
of management to which he or she reports, (B) a reduction in his or
her level of compensation (including base salary, fringe benefits and
target bonus under any corporate-performance based bonus or incentive
programs) by more than fifteen percent (15%) or (C) a relocation of
such individual's place of employment by more than fifty (50) miles,
provided and only if such change, reduction or relocation is effected
by the Corporation without the individual's consent.
Q. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
R. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.
S. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.
T. OPTIONEE shall mean any person to whom an option is granted under
the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.
U. PARENT shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock
A-2.
<PAGE>
possessing fifty percent (50%) or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
V. PARTICIPANT shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.
W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
and Director Fee Option Grant Programs, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
X. PLAN shall mean the Corporation's 1999 Stock Incentive Plan, as
set forth in this document.
Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Z. PLAN EFFECTIVE DATE shall mean the date the Plan shall become
effective and shall be coincident with the Underwriting Date.
AA. PREDECESSOR PLAN shall mean the Corporation's 1997 Stock
Option/Stock Issuance Plan in effect immediately prior to the Plan Effective
Date hereunder.
BB. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders and to administer the Salary Investment Option Grant Program solely
with respect to the selection of the eligible individuals who may participate in
such program.
CC. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary
investment option grant program in effect under the Plan.
DD. SECONDARY COMMITTEE shall mean a committee of one or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
EE. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
A-3.
<PAGE>
FF. SERVICE shall mean the performance of services for the
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.
GG. STOCK EXCHANGE shall mean either the American Stock Exchange or
the New York Stock Exchange.
HH. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
II. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in
effect under the Plan.
JJ. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
KK. TAKE-OVER PRICE shall mean the GREATER of (i) the Fair Market
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
LL. TAXES shall mean the Federal, state and local income and
employment tax liabilities incurred by the holder of Non-Statutory Options or
unvested shares of Common Stock in connection with the exercise of those options
or the vesting of those shares.
MM. 10% STOCKHOLDER shall mean the owner of stock (as determined
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
NN. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
OO. UNDERWRITING DATE shall mean the date on which the Underwriting
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
A-4.
<PAGE>
EXHIBIT 10.19
RHYTHMS NETCONNECTIONS INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the interests
of Rhythms NetConnections Inc., a Delaware Corporation, by providing eligible
employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll-deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
The share numbers in the Plan reflect the six (6)-for-five (5)
stock split effected on March 19, 1999.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall be limited to
One Million Two Hundred Thousand (1,200,000) shares.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2000, by
an amount equal to one percent (1%) of the total number of shares of Common
Stock outstanding on the last trading day in December of the immediately
preceding calendar year, but in no event shall any such annual increase exceed
Seven Hundred and Eighty Thousand (780,000) shares.
C. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant on any one Purchase Date, (iii) the maximum number and class of
securities purchasable by all Participants in the aggregate on any one Purchase
Date, (iv) the maximum
<PAGE>
number and/or class of securities by which the share reserve is to increase
automatically each calendar year pursuant to the provisions of Section III.B of
this Article One and (v) the number and class of securities and the price per
share in effect under each outstanding purchase right in order to prevent the
dilution or enlargement of benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in April
2001. The next offering period shall commence on the first business day in May
2001, and subsequent offering periods shall commence as designated by the Plan
Administrator.
C. Each offering period shall be comprised of a series of one or
more successive Purchase Intervals. Purchase Intervals shall run from the first
business day in May each year to the last business day in October of the same
year and from the first business day in November each year to the last business
day in April of the following year. However, the first Purchase Interval in
effect under the initial offering period shall commence at the Effective Time
and terminate on the last business day in October 1999.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new
offering period shall have a duration of twenty (24) months, unless a shorter
duration is established by the Plan Administrator within five (5) business days
following the start date of that offering period.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of
any offering period under the Plan may enter that offering period on such start
date or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.
2.
<PAGE>
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock during an offering period may be any
multiple of one percent (1%) of the Cash Earnings paid to the Participant during
each Purchase Interval within that offering period, up to a maximum of fifteen
percent (15%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:
(i) The Participant may, at any time during the
offering period, reduce his or her rate of payroll deduction to become
effective as soon as possible after filing the appropriate form with
the Plan Administrator. The Participant may not, however, effect more
than one (1) such reduction per Purchase Interval.
(ii) The Participant may, prior to the commencement of
any new Purchase Interval within the offering period, increase the
rate of his or her payroll deduction by filing the appropriate form
with the Plan Administrator. The new rate (which may not exceed the
fifteen percent (15%) maximum) shall become effective on the start
date of the first Purchase Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day
administratively feasible following the Participant's Entry Date into the
offering period and shall (unless sooner terminated by the Participant) continue
through the pay day ending with or immediately prior to the last day of that
offering period. The amounts so collected shall be credited to the
Participant's book account under the Plan, but no interest shall be paid on the
balance from time to time outstanding in such account. The amounts collected
from the Participant shall not be required to be held in any segregated account
or trust fund and may be commingled with the general assets of the Corporation
and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
3.
<PAGE>
VII. PURCHASE RIGHTS
A. GRANT OF PURCHASE RIGHT. A Participant shall be granted a
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.
B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant on each such Purchase Date. The purchase shall be
effected by applying the Participant's payroll deductions for the Purchase
Interval ending on such Purchase Date to the purchase of whole shares of Common
Stock at the purchase price in effect for the Participant for that Purchase
Date.
C. PURCHASE PRICE. The purchase price per share at which Common
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall be equal to eighty-five percent (85%) of the LOWER of
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.
D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for
the Participant for that Purchase Date. However, the maximum number of
shares of Common Stock purchasable per Participant on any one Purchase Date
shall not exceed Nine Hundred (900) shares, subject to periodic adjustments
in the event of certain changes in the Corporation's capitalization. In
addition, the maximum aggregate number of shares of Common Stock purchasable
by all Participants on any one Purchase Date shall not exceed Three Hundred
Thousand (300,000) shares, subject to periodic adjustments in the event of
certain changes in the Corporation's capitalization. However, the Plan
Administrator shall have the discretionary authority, exercisable prior to
the start of any offering period under the Plan, to increase or decrease the
limitations to be in effect for the number of shares purchasable per
Participant and in the aggregate by all Participants on each Purchase Date
during that offering period.
4.
<PAGE>
E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied to
the purchase of shares of Common Stock on any Purchase Date because they are
not sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable per Participant or in the
aggregate on the Purchase Date shall be promptly refunded.
F. TERMINATION OF PURCHASE RIGHT. The following provisions shall
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next
scheduled Purchase Date in the offering period, terminate his or her
outstanding purchase right by filing the appropriate form with the
Plan Administrator (or its designate), and no further payroll
deductions shall be collected from the Participant with respect to the
terminated purchase right. Any payroll deductions collected during
the Purchase Interval in which such termination occurs shall, at the
Participant's election, be immediately refunded or held for the
purchase of shares on the next Purchase Date. If no such election is
made at the time such purchase right is terminated, then the payroll
deductions collected with respect to the terminated right shall be
refunded as soon as possible.
(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the
offering period for which the terminated purchase right was granted.
In order to resume participation in any subsequent offering period,
such individual must re-enroll in the Plan (by making a timely filing
of the prescribed enrollment forms) on or before his or her scheduled
Entry Date into that offering period.
(iii) Should the Participant cease to remain an
Eligible Employee for any reason (including death, disability or
change in status) while his or her purchase right remains outstanding,
then that purchase right shall immediately terminate, and all of the
Participant's payroll deductions for the Purchase Interval in which
the purchase right so terminates shall be immediately refunded.
However, should the Participant cease to remain in active service by
reason of an approved unpaid leave of absence, then the Participant
shall have the right, exercisable up until the last business day of
the Purchase Interval in which such leave commences, to (a) withdraw
all the payroll deductions collected to date on his or her behalf for
that Purchase Interval or (b) have such funds held for the purchase of
shares on his or her behalf on the next scheduled Purchase Date. In
no event, however, shall any further payroll deductions be collected
on the Participant's behalf during such leave. Upon the Participant's
return to active service (x) within ninety (90) days following the
commencement of such leave or (y) prior to the expiration of any
longer period for which such Participant's right to reemployment with
the Corporation is guaranteed by statute or contract, his or her
payroll deductions under the Plan shall automatically resume at the
rate in
5.
<PAGE>
effect at the time the leave began, unless the Participant withdraws
from the Plan prior to his or her return. An individual who returns to
active employment following a leave of absence which exceeds in duration
the applicable (x) or (y) time period will be treated as a new Employee
for purposes of subsequent participation in the Plan and must
accordingly re-enroll in the Plan (by making a timely filing of the
prescribed enrollment forms) on or before his or her scheduled Entry
Date into the offering period.
G. CHANGE IN CONTROL. Each outstanding purchase right shall
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the LOWER of (i) the Fair Market Value per share of Common
Stock on the Participant's Entry Date into the offering period in which such
Change in Control occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Change in Control. However, the
applicable limitation on the number of shares of Common Stock purchasable per
Participant shall continue to apply to any such purchase, but not the limitation
applicable to the maximum number of shares of Common Stock purchasable in the
aggregate.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Change in Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.
H. PRORATION OF PURCHASE RIGHTS. Should the total number of shares
of Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. ASSIGNABILITY. The purchase right shall be exercisable only by
the Participant and shall not be assignable or transferable by the Participant.
J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans
6.
<PAGE>
(within the meaning of Code Section 423) of the Corporation or any Corporate
Affiliate, would otherwise permit such Participant to purchase more than
Twenty-Five Thousand Dollars ($25,000.00) worth of stock of the Corporation
or any Corporate Affiliate (determined on the basis of the Fair Market Value
per share on the date or dates such rights are granted) for each calendar
year such rights are at any time outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each
outstanding purchase right shall accrue in a series of installments on
each successive Purchase Date during the offering period on which such
right remains outstanding.
(ii) No right to acquire Common Stock under any
outstanding purchase right shall accrue to the extent the Participant
has already accrued in the same calendar year the right to acquire
Common Stock under one or more other purchase rights at a rate equal
to Twenty-Five Thousand Dollars ($25,000.00) worth of Common Stock
(determined on the basis of the Fair Market Value per share on the
date or dates of grant) for each calendar year such rights were at any
time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on March 16, 1999 and shall
become effective at the Effective Time, PROVIDED no purchase rights granted
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.
7.
<PAGE>
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the EARLIEST of (i) the last business day in April, 2009, (ii) the date on
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Corporate Transaction.
No further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the recognition of compensation
expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments
or revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan,
except for permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify the eligibility requirements for participation in
the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
B. Nothing in the Plan shall confer upon the Participant any right
to continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
C. The provisions of the Plan shall be governed by the laws of the
State of Colorado without resort to that State's conflict-of-laws rules.
8.
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SCHEDULE A
CORPORATIONS PARTICIPATING IN
EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME
Rhythms NetConnections Inc.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CASH EARNINGS shall mean the (i) regular base salary paid to a
Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
all overtime payments, bonuses, commissions, profit-sharing distributions and
other incentive-type payments received during such period. Such Cash Earnings
shall be calculated before deduction of (A) any income or employment tax
withholdings or (B) any and all contributions made by the Participant to any
Code Section 401(k) salary deferral plan or Code Section 125 cafeteria benefit
program now or hereafter established by the Corporation or any Corporate
Affiliate. However, Cash Earnings shall NOT include any contributions made on
the Participant's behalf by the Corporation or any Corporate Affiliate to any
employee benefit or welfare plan now or hereafter established (other than Code
Section 401(k) or Code Section 125 contributions).
C. CHANGE IN CONTROL shall mean a change in ownership of the
Corporation pursuant to any of the following transactions:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly by an person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by or is under common
control with the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
D. COMMON STOCK shall mean the Corporation's common stock.
A-1.
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E. CORPORATE AFFILIATE shall mean any parent or subsidiary
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
G. CORPORATION shall mean Rhythms NetConnections Inc., a Delaware
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Rhythms NetConnections Inc., which shall by
appropriate action adopt the Plan.
H. EFFECTIVE TIME shall mean the time at which the Underwriting
Agreement is executed and the Common Stock priced for the initial public
offering. Any Corporate Affiliate which becomes a Participating Corporation
after such Effective Time shall designate a subsequent Effective Time with
respect to its employee-Participants.
I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).
J. ENTRY DATE shall mean the date an Eligible Employee first
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market. If there is no closing selling
price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding
date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no
closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
(iii) For purposes of the initial offering period which
begins at the Effective Time, the Fair Market Value shall be deemed to
be equal to the price per share at which the Common Stock is sold in
the initial public offering pursuant to the Underwriting Agreement.
A-2.
<PAGE>
L. 1933 ACT shall mean the Securities Act of 1933, as amended.
M. PARTICIPANT shall mean any Eligible Employee of a Participating
Corporation who is actively participating in the Plan.
N. PARTICIPATING CORPORATION shall mean the Corporation and such
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
O. PLAN shall mean the Corporation's 1999 Employee Stock Purchase
Plan, as set forth in this document.
P. PLAN ADMINISTRATOR shall mean the committee of two (2) or more
Board members appointed by the Board to administer the Plan.
Q. PURCHASE DATE shall mean the last business day of each Purchase
Interval. The initial Purchase Date shall be October 29, 1999.
R. PURCHASE INTERVAL shall mean each successive six (6)-month period
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.
S. SEMI-ANNUAL ENTRY DATE shall mean the first business day in May
and November each year on which an Eligible Employee may first enter an offering
period.
T. STOCK EXCHANGE shall mean either the American Stock Exchange or
the New York Stock Exchange.
U. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-3.
<PAGE>
Exhibit 10.23
THIRD ADDENDUM TO MASTER LEASE AGREEMENT
DATED AS OF NOVEMBER 19, 1997
BETWEEN
GATX CAPITAL CORPORATION
AND
RHYTHMS NETCONNECTIONS INC.
Dated as of March 31, 1999
This Addendum amends the Master Lease Agreement dated as of November
19, 1997, as amended by an Addendum to Master Lease Agreement dated December 31,
1997 and by a Second Addendum to Master Lease Agreement dated as of May 19, 1998
(as so amended, the "Lease"), between GATX Capital Corporation (formerly, Sun
Financial Group, Inc.) and Rhythms NetConnections Inc. All capitalized terms
used but not defined herein shall have the respective meanings given thereto in
the Lease.
1. ADDITIONAL FINANCING.
(a) COMMITMENT. Subject to the satisfaction of the conditions set forth
in paragraph 2 below, Lessor has agreed to provide up to $13,500,000 of lease
financing in addition to that previously provided to Lessee. The funding of each
Lease Order is subject to the satisfaction of the conditions set forth in
paragraph 3 below. Lessor's commitment to finance Equipment under this Addendum,
shall terminate on the date (the "Commitment Termination Date") that is the same
day of the month in the fifteenth month following the date hereof.
(b) TERM AND LEASE RATE FACTOR. The Initial Term of each Lease Order
financed under this Addendum shall be 36 months and the rental for the initial
Lease Order under this Addendum during the six-month period following the
funding of such initial Lease Order and for each subsequent Lease Order funded
during such six-month period shall be payable in accordance with Section 4 of
the Lease in an amount on each Rent Payment Date equal to the amount funded
under the applicable Lease Order multiplied by 3.0% (the "Lease Rate Factor").
The Lease Rate Factor for all Lease Orders funded following such six-month
period will be determined by calculating a new Lease Rate Factor using as the
implicit interest rate for such Lease Rate Factor the U.S. Treasury note rate
for notes having a 36 month term as quoted in THE WALL STREET JOURNAL on the
date of preparation of the first such Lease Order funded during such subsequent
period; provided, however, that no such adjustment shall be made unless and
until such U.S. Treasury rate shall have increased by more than 25 basis points
above the rate in effect on the date hereof.
(c) END OF TERM OPTIONs. Provided that the Lease has not been
terminated and that no Event of Default or event which, with notice or lapse of
time or both, would become an Event of Default shall have occurred and be
continuing, not more than 180 days and not less than 120 days prior to the
expiration of the Initial Term of each Lease Order funded under this Addendum,
by written notice to Lessor, Lessee shall irrevocably elect either the option
under clause (i) or a combination of the options under clauses (i), (ii) and
(iii) within the parameters set forth therein:
(i) Lessee may elect to purchase Equipment (excluding Soft
Cost Equipment, as defined in Paragraph 1(d)) having an original total
cost (determined with reference to the Equipment Addendum to the
applicable Lease Order) equal to at least 70% of the aggregate total
cost of the Equipment under such Lease Order for a purchase price equal
to the "Fair Market Value" (as defined below) thereof as of the end of
the Initial Term of such Schedule, but such amount shall not be less
1
<PAGE>
than fifteen percent (15%) of the aggregate total amount originally
funded with respect to the Equipment being purchased, nor more than
twenty-five percent (25%) of the aggregate total amount originally
funded with respect to the Equipment being purchased, under such Lease
Order, plus any applicable sales or other transfer tax.
(ii) Lessee may elect to return either (i) one hundred percent
(100%) of the Equipment (other than the Soft Cost Equipment, as defined
in Paragraph 1(d)), or (ii) Equipment (other than Soft Cost Equipment,
as defined in Paragraph 1(d)) having an original total cost (determined
with reference to the Equipment Addendum to the applicable Lease Order)
equal to not more than thirty percent (30%) of the aggregate total cost
of the Equipment subject to such Lease Order, in each case in the
condition required by the Lease.
(iii) Lessee may elect to renew the Lease with respect to any
Equipment not purchased or returned at the end of Initial Term of the
applicable Lease Order, for not less than twelve (12) months or the
remainder of an item of Equipment's remaining useful life if shorter,
for a rent equal to the "Fair Rental Value" (as defined below) of such
item for such additional period, which rent shall be paid monthly in
advance. At the end of the renewal term, Lessee shall elect one of the
options set forth in clauses (i), (ii) or (iii) of this paragraph (c).
"Fair Market Value" shall mean the estimated amount, as of a certain
date, at which the Equipment subject to the Lease may reasonably be
valued in the marketplace by a buyer who could choose not to buy and a
seller who could choose not to sell. In the event that the parties
cannot agree on a Fair Market Value amount, an independent appraiser
(mutually acceptable to Lessor and Lessee) with knowledge of the
Equipment, appropriate certification and experience utilizing Fair
Market Value as defined shall be retained to render an opinion.
"Fair Rental Value" shall mean the estimated amount, as of a certain
date, at which the Equipment subject to the Lease may reasonably be
valued in the marketplace by a lessee who could choose not to lease and
a lessor who could choose not to lease. In the event that the parties
cannot agree on a Fair Rental Value amount, an independent appraiser
(mutually acceptable to Lessor and Lessee) with knowledge of the
Equipment, appropriate certification and experience utilizing Fair
Rental Value as defined shall be retained to render an opinion.
(d) PAYMENTS FOR SOFT COSTS. With respect to any Equipment which is
deemed by Lessor to be soft cost equipment, including without limitation
software, software development costs, tooling, tenant improvements, custom-built
equipment, cabling, installation or freight costs (collectively, and excluding
collocation space costs, "Soft Cost Equipment"), at the time of the final Rent
Payment Date under each Lease Order, Lessee shall make a payment (in addition to
any payment under Paragraph 1(c)(i) or under Paragraph 1(c)(ii) hereof) equal to
fifteen percent (15%) of the total cost of the Soft Cost Equipment subject to
such Lease Order, plus any applicable sales or other transfer tax.
2. CONDITIONS TO EXECUTION OF THIS ADDENDUM. On or prior to the date of
execution of this Addendum by Lessor and the funding of the first Lease Order
under this Addendum, Lessor shall have received in form and substance
satisfactory to Lessor:
(a) A legal opinion of Lessee's legal counsel in form and
substance reasonably satisfactory to Lessor covering the
matters set forth in Exhibit A hereto.
2
<PAGE>
(b) Copies, certified by the Secretary or Assistant Secretary or
Chief Financial Officer of Lessee, of: (A) the
Certificate/Articles of Incorporation and By-Laws of Lessee
(as amended to the date of the Lease) and (B) the resolutions
adopted by Lessee's board of directors authorizing the
execution and delivery of the Lease and this Addendum, the
Lease Orders and the other documents referred to herein and
the performance by Lessee of its obligations hereunder and
thereunder.
(c) A good standing certificate (including franchise tax status)
with respect to Lessee from Lessee's state of incorporation,
the state where Lessee's chief executive office is located and
each state where Equipment is expected to be located, each
dated a date reasonably close to the date of acceptance of the
Lease by Lessor.
(d) Evidence of the insurance coverage required by Section 18 of
the Lease, if not previously provided to Lessor.
(e) All other documents as Lessor shall have reasonably requested.
3. CONDITIONS TO THE FUNDING OF EACH LEASE ORDER. Prior to the funding
of each Lease Order, Lessee shall have satisfied all of the following
conditions:
(a) Lessor shall have received:
(i) A Landlord's Waiver and Consent of each landlord of premises
on which Equipment will be located, substantially in the form of Exhibit
B hereto.
(ii) To the extent Lessor, in its commercially reasonable
business judgment, deems it necessary, a release or other arrangement
with any other lessor or lender to the Lessee to insure that there will
be no impairment of Lessor's interest in the Equipment subject to the
Lease Order.
(iii) Copies of invoices, purchase orders and canceled checks
relating to all Equipment being placed under the Lease pursuant to the
Lease Order and/or a Purchase Order and Invoice Assignment from Lessee to
Lessor substantially in the form of Exhibit C hereto.
(b) Lessee shall have filed or recorded, to the satisfaction of
Lessor, all instruments and documents, including, but not limited to,
precautionary Financing Statements on Form UCC-1 and releases and termination
statements on Form UCC-2, then deemed necessary by Lessor to preserve and
protect its rights hereunder, under the Uniform Commercial Code (including the
termination of any after-acquired property clause of third parties with respect
to any Unit).
(c) Lessor shall have received all other documents and Lessee shall
have performed all other acts as Lessor shall have reasonably requested to
consummate the transaction contemplated by the Lease Order.
(d) Except with the prior consent of Lessor, not to be unreasonably
withheld or delayed, the cost of Soft Cost Equipment which is financed under the
Lease Order shall not exceed fifteen percent (15%) of the total amount of such
Lease Order. Lessee will use its diligent efforts to obtain from the vendor of
any software financed under the Lease a consent to transfer the right to use
such software to a third party without further payment if an Event of Default
under the Lease exists.
3
<PAGE>
(e) On the date of funding of the Lease Order no Event of Default or
event, which with the passage of time or the giving of notice or both would
constitute an Event of Default, shall exist.
(f) Except with the prior written consent of Lessor which shall not
be unreasonably withheld, all of the Equipment subject to the Lease Order shall
consist of routers and ATM switches, DSLAMs, IP concentrators and servers and
related networking and information technology hardware and Soft Cost Equipment.
(g) The amount to be funded under the Lease Order shall not be less
than $4,000,000, as determined by reference to the Equipment Addendum to such
Lease Order.
Lessor may, in its sole discretion, terminate its commitment herein to fund
Lease Orders under the Lease if there is any material adverse change to the
general affairs, management, results of operations, condition (financial or
otherwise) or prospects of Lessee, whether or not arising from transactions in
the ordinary course of business.
4. FINANCIAL COVENANTS
(a) CERTAIN DEFINITIONS. The terms defined in paragraph 4 of the
Second Addendum to the Lease shall have the same meanings for purposes of this
paragraph 4 and of paragraph 4 to any subsequent addendum to the Lease.
(b) CONSOLIDATED OPERATING CASH FLOW. Lessee shall not permit its
Consolidated Operating Cash Flow for the fiscal quarter ending on the date set
forth below to be less than the amount set forth opposite such date below:
<TABLE>
<S> <C>
March 31, 1999 -17,507,993
June 30, 1999 -24,177,533
September 30, 1999 -34,689,886
December 31, 1999 -43,553,169
March 31, 2000 -50,273,067
June 30, 2000 -53,943,611
September 30, 2000 -61,496,059
December 31, 2000 -49,573,006
March 31, 2001 -58,453,548
June 30, 2001 -56,561,322
September 30, 2001 -60,855,319
December 31, 2001 -57,208,954
March 31, 2002 -50,796,277
June 30, 2002 -44,893,593
September 30, 2002 -55,406,092
</TABLE>
A breach of a financial covenant under this paragraph 4 shall constitute an
"Event of Default" under Section 21 of the Lease.
5. REPORTING. The provisions of Section 5 (a) and (c) of the Second
Addendum to the Lease shall apply to this Third Addendum as if fully set forth
herein. In addition, within thirty (30) days of the end of each fiscal quarter
of Lessee, Lessee shall furnish to Lender a certificate of Lessee's Chief
Financial Officer or other senior officer stating that he or she has reviewed
the provisions of the Lease, this Addendum and any other addendum
4
<PAGE>
to the Lease then in effect, and that Lessee is not in default in the observance
or performance of any of the provisions hereof, or if Lessee shall be so in
default, specifying all such defaults and events of which he or she may have
knowledge, and setting forth the calculation of compliance or noncompliance with
each of the financial covenants set forth in paragraph 4 above.
6. NON-UTILIZATION FEE. Lessee agrees that by execution of the Lease it
has agreed to lease Equipment from Lessor having an aggregate cost of not less
than $8,100,000 (the "Minimum Funding Amount"). If Lessee fails at any time to
meet the Minimum Funding Amount because (a) it has not requested funding of
Equipment under the Lease in the amount of the Minimum Funding Amount, or (b) it
has failed to satisfy any condition to any funding of Eligible Equipment, then
Lessee shall pay to Lessor upon Lessor's request therefor a non-utilization fee
of 1.25% of the difference between the maximum amount of financing available
hereunder and the aggregate amount of Lease Orders outstanding hereunder on the
date of such request; provided, however, that Lessee shall not pay a
non-utilization fee upon more than one occasion during the term of this Third
Addendum. Lessee shall pay such non-utilization fee to Lessor, as liquidated
damages and not as a penalty, within ten business days of receiving Lessor's
request for payment thereof.
7. GOVERNING LAW. The first two sentences of Section 25(a) are amended to
read in their entirety as follows:
This Lease Agreement and any Lease Order hereunder shall be governed
in all respects by the laws of the State of California. Lessor and
Lessee agree that any dispute between them arising under this Lease
or any Lease Order shall be resolved in the state or federal courts
in the State of California located in the City and County of San
Francisco.
8. SURVIVAL OF TAX INDEMNITY. Section 23 shall be amended by adding at the
end thereof:
The provisions of this Section 23 shall survive the termination or
cancellation of this Lease.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Addendum as of
March 31, 1999.
LESSOR: LESSEE:
GATX CAPITAL CORPORATION RHYTHMS NETCONNECTIONS INC.
By: /s/ Illegible By: /s/ Scott C. Chandler
--------------------------------- -----------------------------
Name: Illegible Name: Scott C. Chandler
------------------------------- ---------------------------
Title: Title: Chief Financial Officer
------------------------------ --------------------------
5
<PAGE>
EXHIBIT A
MATTERS TO BE COVERED IN LEGAL OPINION
(a) Lessee is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and is duly qualified to
do business and in good standing in the State of California.
(b) Lessee has and had the requisite corporate power and authority to
execute, deliver and perform the Lease, the Third Addendum and the Lease Orders
and to issue the Warrant. All action on the part of Lessee, its directors and
its shareholders necessary for the authorization, execution, delivery and
performance of the Lease, the Third Addendum, the Lease Orders and the Warrant,
has been taken. The Transaction Documents have been duly executed and delivered
by an authorized officer of Lessee.
(c) The execution, delivery and performance of the Transaction
Documents (i) do not conflict with or violate any provision of Lessee's Restated
Certificate of Incorporation or Bylaws or of applicable law, (ii) do not
conflict with or constitute a default under any provision of any material
judgment, writ, decree, order or material agreement, indenture, or instrument to
which Lessee is a party or by which it is bound, and (iii) will not cause the
imposition of any Lien upon the assets or properties of Lessee.
(d) The Transaction Documents constitute legal, valid and binding
obligations of Lessee, enforceable in accordance with their respective terms. To
our knowledge, no filing need be made with any governmental authority with
respect to the Transaction Documents.
(e) The shares of Common Stock issuable upon exercise of the Warrant
have been duly authorized and reserved for issuance upon such exercise, and when
issued in accordance with the terms of the Warrant, will be duly authorized,
validly issued, fully paid and non-assessable.
A-1
<PAGE>
EXHIBIT B
LANDLORD WAIVER
<PAGE>
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:
GATX CAPITAL CORPORATION
Four Embarcadero Center, Suite 2200
San Francisco, CA 94111
Attn: Contract Administration
- --------------------------------------------------------------------------------
LANDLORD'S WAIVER AND CONSENT
THIS LANDLORD'S WAIVER AND CONSENT (this "Waiver"), dated as of
________________________________, 199____, is executed by and between
___________________________________________________________,
____________________________________________________("Landlord")
and GATX CAPITAL CORPORATION ("Lessor").
RECITALS
A. Landlord and RHYTHMS NETCONNECTIONS, INC. ("Tenant") are parties to a
________________________________________________________________[Lease
Agreement], dated as of ____________________________ , 19 ________ (together
with any other agreement between Landlord and Tenant relating to the Premises,
as defined below, all as amended from time to time, to be referred to herein
collectively as the "Lease"), pursuant to which Landlord has leased to Tenant
that certain real property commonly known as , and more particularly described
in ATTACHMENT 1 hereto (the "Premises").
B. Tenant and Lessor intend to or have entered into a Master Lease
Agreement, dated as of November 19, 1997, as amended (the "Credit Agreement")
pursuant to which Lessor has agreed or will agree to lease to Tenant from time
to time certain equipment (the "Equipment") which will be located on the
Premises.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Landlord and Lessor hereby agree as follows:
1. WAIVER AND CONSENT. Landlord hereby consents to the location of the
Equipment on the Premises and does irrevocably waive, disclaim and relinquish
and assign to Lessor any and all rights to impose, receive, assert or enforce
any lien, encumbrance, charge, security interest, ownership interest, claim or
demand of any kind against or involving the Equipment, whether arising by common
law, statute or consensually (under the Lease or otherwise) and whether now in
existence or hereafter created, including, but not limited to, those for rent or
other right of payment. This waiver, disclaimer, relinquishment and assignment
shall survive the termination of the Lease. Landlord further agrees that (a)
neither the Equipment nor any item thereof shall become part of, or otherwise be
or become a fixture attached to, the Premises, notwithstanding the manner of the
Equipment's annexation, the Equipment's adaptability to the uses and purposes
for which the Premises are used, and the intentions of the party making the
annexation; (b) the Equipment (or any item thereof) may be repossessed by
Lessor; (c) in connection with such repossession or otherwise, Lessor, and any
of its agents and employees, may enter upon the Premises for the purposes of (i)
guarding and maintaining the Equipment (or any item thereof), (ii) showing the
Equipment (or any item thereof) to prospective lenders, buyers, lessees and
sublessees, as applicable, and any of their respective agents and employees,
(iii) preparing, disassembling, dismantling, loading and/or removing the
Equipment (or any item thereof), and (iv) general inspections of the Equipment
pursuant to the Credit Agreement; and (d) the right of Lessor to enter the
Premises and the other rights granted to Lessor in this Waiver shall not
terminate until thirty (30) days after Lessor receives written notice from
Landlord of the termination of the Lease. If Lessor should exercise its rights
hereunder (and the failure to exercise such rights shall not be construed as
1
<PAGE>
a waiver thereof), Landlord agrees upon receiving prior written notice, to
provide ingress and egress to effect such exercise as well as provide reasonably
adequate space contiguous to the location of the Equipment to permit the
exercise of such rights. Landlord further agrees that Lessor has no obligation
to exercise any right granted to Lessor in this Waiver and that Lessor may elect
to remove only a portion or none of the Equipment from the Premises.
2. COSTS. Lessor agrees to indemnify and hold the Landlord harmless from
any out-of-pocket costs incurred by Landlord for any physical damage to the
Premises caused by Lessor solely from the exercise of its rights under clause
(b) or (c) of Paragraph 1 above.
3. LEASE DEFAULTS. Landlord further agrees to provide Lessor written
notice of any default or event of default under the Lease (each a "Default
Notice") simultaneously with the giving of notice of the same to Tenant or, if
no such notice is required under the Lease, at least thirty (30) days prior to
the date Landlord would be entitled to terminate the Lease. Each such notice
shall be sent to the address of Lessor set forth below the signature of Lessor
on the last page hereof or such other address as Lessor may from time to time
provide to Landlord, and shall be deemed delivered (i) in the case of notice by
letter, five (5) business days after deposited in the United States mail
registered and return receipt requested, (ii) in the case of notice by overnight
courier, two (2) business days after delivery to such courier and (iii) in the
case of notice given by telex or telecommunication, when given or sent with
electronic confirmation of receipt. During any time period when Tenant is in
default under the Lease, Lessor shall have the option, but not the obligation,
to cure any such default. Landlord shall accept such cure if it occurs within
thirty (30) days after Lessor has received the relevant Default Notice as fully
as if Tenant had fully performed its obligation under the Lease. Upon curing any
such default, Lessor shall be subrogated to the rights of Landlord against
Tenant and, as between Landlord and Tenant, such cured defaults shall no longer
exist.
4. LANDLORD'S REPRESENTATIONS AND WARRANTIES. Landlord hereby warrants and
represents to Lessor that (a) Landlord is the lessor under the Lease; (b) there
are no other agreements between the parties affecting or relating to the
Premises; (c) Landlord has all requisite power and authority to execute and
deliver this Waiver and no consents from any third party are required to do so;
(d) Landlord is the sole owner of the landlord's interest under the Lease and
has not conveyed, transferred or assigned any part of that interest to any other
person or entity; (e) no event of default (nor any event which with the passage
of time would constitute an event of default) has occurred under the Lease; (f)
there exists no litigation affecting title to the Premises or any adverse claim
with respect to the Premises of which Landlord has received notice; (g) there is
no condemnation proceeding pending with respect to any part of the Premises, nor
any threat thereof, of which the Landlord has received notice; (h) the Lease is
in full force and effect; and (i) the Premises are not subject to any mortgage
or other security interest in favor of any person which has not executed an
attornment agreement acceptable to Lessor with respect to this Waiver.
5. MISCELLANEOUS. This Waiver and all rights hereby granted to Lessor
hereunder shall remain in effect so long as there are any obligations owing by
Tenant under the Credit Agreement or any present or future agreement between
Tenant and Lessor which involves the Equipment. All the terms and provisions of
this Waiver shall be binding on and inure to the benefit of the respective
successors and assigns of Landlord and Lessor, and Landlord covenants and agrees
that any assignment, mortgage or other transfer of all or any part of its
interest as the owner and/or landlord of the Premises shall provide and shall be
subject and subordinate to all the terms and provisions hereof. Landlord shall
provide each of Tenant and Lessor a duly executed copy of the agreement
evidencing such subordination. Such agreement shall be in form and substance
reasonably satisfactory to Lessor. The rights and benefits of this Waiver may be
assigned or transferred by Lessor or to third parties who may become the lessor,
directly or indirectly, to Tenant. Lessor shall provide subsequent written
notice to Landlord and Tenant of the assignment or transfer. Headings in this
Waiver are for convenience of reference only and are not part of the substance
hereof. This Waiver shall be governed by and construed in accordance with the
laws of the State of California.
2
<PAGE>
IN WITNESS WHEREOF, Landlord and Lessor have executed this Waiver as of
the date and year first written above.
By:
-----------------------------------
Name:
Title:
--------------------------------
Address:
-----------------------------------------
-----------------------------------------
-----------------------------------------
Attention:
GATX CAPITAL CORPORATION
By:
----------------------------------
Name:
Title:
--------------------------------
Address:
GATX Capital Corporation
Four Embarcadero Center
Suite 2200
San Francisco, CA 94111
Attention: Contract Administrator
3
<PAGE>
Exhibit 10.24
GATX CAPITAL CORPORATION
MASTER LEASE AGREEMENT
NO. _________
================================================================================
This Master Lease Agreement ("Lease Agreement") is made as of the 31ST day of
MARCH ,1999, between GATX CAPITAL CORPORATION of Four Embarcadero Center, Suite
2200, San Francisco, CA 94111 (the "Lessor") and RHYTHMS NETCONNECTIONS INC
having its principal offices at 6933 SOUTH REVERE PARKWAY, SUITE 100, ENGLEWOOD,
CO 80112 (the "Lessee").
TERMS AND CONDITIONS
1. DEFINITIONS.
"Lease Order" shall refer to that document wherein Lessor agrees to
lease to Lessee and Lessee agrees to lease from Lessor certain Equipment. Each
Lease Order shall be signed and submitted by Lessee to Lessor and, when so
submitted, shall constitute a firm irrevocable offer by Lessee to lease the
Equipment identified on the Lease Order subject to the terms of the Lease Order
and this Lease Agreement which, if accepted by Lessor by signing and returning
to Lessee one copy of the same within thirty (30) days of the date of the Lease
Order shall be deemed a duly executed and in force Lease Order.
"Initial Term" shall mean the period beginning on the Commencement Date
and continuing for the number of months set forth in each Lease Order.
"Equipment" shall mean the equipment identified in a duly executed and in
force Lease Order and all related replacements, parts, additions, software,
accessories, alterations and repairs incorporated therein or affixed thereto,
together with any items included on the related Lease Order including, but not
limited to, training, maintenance, license agreements, etc.
"Software" shall mean a computer program in any data, program
description, media or supporting documentation provided by a licensor as part of
the transaction.
"Delivery and Acceptance Date" shall mean the date that the
Equipment listed on the related Lease Order is accepted at Lessee's premises,
such date being specified in the related Delivery and Acceptance Receipt. Unless
expressly agreed otherwise by the parties or Lessee notifies Lessor in writing
that the Equipment has been rejected, the Equipment must be accepted within
seven (7) days after the delivery date, and if not accepted by such time the
Delivery and Acceptance Date shall be deemed to be seven (7) days after the
delivery date.
"Commencement Date" means, as to the Equipment designated on any Lease
Order, where the Delivery and Acceptance Date for such Equipment falls on the
first day of the month, that date, or, in any other case, the first day of the
month or calendar quarter if so provided in the Lease Order, following the
Delivery and Acceptance Date, unless otherwise agreed by the parties.
"Progress Payment Rider" shall refer to that document wherein the seller
of the Equipment requires payment prior to the commencement of a Lease Order and
Lessee agrees to make payments prior to the commencement of a Lease Order.
2. NET LEASE.
THIS LEASE AGREEMENT TOGETHER WITH EACH LEASE ORDER CONSTITUTES A NET
LEASE AND LESSEE'S AGREEMENT TO PAY RENT AND ANY OTHER OBLIGATIONS HEREUNDER AND
UNDER ANY APPLICABLE LEASE ORDERS SHALL BE ABSOLUTE AND UNCONDITIONAL AND SHALL
NOT BE SUBJECT TO ANY ABATEMENT, REDUCTION, SET-OFF, DEFENSE, COUNTERCLAIM,
INTERRUPTION, DEFERMENT OR RECOUPMENT FOR ANY REASON WHATSOEVER. Lessor and
Lessee will enter into one or more Lease Orders pursuant to this Lease
Agreement. Subject to the terms and conditions of this Lease Agreement and a
duly executed and in force Lease Order, Lessor agrees to lease to Lessee and
Lessee agrees to lease from Lessor the Equipment described in each Lease Order.
This Lease Agreement is a master lease and each Lease Order is subject to the
terms of this Lease Agreement. Each Lease Order shall be treated as a separate
lease with respect to the Equipment covered by such Lease Order. In the event of
any conflict between the language of this Lease Agreement and any Lease Order
entered into pursuant hereto, the language of the Lease Order shall prevail with
respect to that Lease Order and the Equipment covered thereby. NO EQUIPMENT
SHALL BE DEEMED LEASED HEREUNDER UNLESS IT IS THE SUBJECT OF A DULY EXECUTED AND
IN FORCE LEASE ORDER.
3. TERM.
The term of this Lease Agreement shall commence on the date set forth
above and shall continue in effect for the Initial Term of any Lease Order and
any extended term as provided herein.
The term of each lease as to any items of Equipment designated on any
Lease Order shall commence on the Delivery and Acceptance Date for such
Equipment, and shall continue for the Initial Term and any extended term
provided herein.
(CONTINUED ON THE FOLLOWING 3 PAGES)
================================================================================
IN WITNESS WHEREOF, the parties have executed this Lease Agreement effective as
of the date first above written.
LESSOR: GATX CAPITAL CORPORATION LESSEE: RHYTHMS NETCONNECTIONS INC.
SIGNATURE: /s/ Illegible SIGNATURE: /s/ Scott C. Chandler
------------------------------- --------------------------
BY: Illegible BY: Scott C. Chandler
-------------------------------------- ---------------------------------
(PRINT NAME) (PRINT NAME)
TITLE: TITLE: Chief Financial Officer
----------------------------------- ------------------------------
DATE: DATE:
------------------------------------ ------------------------------
<PAGE>
4. RENTAL. Rental shall begin to accrue on the Delivery and Acceptance Date and
Lessee shall pay to Lessor, as rental for the Equipment during the Initial Term,
the rent set forth in the respective Lease Order, which shall be due and payable
in advance on the first day of each calendar month or quarter as specified in
the Lease Order during such Initial Term plus any extended term (each date being
hereinafter called a "Rent Payment Date"), unless modified by a Progress Payment
Rider. If the Delivery and Acceptance Date of any Equipment shall be other than
the first day of the month, Lessee shall make an initial payment based on the
Delivery and Acceptance Date in an amount equal to the fraction of the rent as
specified in the related Lease Order for each day from the Delivery and
Acceptance Date to (but not including) the Commencement Date. Rent shall be paid
to Lessor at the address set forth above or at such other place as Lessor shall
designate in writing, or if to an Assignee of Lessor, at such place as such
Assignee shall designate in writing, and shall be paid free and clear of all
claims, demands or setoffs against Lessor or such Assignee. Whenever any payment
by Lessee (of rent or otherwise) is past due hereunder for more than seven (7)
days, Lessee shall pay to Lessor, as additional rent, interest on such amount
until and including the date of payment, at the lesser of 1.5% per month or the
maximum allowable rate of interest permitted by law.
5. TAXES. Lessee covenants to promptly report, file, pay and indemnify and hold
Lessor harmless with respect to any and all Taxes, as hereinafter defined. The
term "Taxes" as used herein shall mean all taxes (including sales, use, excise,
personal property, ad valorem, stamp, documentary and other taxes), and all
other governmental fees, charges and assessments (general or special) due,
assessed or levied by any foreign, federal, state, county or local government or
taxing authority, and any penalties, fines or interest thereon, which are
imposed against, upon or relating to the Equipment or the use, registration,
rental, shipment, transportation, delivery, ownership or operation thereof, and
on or relating to the lease thereof including the rentals or receipts due under
this Lease Agreement, but shall not include any taxes solely based upon or
measured by the income of Lessor. Lessee will, upon request by Lessor, submit to
Lessor written evidence of Lessee's payment of all Taxes due hereunder. Any tax
returns filed by Lessee shall show Lessor as the owner of the Equipment.
6. INSTALLATION, USE, MAINTENANCE AND INSPECTION OF EQUIPMENT.
(a) Lessee shall pay all installation, transportation, rigging, unpacking
and repacking, drayage, handling and insurance charges on the Equipment upon
delivery to Lessee and upon redelivery to Lessor upon the expiration or earlier
termination of the Initial Term or any extension thereof, to such destination as
is specified by Lessor within the continental United States of America ("Return
Location"). Lessee shall furnish appropriate installation facilities for the
Equipment. Lessee represents and warrants that: (i) it has selected all
Equipment based on its own judgment and expressly disclaims any reliance upon
statements made by Lessor; and (ii) as of the Delivery and Acceptance Date, as
between Lessee and Lessor, Lessee shall have unconditionally accepted such
Equipment. Lessee shall execute and deliver to Lessor a Delivery and Acceptance
Receipt which shall be conclusive evidence that, without limitation, Lessee
finds the Equipment complete, in good working order and condition and
satisfactory for its requirements.
(b) Lessee shall comply with all laws, regulations and orders of any
governmental branch or agency which relates to the installation, use, possession
or operation of the Equipment, and shall use the Equipment in the regular course
of its business only, within its normal capacity, without abuse.
(c) Lessee, at its own expense, shall maintain the Equipment in good
operating condition, repair and appearance, and protect the same from
deterioration other than normal wear and tear, and shall enter into, and keep in
force a maintenance agreement with the manufacturer of the Equipment. Lessee
shall cause the manufacturer to keep the Equipment in good and efficient working
order, less normal wear and tear in full compliance and in accordance with the
provisions of such maintenance agreement and shall furnish evidence of such
agreement to Lessor upon request. During Lessee's normal business hours, Lessee
shall provide the manufacturer's field engineering representatives with access
to the equipment to install engineering changes necessary to keep the Equipment
at currently announced engineering change levels. Upon deinstallation of any
Equipment, Lessee shall provide Lessor evidence from the manufacturer stating
the Equipment is at currently announced engineering change levels and is
qualified for the manufacturer's maintenance agreement. The Equipment shall be
returned in the same operating order, repair, condition and appearance as on the
Delivery and Acceptance Date, reasonable wear and tear excepted.
(d) During Lessee's normal business hours, upon prior written notice to
Lessee and subject to Lessee's reasonable security procedures, Lessee shall
permit Lessor or its designee to inspect the Equipment, Lessee's equipment log
and maintenance records.
(e) Prior to delivery of any Equipment, the obligations of Lessor may be
suspended to the extent that Lessor is hindered or prevented from complying
therewith because of labor disturbances, acts of God, fire, storms, accidents,
failure of the manufacturer to deliver any Equipment, governmental regulations
or any cause whatsoever not within the control of Lessor.
7. RELOCATION. Lessee shall not move or permit to be moved any Equipment from
the location set forth in the applicable Lease Order without the prior written
consent of Lessor, which shall not be unreasonably withheld; provided, however,
in no event shall any Equipment be moved to a location outside the United States
of America. Risk of loss and all costs and expenses incurred in connection with
any movement of Equipment shall be the responsibility of Lessee.
8. ALTERATIONS AND MODIFICATIONS. Lessee shall not make modifications,
alterations or additions to Equipment (other than normal operating accessories
or controls) without the prior written consent of Lessor, which consent shall
not be unreasonably withheld. Notwithstanding the foregoing, Lessee shall be
entitled to acquire and install, at Lessee's expense, such additional features
or options ("Modifications") which (i) will not impair the originally intended
function or use of the Equipment in which the Modifications are installed, (ii)
will not require removal of any part of the Equipment, (iii) will not interfere
with Lessee's ability to obtain and maintain the maintenance contract required
by Paragraph 6(c), and (iv) the addition of which will not have an adverse
impact upon the value of the underlying Equipment or Lessor's rights therein.
Such Modifications shall be of the type which are readily installed and removed
without damage to the Equipment so as to restore the Equipment to the condition
in which it existed prior to the installation of such Modifications provided,
however, that if Lessor so agrees in writing, Lessee shall not be required to
remove such Modifications. Any Modifications not so removed shall become the
property of Lessor. All Modifications must qualify for the manufacturer's
maintenance agreement and be maintained in accordance with Paragraph 6(c)
hereof. Lessee hereby grants to Lessor the right and opportunity to first submit
or match the last proposal for the lease, financing or supply of any
Modification.
9. SOFTWARE. Lessee and Lessor acknowledge that the Equipment may contain or
include a description of certain Software in which Lessor and Lessee may have no
ownership or other proprietary rights. Where required by the Software owner,
manufacturer or distributor, Lessee shall enter into a license or other
agreement for the use of such Software. Any Software agreement shall be separate
and distinct from this Master Lease and any Lease Order, and Lessor and Assignee
shall not have any obligations thereunder, but shall have the right to require
Lessee to terminate Lessee's use of the Software if an Event of Default shall
occur and shall be continuing hereunder. In the event rent specified in a Lease
Order includes an amount attributable to the financing by Lessor of Lessee's fee
for use of Software, Lessee agrees that such amount shall be deemed rent and
subject to all the provisions of this Lease Agreement. Upon termination of this
Lease Agreement for reasons other than default, Lessee hereby assigns to Lessor,
to the extent assignable, any and all rights and obligations relating to
software and applicable software licenses.
10. OWNERSHIP, SECURITY INTEREST. It is expressly understood that the Equipment
is, and shall at all times remain, personal property of Lessor. Lessee shall
have no right, title or interest in the Equipment except as expressly provided
herein. If requested by Lessor, Lessee will obtain, prior to delivery of any
Equipment, a certificate satisfactory to Lessor from all parties with a real
property interest in the premises where the Equipment shall be located, waiving
any claim with respect to the Equipment. If Lessor supplies Lessee with labels,
plates or other markings stating that the Equipment is owned by Lessor, Lessee
shall attach same in a prominent place on the Equipment. Lessee agrees to
execute Uniform Commercial Code financing statements and any and all additional
instruments requested by Lessor to perfect the interest of Lessor, its
successors or assigns in this Master Lease, any Lease Order, the payments due
hereunder or the Equipment. Lessee authorizes Lessor to file a copy of the
Master Lease or any Lease Order or invoice as a financing statement. Lessee
agrees to reimburse Lessor for all recording and filing fees.
11. ASSIGNMENT OR SUBLETTING BY LESSEE. LESSEE SHALL NOT ASSIGN, TRANSFER,
PLEDGE OR OTHERWISE DISPOSE OF THIS LEASE AGREEMENT, ANY LEASE ORDER OR ANY OF
ITS RIGHTS THEREUNDER NOR SUBLEASE OR LEND ANY OF THE EQUIPMENT TO ANY OTHER
PERSON WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR. ANY PURPORTED ASSIGNMENT,
TRANSFER, PLEDGE, OR OTHER DISPOSITION OF THIS LEASE AGREEMENT, ANY LEASE ORDER
OR ANY OF LESSEE'S RIGHTS THEREUNDER, OR ANY PURPORTED SUBLEASE OR LENDING OF
THE EQUIPMENT, WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, AT LESSOR'S OPTION, SHALL
BE VOID AND OF NO EFFECT. FOR THE PURPOSES OF THIS PARAGRAPH 11, ANY PURPORTED
SALE OR OTHER TRANSFER OF A CONTROLLING OWNERSHIP INTEREST OF LESSEE (WHETHER IN
ONE TRANSACTION OR SERIES OF RELATED TRANSACTIONS) SHALL BE DEEMED AN ASSIGNMENT
OF THE LESSEE'S RIGHTS HEREUNDER REQUIRING THE PRIOR WRITTEN CONSENT OF THE
LESSOR. As to any permitted assignment or sublease, the following conditions
shall apply:
(a) Lessee shall remain fully liable for all payments due under each Lease
Order and remain the primary obligor for all remaining obligations under this
Lease Agreement and any Lease Orders hereunder.
(b) Lessee shall give Lessor at least thirty (30) days written notice of
the location of the Equipment and the identity of the assignee or sublessee
prior to the installation at assignee's or sublessee's premises. Lessee shall be
responsible for obtaining any and all financing statements and other
documentation reasonably requested by Lessor.
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(c) Any sublessee's interest in any permitted sublease hereunder shall be
subordinate to the interests of Lessor or any Assignee of Lessor.
12. DISCLAIMER OF WARRANTIES.
(A) LESSEE ACKNOWLEDGES THAT LESSOR IS NOT THE MANUFACTURER OF THE
EQUIPMENT, NOR THE AGENT OF THE MANUFACTURER AND THAT LESSOR HAS MADE NO
REPRESENTATIONS, WARRANTIES OR COVENANTS OF ANY KIND, EXPRESS OR IMPLIED, AS TO
ANY MATTER WHATEVER, INCLUDING BUT NOT LIMITED TO: THE DESIGN, CONDITION OR
PERFORMANCE OF THE EQUIPMENT, ITS MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF THE EQUIPMENT. FURTHER,
LESSOR MAKES NO WARRANTIES WITH RESPECT TO THE CONFORMITY OF THE EQUIPMENT TO
THE PROVISIONS AND SPECIFICATIONS OF ANY LAW, RULE, REGULATION, CONTRACT OR
PURCHASE ORDER, OR WITH RESPECT TO PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT
MATTERS OR "YEAR 2000" COMPLIANCE. LESSOR EXPRESSLY DISCLAIMS ANY AND ALL
EXPRESS OR IMPLIED WARRANTIES. AS TO LESSOR, LESSEE LEASES THE EQUIPMENT "AS IS,
WHERE IS".
(B) LESSEE AGREES THAT LESSOR SHALL NOT BE LIABLE TO THE LESSEE FOR ANY
CLAIM, LOSS OR DAMAGE, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR OTHERWISE,
INCLUDING WITHOUT LIMITATION, LOSS OF PROFIT, LOSS OF BUSINESS, OR OTHER
FINANCIAL LOSS, WHICH MAY BE CAUSED, DIRECTLY OR INDIRECTLY, BY THE EQUIPMENT,
THE INADEQUACY OF THE EQUIPMENT FOR ANY PURPOSE OR ANY USE THEREOF, BY ANY
DEFICIENCY OR DEFECT THEREIN, OR BY ANY INCIDENT WHATSOEVER IN CONNECTION
THEREWITH, ARISING IN STRICT LIABILITY, NEGLIGENCE, CONTRACT, TORT OR OTHERWISE,
OR IN ANY WAY RELATING TO OR ARISING OUT OF THE EQUIPMENT, THIS LEASE AGREEMENT
OR ANY LEASE ORDER. THE LESSEE AGREES THAT IT WILL, IRRESPECTIVE OF ANY SUCH
CLAIM, LOSS, DAMAGE OR EXPENSE, CONTINUE TO PAY SUCH MONTHLY RENTAL CHARGES AND
OTHER SUMS AS MAY COME DUE UNDER ANY LEASE ORDER HEREUNDER.
13. ASSIGNMENT OF MANUFACTURER'S WARRANTIES. Lessor hereby assigns to Lessee, to
the extent assignable, all manufacturer's warranties, service agreements and
patent indemnities with respect to the Equipment, if any, for the purpose of
making appropriate claims against the manufacturer, provided that the Lessor
shall retain at all times the right to be protected by these warranties,
agreements and indemnities as the owner of the Equipment. The Lessee's sole
remedy for the breach of any such warranty, indemnification or service agreement
shall be against the manufacturer, and not against Lessor or any Assignee of
Lessor, nor shall any such breach have any effect whatsoever on the rights and
obligations of either party with respect to this Lease Agreement. Lessor will,
upon request by Lessee and at Lessee's sole expense, cooperate with Lessee in
the enforcement of any benefit provided in any such warranties, service
agreements and patent indemnities.
14. INDEMNIFICATION. Lessee agrees that it will defend, indemnify and hold
Lessor harmless against any and all claims, demands, liabilities, obligations,
losses, damages, injuries, penalties, actions, costs and expenses, including
reasonable attorney's fees, of whatever kind and nature arising out of or in
connection with the possession, use, condition (including, but not limited to,
latent and other defects, whether or not discoverable by Lessor or Lessee),
operation, ownership by Lessor, selection, delivery, leasing or return of any
item of Equipment leased hereunder, regardless of where, how and by whom
operated, or any failure on the part of Lessee to accept the Equipment or
otherwise to perform or comply with the provisions of this Lease Agreement or
any Lease Order, except for Lessor's gross negligence or willful misconduct. The
indemnities and assumptions of liabilities and obligations herein provided for
shall continue in full force and effect notwithstanding the expiration or
termination of the Initial Term, any renewal or extension thereof, or of any
Lease Order or this Lease Agreement.
15. ASSIGNMENT BY LESSOR. LESSOR MAY ASSIGN OR TRANSFER THIS MASTER LEASE OR ANY
LEASE ORDER HEREUNDER OR LESSOR'S INTEREST IN THE EQUIPMENT OR GRANT A SECURITY
INTEREST THEREIN TO ONE OR MORE ASSIGNEES WITHOUT NOTICE TO LESSEE. Any Assignee
of Lessor shall have all of the rights but none of the obligations of Lessor
hereunder unless expressly agreed in writing, and Lessee agrees that it will not
assert against any Assignee any defense or counterclaim that Lessee may have
against Lessor. Lessee shall have no greater obligations to any Assignee than it
had to Lessor at the time of assignment, and such assignment shall not limit or
otherwise restrict the rights afforded Lessee hereunder. Lessee hereby (i)
consents to such assignments and/or grants, (ii) agrees to promptly execute and
deliver UCC financing statements, an Acknowledgment and Consent of Assignment
and such further acknowledgments, agreements, certificates and other instruments
as may be reasonably requested by Lessor or Assignee to effect such assignments
and/or grants. Lessee acknowledges that any assignment or transfer by Lessor
made in accordance with the provisions of this paragraph shall not materially
change Lessee's duties or obligations under this Lease nor materially increase
the burdens or risks imposed on Lessee. In the event of an assignment, all
references herein to Lessor shall be deemed to include Assignee. Notwithstanding
any such assignment: (i)Lessor shall not be relieved of any of its obligations
hereunder; and (ii) the rights of Lessee to quiet enjoyment and possession of
the Equipment shall not be impaired so long as Lessee is not in default under
this Lease.
16. QUIET POSSESSION AND ENJOYMENT. Lessor covenants that so long as Lessee is
not in default hereunder, neither Lessor nor any Assignee will disturb Lessee's
quiet possession and enjoyment of the Equipment, subject to and in accordance
with the provisions of this Lease Agreement and the applicable Lease Order.
17. DAMAGE, DESTRUCTION OR LOSS.
(a) Upon delivery of the Equipment to Lessee until the Equipment is
redelivered to Lessor, Lessee shall bear the entire risk of loss, damage, or
destruction with respect to the Equipment resulting from any cause whatsoever.
(b) If any Equipment becomes damaged beyond repair, lost, stolen,
destroyed or permanently rendered unfit, or in the event of any condemnation or
taking by any governmental authority (any such occurrence being hereinafter
referred to as an "Event of Loss"), then Lessee shall promptly notify Lessor and
shall do either of the following within thirty (30) days after the occurrence of
an Event of Loss:
(i) At its expense, promptly replace the affected Equipment with like
or better replacement equipment of identical make, model, configuration,
capacity and condition, in good repair, free and clear of all liens, in which
case any such replacement equipment shall become the property of Lessor and for
all purposes of this Master Lease shall be deemed to be the Equipment which it
replaced; or
(ii) Terminate the Lease Order with respect to the affected Equipment
and pay to Lessor on the next payment date, an amount equal to the present value
of the remaining rental payments discounted by five percent (5%), plus the fair
market value in continued use of the Equipment.
18. INSURANCE. Lessee shall, at its expense, insure the Equipment against all
risks and in such amounts as Lessor shall reasonably require (but not less than
the full replacement value) with carriers reasonably acceptable to Lessor, shall
maintain a loss payable endorsement in favor of Lessor and its assigns affording
to Lessor and its assigns such additional protection as Lessor and its assigns
shall reasonably require, and Lessee shall maintain liability insurance
reasonably satisfactory to Lessor and its assigns. All such insurance policies
shall name Lessee, Lessor and its assigns as additional insureds and shall name
Lessor and its assigns as loss payee(s), and shall provide that insurance
coverage shall not be canceled or altered without at least thirty (30) days
prior written notice to Lessor and Assignee, and that no breach of warranty by
Lessor shall invalidate such insurance with respect to any additional insured.
Lessee shall promptly furnish appropriate evidence of such insurance to Lessor
and any Assignee.
19. REPRESENTATIONS AND WARRANTIES OF LESSEE. Lessee represents and warrants to
Lessor and any Assignees on the date hereof and on the date of each Lease Order
that: (i) the execution and performance of this Lease Agreement and all Lease
Orders are duly authorized and this Lease Agreement and the Lease Orders
constitute legal, valid and binding obligations of Lessee enforceable in
accordance with their terms; (ii) the performance under the Lease Agreement and
all Lease Orders by Lessee will not result in any breach, default or violation
of Lessee's articles of incorporation or by-laws, if applicable, or partnership
agreement, if applicable, or any agreement to which Lessee is a party; (iii)
Lessee is in good standing duly organized, and validly existing in its
jurisdiction of incorporation or organization and in any jurisdiction(s) in
which any of the Equipment is to be located; (iv) there are no actions, suits or
proceedings pending or threatened, before any court, agency, or arbitrator which
will, if determined adversely to Lessee, materially adversely affect its ability
to perform its obligations under this Lease Agreement or any Lease Order; and
(v) any and all information with respect to Lessee heretofore furnished to
Lessor was, when furnished, true and complete.
20. FINANCIAL STATEMENTS, ETC.. During the term of this Lease Agreement, Lessee
shall furnish to Lessor and any Assignee Lessee's audited balance sheet, income
statement and statement of cash flows for its most recent fiscal year, within
ninety days and quarterly statements within forty-five days, all prepared in
accordance with generally accepted accounting principles consistently applied,
and, from time to time, such other information concerning the Equipment as
Lessor or any Assignee may reasonably request.
21. DEFAULT. The occurrence of any of the following events shall constitute an
"Event of Default" hereunder and under each Lease Order entered into pursuant
hereto:
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(a) Lessee shall fail to pay any installment of rent or other charge due
under this Lease Agreement or any Lease Order thereunder within ten (10) days
after the same is due and payable;
(b) Lessee attempts to move, sell, assign, transfer, encumber, dispose of,
sublet or lend any of the Equipment without the prior written consent of Lessor;
(c) Except for defaults covered by Paragraph (a) above, Lessee shall fail
to perform or observe any covenant, condition or agreement to be performed or
observed by it hereunder or under any Lease Order and such failure continues
unremedied for fifteen (15) days after notice thereof to Lessee by Lessor;
(d) Any representation or warranty made by Lessee in this Lease Agreement,
any Lease Order, or in any document or certificate made or furnished to Lessor
in connection herewith or pursuant hereto shall prove to be false at any time in
any material respect;
(e) Lessee ceases doing business as a going concern; makes an assignment
for the benefit of creditors; admits in writing its inability to pay its debts
as they become due; files a voluntary petition in bankruptcy; is adjudicated to
be bankrupt or insolvent; files a petition seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar arrangement under any present or future statute, law or regulation or
files an answer admitting the material allegations of a petition filed against
it in any such proceeding; consents to or acquiesces in the appointment of a
trustee, receiver or liquidator of it or of all or any substantial part of its
assets or properties, or if it or its shareholders shall take any action to
effect a dissolution or liquidation and, in the case of any such proceeding not
being instituted by Lessee, such proceeding is not dismissed or vacated within
thirty (30) days.
22. REMEDIES. Upon the occurrence of any Event of Default and at any time
thereafter, Lessor may, with or without terminating this Lease Agreement, do any
one or more of the following:
(a) Proceed by appropriate court action to enforce performance by Lessee
of the applicable terms of this Lease Agreement or any Lease Order;
(b) Declare immediately payable all sums due and to become due hereunder
for the full term of any and all Lease Orders under this Master Lease;
(c) If the Lease Order provides for a Stipulated Loss Value or other fixed
value of the Equipment, recover (i) any then accrued and unpaid rent plus
interest thereon at the late payment rate, (ii) the Stipulated Loss Value or
other fixed value, at Lessor's option, of the Equipment as of the rent payment
date immediately preceding Lessee's date of default, and (iii) all commercially
reasonable costs and expenses incurred by Lessor in any repossession, recovery,
storage, repair, sale, release or other disposition of the Equipment, including
reasonable attorney's fees and costs incurred in connection therewith or
otherwise resulting from Lessee's default;
(d) If the Lease Order does not provide for a Stipulated Loss Value or
other fixed value for the Equipment, recover from Lessee damages, not as a
penalty, but herein liquidated for all purposes and in an amount equal to the
sum of (i) any then accrued and unpaid Rent plus interest thereon at the Late
Payment Rate, (ii) the present value of all remaining Rent contracted to be paid
over the unexpired portion of the Initial Term or any extended term, discounted
at an interest rate of five percent (5%) per annum plus prepayment penalty fees,
(iii) all commercially reasonable costs and expenses incurred by Lessor in any
repossession, recovery, storage, or repair, sale, re-lease or other disposition
of the Equipment, including reasonable attorney's fees and costs incurred in
connection therewith or otherwise resulting from Lessee's default and (iv) the
fair market residual value in continued use at the time of default of the
Equipment determined by Lessor;
(e) Re-lease or sell any or all of the Equipment at a public or private
sale, with the privilege of becoming the purchaser or Lessee thereof, on such
terms and notice as Lessor shall deem reasonable, and thereafter Lessor shall
apply the proceeds derived therefrom as follows, Lessee remaining liable for any
deficiency: First, to reimburse Lessor for all costs and expenses incurred by
Lessor in any repossession, recovery, storage, repair, sale, re-lease or other
disposition of the Equipment, including reasonable attorney's fees, commissions
and broker's fees and costs incurred in connection therewith or otherwise
resulting from Lessee's default; second, to pay Lessor any amounts owing
hereunder, third, to reimburse Lessee for any amount paid hereunder as a result
of Lessee's default; and fourth, any surplus remaining thereafter to Lessor;
(f) Take immediate possession of any or all of such Equipment wherever
situated, and for such purpose, enter upon any premises (by summary proceedings
or otherwise) where the Equipment is located without prejudice to any other
remedy or claim referred to herein; and
(g) Exercise any other right or remedy which may be available to it under
the Uniform Commercial Code or any other applicable law.
A termination hereunder shall occur only upon notice by Lessor and only as
to such Equipment as Lessor specifically elects to terminate and this Master
Lease and all Lease Orders hereunder shall continue in full force and effect as
to the remaining Equipment, if any. No remedy referred to in this Paragraph 22
is intended to be exclusive, but each shall be cumulative and in addition to any
other remedy referred to above or otherwise available to Lessor at law or in
equity. No express or implied waiver by Lessor of any default shall constitute a
waiver of any other default by Lessee or a waiver of any of Lessor's rights.
23. LOSS OF ANTICIPATED TAX BENEFITS. Lessee acknowledges that unless otherwise
agreed to in writing by Lessor, Lessor intends to claim all available tax
benefits of ownership with respect to the Equipment (the "Tax Benefits"),
including, but not limited to, cost recovery deductions as provided in Section
168 of the Internal Revenue Code of 1986, as amended (the "Code"), with respect
to each item of Equipment for each of Lessor's taxable years during the Initial
Term and any extended or renewal term. Notwithstanding anything herein to the
contrary, if Lessor shall not be entitled to, or shall be subject to recapture
of the Tax Benefits as a result of any act, omission or misrepresentation of
Lessee, Lessee shall pay to Lessor upon demand an amount sufficient to reimburse
Lessor for such loss, together with any related interest and penalties, based on
the highest marginal corporate income tax rate prevailing at the time of such
loss, regardless of whether Lessor or any member of a consolidated group of
which Lessor is also a member is then subject to any increase in tax as a result
of such loss of Tax Benefits.
24. TERMINATION. Each Lease Order, with respect to all but not less than all of
the Equipment covered thereby, may be terminated by either party at the end of
the Initial Term or any renewal or extended term thereof provided written notice
of termination of a Lease Order is given between one hundred eighty days and
ninety days prior to the termination of the Lease Order. If proper notice of
termination is not given, or if the Equipment is not returned to Lessor as
notified, the term of the Lease Order shall be extended on the same terms and
conditions for six months. Thereafter, the Lease Order as so extended may be
terminated by either party at the end of any calendar month by giving the other
party ninety days prior written notice.
25. GENERAL.
(a) This Lease Agreement and any Lease Order hereunder shall be governed
in all respects by the laws of the State of Florida. Lessor and Lessee agree
that any dispute between them arising under this Lease Agreement or any Lease
Order shall be resolved in the state or federal courts in the State of Florida
having within its jurisdiction the City of Tampa, Florida. Lessee hereby
knowingly and irrevocably waives any objections to an action in such courts in
the State of Florida on the grounds of lack of personal jurisdiction or improper
venue and agrees that effective service of process may be made upon Lessee by
mail under the notice provisions of subparagraph 25(c) hereof. NO RIGHTS OR
REMEDIES REFERRED TO IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE SHALL BE
INCORPORATED INTO THIS LEASE AGREEMENT UNLESS EXPRESSLY GRANTED IN THIS LEASE
AGREEMENT OR A LEASE ORDER HEREUNDER.
(b) This Lease Agreement and all Lease Orders constitute the entire
agreement between Lessee and Lessor with respect to the Equipment covered
thereby and supersede any prior or contemporaneous agreements or understandings
relating thereto. No covenant, condition or other term or provision hereof or of
any Lease Order may be waived, changed, amended or modified except by a written
agreement signed by both Lessor and Lessee.
(c) All notices, consents or requests desired or required to be given
hereunder shall be in writing and shall be mailed, via certified mail, return
receipt requested, to the address of the other party set forth on the first page
hereof or to such other address as such party shall have designated by a proper
notice.
(d) This Lease Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective permitted successors and assigns.
(e) Paragraph headings are for convenience of reference only and shall not
be construed as part of this Lease Agreement.
(f) It is expressly understood that all of the Equipment shall be and
remain personal property of the Lessor notwithstanding the manner in which the
same may be attached or affixed to realty, and Lessee shall do all acts and
execute all documents necessary to insure that the Equipment remains personal
property.
(g) All agreements, representations and warranties contained in this Lease
Agreement, any Lease Order, and in any document delivered pursuant hereto or in
connection herewith shall be for the benefit of Lessor and any Assignee and
shall survive the execution and delivery, and the expiration or other
termination, of this Lease Agreement and any Lease Order.
(h) Time is of the essence of this Lease Agreement and each Lease Order.
(i) Lessee shall, upon request of Lessor, perform all such other acts and
execute and deliver to Lessor all such other documents which Lessor deems
reasonably necessary to implement the provisions of this Lease Agreement or any
Lease Order.
(j) Each Lease Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but there shall be only one executed
original of each Lease Order which shall be marked "Original" (the "Original")
and all other counterparts shall be marked "Duplicate". To the extent, if any,
that a Lease Order constitutes chattel paper (as such term is defined in the
Uniform Commercial Code) no security interest in the Lease Order may be created
through the transfer or possession of any counterpart other than the Original of
the Lease Order accompanied by an Original or certified copy of the Lease
Agreement.
4 of 4
<PAGE>
Exhibit 10.25
FIRST ADDENDUM TO MASTER LEASE AGREEMENT
DATED AS OF MARCH 31, 1999
BETWEEN
GATX CAPITAL CORPORATION
AND
RHYTHMS NETCONNECTIONS INC.
Dated as of March 31, 1999
This First Addendum amends the Master Lease Agreement, dated as of
March 31, 1999 (the "Lease"), between GATX Capital Corporation and Rhythms
NetConnections Inc. All capitalized terms used but not defined herein shall have
the respective meanings given thereto in the Lease.
1. FINANCING.
(a) COMMITMENT. Subject to the satisfaction of the conditions set forth
in paragraph 2 below and on the basis set forth in this paragraph, Lessor has
agreed to provide up to $26,500,000 of lease financing to Lessee. The funding of
each Lease Order is subject to the satisfaction of the conditions set forth in
paragraph 3 below. Lessor's commitment to finance Equipment under this Addendum,
shall terminate on the date (the "Commitment Termination Date") that is the same
day of the month in the fifteenth month following the date hereof.
(b) TERM AND LEASE RATE FACTOR. The Initial Term of each Lease Order
financed under this Addendum shall be 36 months and the rental for the initial
Lease Order under this Addendum during the six-month period following the
funding of such initial Lease Order and for each subsequent Lease Order funded
during such six-month period shall be payable in accordance with Section 4 of
the Lease in an amount on each Rent Payment Date equal to the amount funded
under the applicable Lease Order multiplied by 3.0% (the "Lease Rate Factor").
The Lease Rate Factor for all Lease Orders funded following such six-month
period will be determined by calculating a new Lease Rate Factor using as the
implicit interest rate for such Lease Rate Factor the U.S. Treasury note rate
for notes having a 36 month term as quoted in THE WALL STREET JOURNAL on the
date of preparation of the first such Lease Order funded during such subsequent
period; provided, however, that no such adjustment shall be made unless and
until such U.S. Treasury rate shall have increased by more than 25 basis points
above the rate in effect on the date hereof.
(c) END OF TERM OPTIONs. Provided that the Lease has not been
terminated and that no Event of Default or event which, with notice or lapse of
time or both, would become an Event of Default shall have occurred and be
continuing, not more than 180 days and not less than 120 days prior to the
expiration of the Initial Term of each Lease Order funded under this Addendum,
by written notice to Lessor, Lessee shall irrevocably elect either the option
under clause (i) or a combination of the options under clauses (i), (ii) and
(iii) within the parameters set forth therein:
(i) Lessee may elect to purchase Equipment (excluding Soft
Cost Equipment, as defined in Paragraph 1(d)) having an original total
cost (determined with reference to the Equipment Addendum to the
applicable Lease Order) equal to at least 70% of the aggregate total
cost of the Equipment under such Lease Order for a purchase price equal
to the "Fair Market Value" (as defined below) thereof as of the end of
the Initial Term of such Schedule, but such amount shall not be less
1
<PAGE>
than fifteen percent (15%) of the aggregate total amount originally
funded with respect to the Equipment being purchased, nor more than
twenty-five percent (25%) of the aggregate total amount originally
funded with respect to the Equipment being purchased, under such Lease
Order, plus any applicable sales or other transfer tax.
(ii) Lessee may elect to return either (i) one hundred percent
(100%) of the Equipment (other than Soft Cost Equipment, as defined in
Paragraph 1(d)), or (ii) Equipment (other than Soft Cost Equipment, as
defined in Paragraph 1(d)) having an original total cost (determined
with reference to the Equipment Addendum to the applicable Lease Order)
equal to not more than thirty percent (30%) of the aggregate total cost
of the Equipment subject to such Lease Order, in each case in the
condition required by the Lease.
(iii) Lessee may elect to renew the Lease with respect to any
Equipment not purchased or returned at the end of Initial Term of the
applicable Lease Order, for not less than twelve (12) months or the
remainder of an item of Equipment's remaining useful life if shorter,
for a rent equal to the "Fair Rental Value" (as defined below) of such
item for such additional period, which rent shall be paid monthly in
advance. At the end of the renewal term, Lessee shall elect one of the
options set forth in clauses (i), (ii) or (iii) of this paragraph (c).
"Fair Market Value" shall mean the estimated amount, as of a certain
date, at which the Equipment subject to the Lease may reasonably be
valued in the marketplace by a buyer who could choose not to buy and a
seller who could choose not to sell. In the event that the parties
cannot agree on a Fair Market Value amount, an independent appraiser
(mutually acceptable to Lessor and Lessee) with knowledge of the
Equipment, appropriate certification and experience utilizing Fair
Market Value as defined shall be retained to render an opinion.
"Fair Rental Value" shall mean the estimated amount, as of a certain
date, at which the Equipment subject to the Lease may reasonably be
valued in the marketplace by a lessee who could choose not to lease and
a lessor who could choose not to lease. In the event that the parties
cannot agree on a Fair Rental Value amount, an independent appraiser
(mutually acceptable to Lessor and Lessee) with knowledge of the
Equipment, appropriate certification and experience utilizing Fair
Rental Value as defined shall be retained to render an opinion.
(d) PAYMENTS FOR SOFT COSTS. With respect to any Equipment which is
deemed by Lessor to be soft cost equipment, including without limitation
software, software development costs, tooling, tenant improvements, custom-built
equipment, cabling, installation or freight costs (collectively, and excluding
collocation space costs, "Soft Cost Equipment"), at the time of the final Rent
Payment Date under each Lease Order, Lessee shall make a payment (in addition to
any payment under Paragraph 1(c)(i) or under Paragraph 1(c)(ii) hereof) equal to
fifteen percent (15%) of the total cost of the Soft Cost Equipment subject to
such Lease Order, plus any applicable sales or other transfer tax.
2. CONDITIONS TO EXECUTION OF THIS ADDENDUM. On or prior to the date of
execution of this Addendum by Lessor and the funding of the first Lease Order
under this Addendum, Lessor shall have received in form and substance
satisfactory to Lessor:
(a) A legal opinion of Lessee's legal counsel in form and
substance reasonably satisfactory to Lessor covering the
matters set forth in Exhibit A hereto.
2
<PAGE>
(b) Copies, certified by the Secretary or Assistant Secretary or
Chief Financial Officer of Lessee, of: (A) the
Certificate/Articles of Incorporation and By-Laws of Lessee
(as amended to the date of the Lease) and (B) the resolutions
adopted by Lessee's board of directors authorizing the
execution and delivery of the Lease and this Addendum, the
Lease Orders and the other documents referred to herein and
the performance by Lessee of its obligations hereunder and
thereunder.
(c) A good standing certificate (including franchise tax status)
with respect to Lessee from Lessee's state of incorporation,
the state where Lessee's chief executive office is located and
each state where Equipment is expected to be located, each
dated a date reasonably close to the date of acceptance of the
Lease by Lessor.
(d) Evidence of the insurance coverage required by Section 18 of
the Lease, if not previously provided to Lessor.
(e) All other documents as Lessor shall have reasonably requested.
3. CONDITIONS TO THE FUNDING OF EACH LEASE ORDER. Prior to the funding
of each Lease Order, Lessee shall have satisfied all of the following
conditions:
(a) Lessor shall have received:
(i) A Landlord's Waiver and Consent of each landlord of premises
on which Equipment will be located, substantially in the form of Exhibit
B hereto.
(ii) To the extent Lessor, in its commercially reasonable
business judgment, deems it necessary, a release or other arrangement
with any other lessor or lender to the Lessee to insure that there will
be no impairment of Lessor's interest in the Equipment subject to the
Lease Order.
(iii) Copies of invoices, purchase orders and canceled checks
relating to all Equipment being placed under the Lease pursuant to the
Lease Order and/or a Purchase Order and Invoice Assignment from Lessee to
Lessor substantially in the form of Exhibit C hereto.
(b) Lessee shall have filed or recorded, to the satisfaction of
Lessor, all instruments and documents, including, but not limited to,
precautionary Financing Statements on Form UCC-1 and releases and termination
statements on Form UCC-2, then deemed necessary by Lessor to preserve and
protect its rights hereunder, under the Uniform Commercial Code (including
the termination of any after-acquired property clause of third parties with
respect to any Unit).
(c) Lessor shall have received all other documents and Lessee shall
have performed all other acts as Lessor shall have reasonably requested to
consummate the transaction contemplated by the Lease Order.
(d) Except with the prior consent of Lessor, not to be unreasonably
withheld or delayed, the cost of Soft Cost Equipment which is financed under
the Lease Order shall not exceed fifteen percent (15%) of the total amount of
such Lease Order. Lessee will use its diligent efforts to obtain from the
vendor of any software financed under the Lease a consent to transfer the
right to use such software to a third party without further payment if an
Event of Default under the Lease exists.
3
<PAGE>
(e) On the date of funding of the Lease Order no Event of Default or
event, which with the passage of time or the giving of notice or both would
constitute an Event of Default, shall exist.
(f) Except with the prior written consent of Lessor which shall not
be unreasonably withheld, all of the Equipment subject to the Lease Order
shall consist of routers and ATM switches, DSLAMs, IP concentrators and
servers and related networking and information technology hardware and Soft
Cost Equipment.
(g) The amount to be funded under the Lease Order shall not be less
than $4,000,000, as determined by reference to the Equipment Addendum to such
Lease Order.
Lessor may, in its sole discretion, terminate its commitment herein to fund
Lease Orders under the Lease if there is any material adverse change to the
general affairs, management, results of operations, condition (financial or
otherwise) or prospects of Lessee, whether or not arising from transactions in
the ordinary course of business.
4. FINANCIAL COVENANTS
(a) CERTAIN DEFINITIONS. The following capitalized terms shall have
the following respective meanings for purposes of this Lease:
"CONSOLIDATED OPERATING CASH FLOW" shall have the meaning
given to such term in the Indenture.
"INDENTURE" shall mean the Indenture, dated as of May 5,
1998, between Lessee and State Street Bank and Trust Company
of California, N.A., as trustee.
(b) CONSOLIDATED OPERATING CASH FLOW. Lessee shall not permit its
Consolidated Operating Cash Flow for the fiscal quarter ending on the date
set forth below to be less than the amount set forth opposite such date below:
<TABLE>
<S> <C>
March 31, 1999 -17,507,993
June 30, 1999 -24,177,533
September 30, 1999 -34,689,886
December 31, 1999 -43,553,169
March 31, 2000 -50,273,067
June 30, 2000 -53,943,611
September 30, 2000 -61,496,059
December 31, 2000 -49,573,006
March 31, 2001 -58,453,548
June 30, 2001 -56,561,322
September 30, 2001 -60,855,319
December 31, 2001 -57,208,954
March 31, 2002 -50,796,277
June 30, 2002 -44,893,593
September 30, 2002 -55,406,092
</TABLE>
A breach of a financial covenant under this paragraph 4 shall constitute an
"Event of Default" under Section 21 of the Lease.
4
<PAGE>
5. REPORTING. Lessee shall furnish to Lender:
(a) FINANCIAL STATEMENTS. So long as Lessee is not subject to the
reporting requirements of Section 12 or Section 15 of the Securities and
Exchange Act of 1934, as amended, promptly as they are available, unaudited
quarterly and audited annual financial statements of Lessee and such other
financial information as Lender may reasonably request from time to time.
From and after such time as Lessee becomes a publicly reporting company,
promptly as they are available and in any event: (i) at the time of filing of
Lessee's Form 10-K with the Securities and Exchange Commission after the end
of each fiscal year of Lessee, the financial statements of Lessee filed with
such Form 10-K; and (ii) at the time of filing of Lessee's Form 10-Q with the
Securities and Exchange Commission after the end of each of the first three
fiscal quarters of Lessee, the financial statements of Lessee filed with such
Form 10-Q.
(b) COMPLIANCE STATEMENTS. Within thirty (30) days of the end of each
fiscal quarter of Lessee, a certificate of Lessee's Chief Financial Officer or
other senior officer stating that he or she has reviewed the provisions of the
Lease, this Addendum and any other addendum to the Lease then in effect, and
that Lessee is not in default in the observance or performance of any of the
provisions hereof, or if Lessee shall be so in default, specifying all such
defaults and events of which he or she may have knowledge, and setting forth the
calculation of compliance or noncompliance with each of the financial covenants
set forth in paragraph 4 above.
(c) MANAGEMENT REPORTS. Within twenty (20) days of the end of each month,
a management report setting forth by month and year-to-date, (i) new markets
entered and total markets entered, (ii) new central office locations and total
central office locations, and (iii) new lines and total lines.
6. ASSIGNMENT. Section 15 of the Lease shall be deemed amended to add the
following sentence:
"Notwithstanding the foregoing, Lessor shall in all circumstances
retain at least a 25% interest in the Lease, the Lease Orders thereto
and the Equipment.
7. NON-UTILIZATION FEE. Lessee agrees that by execution of the Lease it
has agreed to lease Equipment from Lessor having an aggregate cost of not less
than $6,300,000 hereunder, and if Lessor shall make available hereunder the
additional lease financing referred to in Paragraph 1(a) hereof, not less than
$15,900,000 thereafter (each such amount, the "Minimum Funding Amount"). If
Lessee fails at any time to meet the Minimum Funding Amount because (a) it has
not requested funding of Equipment under the Lease in the amount of the Minimum
Funding Amount, or (b) it has failed to satisfy any condition to any funding of
Eligible Equipment, then Lessee shall pay to Lessor upon Lessor's request
therefor a non- utilization fee of 1.25% of the difference between the maximum
amount of financing available hereunder on the date of such request and the
aggregate amount of Lease Orders then outstanding hereunder; provided, however,
that Lessee shall not pay a non-utilization fee upon more than one occasion
during the term of this Addendum. Lessee shall pay such non-utilization fee to
Lessor, as liquidated damages and not as a penalty, within ten business days of
receiving Lessor's request for payment thereof.
8. GOVERNING LAW. The first two sentences of Section 25(a) are amended to
read in their entirety as follows:
This Lease Agreement and any Lease Order hereunder shall be governed
in all respects by the laws of the State of California. Lessor and
Lessee agree that any dispute between them arising under this Lease
or any Lease Order shall be resolved in the state or federal courts
in the State of California located in the City and County of San
Francisco.
9. SURVIVAL OF TAX INDEMNITY. Section 23 shall be amended by adding at the
end thereof:
5
<PAGE>
The provisions of this Section 23 shall survive the termination or
cancellation of this Lease.
10. MISCELLANEOUS. The following Sections of the Lease are amended as
follows:
SECTION 1: The eleventh line is amended by replacing "seven (7) days" with
"fourteen (14) days" after "accepted within" and "seven (7) days" with "fourteen
(14) days" after "shall be deemed to be".
SECTION 4: The second line is amended by deleting "or quarter" after "each
calendar month".
SECTION 6(C): The second line is amended by inserting "or certified
maintenance provider" after "and keep in force a maintenance agreement with the
manufacturer" and "or certified maintenance provider" after "Lessee shall cause
the manufacturer". The third sentence is deleted in its entirety.
SECTION 7: The first sentence is amended by replacing "not move or permit
to be moved any Equipment from the location set forth in the applicable Lease
Order without the prior written consent of Lessor, which shall not be
unreasonably withheld," with "be permitted to relocate the Equipment within the
State set forth in the applicable Lease Order without the prior written consent
of the Lessor provided Lessee provides Lessor with a quarterly report detailing
any and all relocations of the Equipment."
SECTION 8: The first sentence is amended by replacing "shall not" with
"may" and" "which consent shall not be unreasonably withheld" with "provided
Lessee provides Lessor with a quarterly report detailing any and all
modifications, alterations or additions to the Equipment". The second sentence
is amended by deleting "(ii) will not require the removal of any part of the
Equipment" after "use of the Equipment in which the Modifications are
installed." The fourth line is amended by deleting the word "contract" after
"(iii) will not interfere with Lessee's ability to obtain and maintain the
maintenance". The eighth line is amended by changing the word "agreement" to
"requirements" after "All Modifications must qualify for the manufacturer's
maintenance".
SECTION 11: The third line is amended by adding "WHICH SHALL NOT BE
UNREASONABLY WITHHELD" after "THE PRIOR WRITTEN CONSENT OF LESSOR". The
sixth line is amended by inserting "DEFINED AS GREATER THAN 50%" after
"CONTROLLING OWNERSHIP INTEREST OF LESSEE". The seventh line is amended by
inserting the sentence "SUCH CONSENT SHALL NOT BE UNREASONABLY WITHHELD BY
LESSOR (i.e. if the purported assignee has a better credit rating than the
Lessee)."
SECTION 14: The fifth line is amended by deleting "gross" after "except
for Lessor's" and deleting "willful" after "negligence or."
SECTION 17(B)(II): The second line is amended by inserting "end of term"
after "plus the."
SECTION 21(B): The first line is amended by inserting "Equipment out of
the State" after "Lessee attempts to move."
6
<PAGE>
SECTION 23: The fourth line is amended by inserting "material" after "as a
result of any" and "," after "or shall be subject to the recapture of."
SECTION 24: The fourth line is amended by changing "six" to "three" after
"on the same terms and conditions for."
IN WITNESS WHEREOF, Lessor and Lessee have executed this First Addendum as
of March 31, 1999.
LESSOR: LESSEE:
GATX CAPITAL CORPORATION RHYTHMS NETCONNECTIONS INC.
By: /s/ Illegible By: /s/ Scott C. Chandler
---------------------------------- --------------------------------
Name: Illegible Name: Scott C. Chandler
-------------------------------- ------------------------------
Title: Title: Chief Financial Officer
------------------------------- -----------------------------
7
<PAGE>
EXHIBIT A
MATTERS TO BE COVERED IN LEGAL OPINION
(a) Lessee is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and is duly qualified to
do business and in good standing in the State of California.
(b) Lessee has and had the requisite corporate power and authority to
execute, deliver and perform the Lease, the First Addendum and the Lease Orders
and to issue the Warrant. All action on the part of Lessee, its directors and
its shareholders necessary for the authorization, execution, delivery and
performance of the Lease, the First Addendum, the Lease Orders and the Warrant,
has been taken. The Transaction Documents have been duly executed and delivered
by an authorized officer of Lessee.
(c) The execution, delivery and performance of the Transaction
Documents (i) do not conflict with or violate any provision of Lessee's Restated
Certificate of Incorporation or Bylaws or of applicable law, (ii) do not
conflict with or constitute a default under any provision of any material
judgment, writ, decree, order or material agreement, indenture, or instrument to
which Lessee is a party or by which it is bound, and (iii) will not cause the
imposition of any Lien upon the assets or properties of Lessee.
(d) The Transaction Documents constitute legal, valid and binding
obligations of Lessee, enforceable in accordance with their respective terms. To
our knowledge, no filing need be made with any governmental authority with
respect to the Transaction Documents.
(e) The shares of Common Stock issuable upon exercise of the Warrant
have been duly authorized and reserved for issuance upon such exercise, and when
issued in accordance with the terms of the Warrant, will be duly authorized,
validly issued, fully paid and non-assessable.
A-1
<PAGE>
EXHIBIT B
LANDLORD WAIVER
<PAGE>
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:
GATX CAPITAL CORPORATION
Four Embarcadero Center, Suite 2200
San Francisco, CA 94111
Attn: Contract Administration
- --------------------------------------------------------------------------------
LANDLORD'S WAIVER AND CONSENT
THIS LANDLORD'S WAIVER AND CONSENT (this "Waiver"), dated as
of ____________, 199______, is executed by and between
__________________________________________________________
,________________________________________ ("Landlord") and GATX CAPITAL
CORPORATION ("Lessor").
RECITALS
A. Landlord and RHYTHMS NETCONNECTIONS, INC. ("Tenant") are parties to
a ________________________________________________________________ [Lease
Agreement], dated as of ______________________________, 19_________ (together
with any other agreement between Landlord and Tenant relating to the Premises,
as defined below, all as amended from time to time, to be referred to herein
collectively as the "Lease"), pursuant to which Landlord has leased to Tenant
that certain real property commonly known as _______________________________
______________________________________________, and more particularly described
in ATTACHMENT 1 hereto (the "Premises").
B. Tenant and Lessor intend to or have entered into a Master Lease
Agreement, dated as of November 19, 1997, as amended (the "Credit Agreement")
pursuant to which Lessor has agreed or will agree to lease to Tenant from time
to time certain equipment (the "Equipment") which will be located on the
Premises.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Landlord and Lessor hereby agree as follows:
1. WAIVER AND CONSENT. Landlord hereby consents to the location of the
Equipment on the Premises and does irrevocably waive, disclaim and relinquish
and assign to Lessor any and all rights to impose, receive, assert or enforce
any lien, encumbrance, charge, security interest, ownership interest, claim or
demand of any kind against or involving the Equipment, whether arising by common
law, statute or consensually (under the Lease or otherwise) and whether now in
existence or hereafter created, including, but not limited to, those for rent or
other right of payment. This waiver, disclaimer, relinquishment and assignment
shall survive the termination of the Lease. Landlord further agrees that (a)
neither the Equipment nor any item thereof shall become part of, or otherwise be
or become a fixture attached to, the Premises, notwithstanding the manner of the
Equipment's annexation, the Equipment's adaptability to the uses and purposes
for which the Premises are used, and the intentions of the party making the
annexation; (b) the Equipment (or any item thereof) may be repossessed by
Lessor; (c) in connection with such repossession or otherwise, Lessor, and any
of its agents and employees, may enter upon the Premises for the purposes of (i)
guarding and maintaining the Equipment (or any item thereof), (ii) showing the
Equipment (or any item thereof) to prospective lenders, buyers, lessees and
sublessees, as applicable, and any of their respective agents and employees,
(iii) preparing, disassembling, dismantling, loading and/or removing the
Equipment (or any item thereof), and (iv) general inspections of the Equipment
pursuant to the Credit Agreement; and (d) the right of Lessor to enter the
Premises and the other rights granted to Lessor in this Waiver shall not
terminate until thirty (30) days after Lessor receives written notice from
Landlord of the termination of the Lease. If Lessor should exercise its rights
hereunder (and the failure to exercise such rights shall not be construed as
1
<PAGE>
a waiver thereof), Landlord agrees upon receiving prior written notice, to
provide ingress and egress to effect such exercise as well as provide reasonably
adequate space contiguous to the location of the Equipment to permit the
exercise of such rights. Landlord further agrees that Lessor has no obligation
to exercise any right granted to Lessor in this Waiver and that Lessor may elect
to remove only a portion or none of the Equipment from the Premises.
2. COSTS. Lessor agrees to indemnify and hold the Landlord harmless
from any out-of-pocket costs incurred by Landlord for any physical damage to the
Premises caused by Lessor solely from the exercise of its rights under clause
(b) or (c) of Paragraph 1 above.
3. LEASE DEFAULTS. Landlord further agrees to provide Lessor written
notice of any default or event of default under the Lease (each a "Default
Notice") simultaneously with the giving of notice of the same to Tenant or, if
no such notice is required under the Lease, at least thirty (30) days prior to
the date Landlord would be entitled to terminate the Lease. Each such notice
shall be sent to the address of Lessor set forth below the signature of Lessor
on the last page hereof or such other address as Lessor may from time to time
provide to Landlord, and shall be deemed delivered (i) in the case of notice by
letter, five (5) business days after deposited in the United States mail
registered and return receipt requested, (ii) in the case of notice by overnight
courier, two (2) business days after delivery to such courier and (iii) in the
case of notice given by telex or telecommunication, when given or sent with
electronic confirmation of receipt. During any time period when Tenant is in
default under the Lease, Lessor shall have the option, but not the obligation,
to cure any such default. Landlord shall accept such cure if it occurs within
thirty (30) days after Lessor has received the relevant Default Notice as fully
as if Tenant had fully performed its obligation under the Lease. Upon curing any
such default, Lessor shall be subrogated to the rights of Landlord against
Tenant and, as between Landlord and Tenant, such cured defaults shall no longer
exist.
4. LANDLORD'S REPRESENTATIONS AND WARRANTIES. Landlord hereby warrants
and represents to Lessor that (a) Landlord is the lessor under the Lease; (b)
there are no other agreements between the parties affecting or relating to the
Premises; (c) Landlord has all requisite power and authority to execute and
deliver this Waiver and no consents from any third party are required to do so;
(d) Landlord is the sole owner of the landlord's interest under the Lease and
has not conveyed, transferred or assigned any part of that interest to any other
person or entity; (e) no event of default (nor any event which with the passage
of time would constitute an event of default) has occurred under the Lease; (f)
there exists no litigation affecting title to the Premises or any adverse claim
with respect to the Premises of which Landlord has received notice; (g) there is
no condemnation proceeding pending with respect to any part of the Premises, nor
any threat thereof, of which the Landlord has received notice; (h) the Lease is
in full force and effect; and (i) the Premises are not subject to any mortgage
or other security interest in favor of any person which has not executed an
attornment agreement acceptable to Lessor with respect to this Waiver.
5. MISCELLANEOUS. This Waiver and all rights hereby granted to Lessor
hereunder shall remain in effect so long as there are any obligations owing by
Tenant under the Credit Agreement or any present or future agreement between
Tenant and Lessor which involves the Equipment. All the terms and provisions of
this Waiver shall be binding on and inure to the benefit of the respective
successors and assigns of Landlord and Lessor, and Landlord covenants and agrees
that any assignment, mortgage or other transfer of all or any part of its
interest as the owner and/or landlord of the Premises shall provide and shall be
subject and subordinate to all the terms and provisions hereof. Landlord shall
provide each of Tenant and Lessor a duly executed copy of the agreement
evidencing such subordination. Such agreement shall be in form and substance
reasonably satisfactory to Lessor. The rights and benefits of this Waiver may be
assigned or transferred by Lessor or to third parties who may become the lessor,
directly or indirectly, to Tenant. Lessor shall provide subsequent written
notice to Landlord and Tenant of the assignment or transfer. Headings in this
Waiver are for convenience of reference only and are not part of the substance
hereof. This Waiver shall be governed by and construed in accordance with the
laws of the State of California.
2
<PAGE>
IN WITNESS WHEREOF, Landlord and Lessor have executed this Waiver as of
the date and year first written above.
------------------------------------------
By:
------------------------------------
Name:
Title:
---------------------------------
Address:
------------------------------------------
------------------------------------------
------------------------------------------
Attention:
GATX CAPITAL CORPORATION
By:
------------------------------------
Name:
Title:
---------------------------------
Address:
GATX Capital Corporation
Four Embarcadero Center
Suite 2200
San Francisco, CA 94111
Attention: Contract Administrator
3
<PAGE>
Exhibit 10.26
AMENDMENT NO. 1 TO FRAMEWORK AGREEMENT
This Amendment No. 1 ("Amendment") to the Framework Agreement originally
dated as of March 3, 1999 (the "Agreement") is made as of this 6th day of April
1999 by and between between RHYTHMS NETCONNECTIONS, INC., a Delaware
corporation, and MCI WORLDCOM, INC., a Georgia corporation. Capitalized terms
used herein which are not defined herein shall have the definitions ascribed to
them in the Agreement.
WHEREAS, the parties desire to amend the Agreement as set forth herein.
In consideration of the promises and covenants contained herein and other
good and valuable consideration the receipt of which is hereby acknowledged, the
parties hereto agree as follows:
1. AMENDMENTS TO AGREEMENT.
(a) Section 2.2 of the Agreement is hereby amended to read as follows:
"2.2 PREFERRED PROVIDER STATUS.Subject to the conditions and
limitations contained in Sections 2.3 and 2.4 hereof and pursuant
to the CSA, Rhythms shall BE DESIGNATED AS THE FIRST CHOICE
CARRIER IN MCI WORLDCOM'S AUTOMATED CARRIER SYSTEM, at those
locations where Rhythms provides DSL Services and MCI WORLDCOM
does not have the capability to provide comparable services for
itself using its own network, all new DSL Services utilized by MCI
WORLDCOM, excluding (i) UUNET Technologies, Inc. and its direct
subsidiaries ("collectively, "UUNET"), and (ii) DSL Services for
an MCI WORLDCOM customer that requires or demands that MCI
WORLDCOM use services of a provider other than Rhythms. UUNET, for
its business customers, shall have the right to obtain DSL
Services under the terms of the CSA but shall not be subject to
the requirements of this Section 2.2. In the event that MCI
WORLDCOM is utilizing another provider of DSL Services prior to
the time that such DSL Services are available from Rhythms, MCI
WORLDCOM shall have no obligation to use the DSL Services of
Rhythms, for the lines already installed in that particular wire
center area, at or after the time that such services become
available from Rhythms; provided, however, if MCI WORLDCOM elects
to move such DSL Services from the other provider to Rhythms, then
Rhythms shall be obligated to provide such DSL Services in
accordance with the CSA and subject to Section 2.3 of this
Agreement."
(b) The references to "thirty (30) days" in each of Sections 2.1, 3.1,
4.1, 4.2 and 8.2(d) are hereby amended to refer to "sixty (60) days".
<PAGE>
2. EFFECT OF AMENDMENT. Except as amended and set forth above, the
Agreement shall continue in full force and effect.
3. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which will be deemed an original and all of which together
shall constitute one and the same instrument.
4. SEVERABILITY. If one or more provisions of this Amendment are held
to be unenforceable under applicable law, such provision shall be excluded from
this Amendment and the balance of the Amendment shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
5. ENTIRE AGREEMENT. This Amendment, together with the Agreement,
constitutes the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof.
6. GOVERNING LAW. This Amendment shall be governed by and construed
in accordance with the laws of the State of New York, without giving effect to
its principles of conflicts of law.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, this Amendment is hereby executed as of the date first
above written.
MCI WORLDCOM, INC.
BY: /s/ Susan Mayer
---------------------------
Name
President
---------------------------
Title
RHYTHMS NETCONNECTIONS, INC.
BY: /s/ Catherine Hapka
---------------------------
Name
President
---------------------------
Title
<PAGE>
Exhibit 10.27
RHYTHMS NETCONNECTIONS INC.
SERIES C PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
April 6, 1999
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
1. Purchase and Sale of Preferred 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. . . . . . . . . . . . . . .1
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.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
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. . . . . . . . . . . . . . . . . . . . . . . . .
3.4 Investment Experience. . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.5 Accredited Investor. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.6 Restricted Securities. . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.7 Qualified Passive Investor.. . . . . . . . . . . . . . . . . . . . . . . 12
(i)
<PAGE>
4. Covenants of the Investor.. . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.1 Further Limitations on Disposition.. . . . . . . . . . . . . . . . . . . 13
4.2 Legends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.3 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.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.5 Proceedings and Documents. . . . . . . . . . . . . . . . . . . . . . . . 14
5.6 Opinion of Company Counsel.. . . . . . . . . . . . . . . . . . . . . . . 15
5.7 Investors' Rights Agreement. . . . . . . . . . . . . . . . . . . . . . . 15
6. Conditions of the Company's Obligations at the Closing. . . . . . . . . . . . 15
6.1 Representations and Warranties.. . . . . . . . . . . . . . . . . . . . . 15
6.2 Qualifications.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.3 Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.4 Investors' Rights Agreement. . . . . . . . . . . . . . . . . . . . . . . 15
7. Indemnification.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.1 Indemnity by Company.. . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.2 Indemnity by Investor. . . . . . . . . . . . . . . . . . . . . . . . . . 16
8. Miscellaneous.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.1 Survival of Warranties.. . . . . . . . . . . . . . . . . . . . . . . . . 16
8.2 Successors and Assigns.. . . . . . . . . . . . . . . . . . . . . . . . . 17
8.3 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.4 Counterparts.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.5 Titles and Subtitles.. . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.6 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.7 Finder's Fee.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.8 Expenses.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.9 Amendments and Waivers.. . . . . . . . . . . . . . . . . . . . . . . . . 18
8.10 Severability.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.11 Aggregation of Stock.. . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.12 Entire Agreement.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</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 - Form of Warrant
(ii)
<PAGE>
SERIES C PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
THIS SERIES C PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT (this
"Agreement") is made as of the 6th day of April 1999, by and between Rhythms
NetConnections Inc., a Delaware corporation (the "Company"), and U.S.
Telesource, Inc. (the "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF PREFERRED 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 C attached hereto (the
"Warrant"), to purchase 180,000 shares of the Company's Common Stock at an
exercise price of $6.70 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 April 6,
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. 27,000,000 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 30,852,226 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 9,707,864 shares of Common Stock, 8,395,655 shares of
which have been designated Series C Preferred Stock 7,462,819 of which are
issued and outstanding and the rest will be sold pursuant to this Agreement and
441,176 shares of which have been designated Series D Preferred Stock all of
which will be sold pursuant to that certain Series D Preferred Stock Purchase
Agreement dated as of the date hereof. 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. 81,000,000 shares of common stock
("Common Stock"), of which 9,643,660 shares are issued and outstanding and are
owned by the persons, and in the numbers specified in Schedule D hereto, and of
which 438,115 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) warrants to purchase 1,576,996 shares of Common Stock issued
in connection certain equity investments in the Company, (C) the conversion
privileges of each of the Series A Preferred Stock, the Series B Preferred
Stock, the Series C Preferred Stock and the Series D Preferred Stock, (D) the
rights provided in Section 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, (E) the Company's reservation of
11,673,530 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, (F) warrants to purchase up to 4,732,800 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 (G)
warrants to purchase up to 694,878 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-
<PAGE>
2.3 SUBSIDIARIES. The Company does not presently own or control,
directly or indirectly, any interest in any other corporation, association,
or other business entity.
2.4 AUTHORIZATION. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement and the Investors'
Rights Agreement, the performance of all obligations of the Company hereunder
and thereunder and the authorization, issuance (or reservation for issuance),
sale and delivery of the Series 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.
-3-
<PAGE>
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.
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 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
-4-
<PAGE>
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 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.
(a) 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.
(b) 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
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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, 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
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Company. No member of the immediate family of any officer or director of the
Company is directly or indirectly interested in any material contract with
the Company.
2.14 PERMITS. The Company has all franchises, permits, licenses,
and other similar authorities necessary for the conduct of its business as
now being conducted by it, the lack of which could materially and adversely
affect the business, properties, prospects, or financial condition of the
Company and believes it can obtain, without undue burden or expense, any
similar authority for the conduct of its business as planned to be conducted.
The Company is not in default in any material respect under any of such
franchises, permits, licenses, or other similar authority.
2.15 ENVIRONMENTAL AND SAFETY LAWS.
(a) 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.
(b) 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.
(c) 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.
(d) 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.
(e) 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
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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.
(f) 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.
(g) 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.
(h) 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
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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
December 31, 1998 and for the period then ended (the "Financial Statements").
The Financial Statements are true, complete and correct, present fairly the
financial condition of the Company and the results of operations as of the
date of such statements and have been prepared in accordance with generally
accepted accounting principles ("GAAP"), except that the unaudited Financial
Statements do not contain the footnotes required by GAAP. The Financial
Statements accurately set forth and describe the financial condition and
operating results of the Company as of the date, and for the period,
indicated therein, subject to normal year-end audit adjustments.
2.23 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed
all tax returns and reports required by law. These returns and reports are
true and correct in all material respects. The Company has paid all taxes
and other assessments due, except those contested by it in good faith which
are listed in the Schedule of Exceptions. The provision for taxes of the
Company as shown in 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.
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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.
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 and the Investors' Rights 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
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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.
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 and
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 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.
3.7 QUALIFIED PASSIVE INVESTOR. The Investor represents and
warrants to the Company that the voting securities of the Company are being
acquired by, and will be held by the Investor solely for the purpose of
investment within the meaning of Section 7A(c)(9) of the Clayton Act, and 16
C.F.R. Sections 801.1(j) and 802.9, and that the Investor has no intention of
participating in the formulation, determination, or direction of the basic
business decisions of the Company.
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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,
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.
(b) Notwithstanding the provisions of subsection (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 Colorado.
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4.3 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 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. Any 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 by the Company 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 INVESTORS' RIGHTS AGREEMENT. The Company and the Investor
shall have entered into the Investors' Rights Agreement in the form attached
as EXHIBIT B.
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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..
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. 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 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
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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. 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.
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
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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 Section 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.
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.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-16-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
RHYTHMS NETCONNECTIONS INC.
By: /s/ Catherine Hapka
------------------------------------
Catherine Hapka, President
Address: 6933 South Revere Parkway
Englewood, CO 80112-3931
INVESTOR:
U.S. TELESOURCE, INC.
By: /s/ Marc B. Weisberg
-------------------------------------
Its: President & Chief Executive Officer
-------------------------------------
Address: 700 Qwest Tower
555 17th Street
Denver, CO 80202
[SIGNATURE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT]
<PAGE>
SCHEDULE A
Schedule of Investor
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE NUMBER OF SERIES C NUMBER OF
SHARE WARRANT 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>
U.S. Telesource, Inc. $7,500,001.44 $180 $7,500,181.44 932,836 180,000
TOTALS $7,500,001.44 $180 $7,500,181.44 932,836 180,000
------------- ---- ------------- ------- -------
------------- ---- ------------- ------- -------
</TABLE>
A-1
<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
B-1
<PAGE>
<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>
B-2
<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>
C-1
<PAGE>
SCHEDULE D
Schedule of Common Holders
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
<S> <C>
Enterprise Partners III, L.P. 1,325,882
Enterprise Partners III Associates, L.P. 115,294
Enterprise Partners IV, L.P. 720,588
Employees of the Company who have
exercised stock options 7,481,896
---------
TOTAL 9,643,660
---------
---------
</TABLE>
D-1
<PAGE>
EXHIBIT A
RESTATED CERTIFICATE OF INCORPORATION
See Exhibit 3.1 to Registration Statement on Form S-1
EXHIBIT A-1
<PAGE>
EXHIBIT B
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
See Exhibit 10.29 to Registration Statement on Form S-1
EXHIBIT B-1
<PAGE>
EXHIBIT C
FORM OF WARRANT
See Exhibit 4.11 to Registration Statement on Form S-1
EXHIBIT C-1
<PAGE>
Exhibit 10.28
RHYTHMS NETCONNECTIONS INC.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
April 6, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Purchase and Sale of Preferred Stock...................................................1
1.1 Sale and Issuance of Preferred Stock..........................................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 and Common Stock............................3
2.6 Consents......................................................................3
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............................................................5
2.13 Related-Party Transactions....................................................6
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...........................................................8
2.19 Corporate Documents...........................................................8
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.....................................................................9
2.25 Minute Books..................................................................9
2.26 Labor Agreements and Actions..................................................9
2.27 Inventory....................................................................10
2.28 Notes and Accounts Receivable................................................10
2.29 Powers of Attorney...........................................................10
2.30 Guaranties...................................................................10
3. Representations and Warranties of the Investor........................................10
3.1 Authorization................................................................10
3.2 Purchase Entirely for Own Account............................................11
3.3 Disclosure of Information....................................................11
3.4 Investment Experience........................................................11
3.5 Accredited Investor..........................................................11
3.6 Restricted Securities........................................................11
3.7 Qualified Passive Investor...................................................11
<PAGE>
<CAPTION>
PAGE
----
<S> <C> <C>
4. Covenants of the Investor.............................................................11
4.1 Further Limitations on Disposition...........................................11
4.2 Legends......................................................................12
4.3 Waiver of "Piggy-Back"Registration Rights....................................12
5. Conditions of Investor's Obligations at the Closing...................................13
5.1 Representations and Warranties...............................................13
5.2 Performance..................................................................13
5.3 Compliance Certificate.......................................................13
5.4 Qualifications...............................................................13
5.5 Proceedings and Documents....................................................13
5.6 Opinion of Company Counsel...................................................13
5.7 Investors'Rights Agreement...................................................13
6. Conditions of the Company's Obligations at the Closing................................13
6.1 Representations and Warranties...............................................14
6.2 Qualifications...............................................................14
6.3 Performance..................................................................14
6.4 Investors'Rights Agreement...................................................14
7. Indemnification.......................................................................14
7.1 Indemnity by Company.........................................................14
7.2 Indemnity by Investor........................................................14
8. Miscellaneous.........................................................................15
8.1 Survival of Warranties.......................................................15
8.2 Successors and Assigns.......................................................15
8.3 Governing Law................................................................15
8.4 Counterparts.................................................................15
8.5 Titles and Subtitles.........................................................15
8.6 Notices......................................................................15
8.7 Finder's Fee.................................................................15
8.8 Expenses.....................................................................16
8.9 Amendments and Waivers.......................................................16
8.10 Severability.................................................................16
8.11 Aggregation of Stock.........................................................16
8.12 Entire Agreement.............................................................16
</TABLE>
SCHEDULE A - Schedule of Series A Preferred Holders
SCHEDULE B - Schedule of Series B Preferred Holders
SCHEDULE C - Schedule of Common Holders
EXHIBIT A - Restated Certificate of Incorporation
EXHIBIT B - Amended and Restated Investors' Right Agreement
(ii)
<PAGE>
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES D PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is
made as of the 6th day of April 1999, by and between Rhythms NetConnections
Inc., a Delaware corporation (the "Company"), and U.S. Telesource, Inc. (the
"Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF PREFERRED STOCK.
1.1 SALE AND ISSUANCE OF PREFERRED STOCK.
(A) RESTATED CERTIFICATE. The Company shall adopt and file with
the Secretary of State of Delaware before the Closing (as defined below) the
Restated Certificate of Incorporation in the form attached hereto as EXHIBIT A
(the "Restated Certificate").
(B) PURCHASE OF PREFERRED STOCK. Subject to the terms and
conditions of this Agreement, the Investor agrees to purchase at the Closing
(defined below) and the Company agrees to sell and issue to the Investor at the
Closing 441,176 shares of the Company's Series D Preferred Stock ("Series D
Preferred Stock"). The purchase price of each share of Series D Preferred Stock
shall be $17.00.
1.2 CLOSING. The purchase and sale of the Series D Preferred Stock
shall take place at the offices of Brobeck, Phleger & Harrison LLP, 550 West "C"
Street, Suite 1200, San Diego, California, promptly after the time that the IPO
Price is determined (in no event later than one day after such time), 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 D Preferred Stock which such Investor is purchasing at the Closing (as
determined pursuant to the formula set forth above in subsection 1.1(b)) 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:
<PAGE>
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 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. 27,000,000 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
A) and which are currently convertible into 30,852,226 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 B) and which are currently
convertible into 9,707,864 shares of Common Stock, 8,395,655 shares of which
have been designated Series C Preferred Stock 7,462,819 of which are issued and
outstanding and the rest will be sold pursuant to that certain Series C
Preferred Stock Purchase Agreement dated as of the date hereof and 441,176
shares of which have been designated Series D Preferred Stock all of which may
be sold pursuant to this Agreement. The rights, privileges and preferences of
the Series D Preferred Stock as of the Closing will be as stated in the Restated
Certificate attached hereto as EXHIBIT A.
(ii) COMMON STOCK. 81,000,000 shares of common stock ("Common
Stock"), of which 9,643,660 shares are issued and outstanding and are owned by
the persons, and in the numbers specified in Schedule C hereto, and of which
438,115 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) warrants to purchase 180,000 shares of
Common Stock to be issued pursuant to that certain Series C Preferred Stock
and Warrant Purchase Agreement dated as of the date hereof, (B) warrants to
purchase 1,576,996 shares of Common Stock issued in connection certain equity
investments in the Company, (C) the conversion privileges of each of the
Series A Preferred Stock, the Series B Preferred Stock, the Series C
Preferred Stock and the Series D Preferred Stock to be issued under this
Agreement, (D) 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, (E) the
Company's reservation of 11,673,530 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, (F) warrants to purchase up
to 4,732,800 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 (G) warrants to purchase up to 694,878 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
2
<PAGE>
from the Company of any shares of its capital stock. The Company is not a party
or subject to any agreement or understanding, and, to the Company's knowledge,
there is no agreement or understanding between any persons and/or entities,
which affects or relates to the voting or giving of written consents with
respect to any security or by a director of the Company.
2.3 SUBSIDIARIES. The Company does not presently own or control,
directly or indirectly, any interest in any other corporation, association, or
other business entity.
2.4 AUTHORIZATION. All corporate action on the part of the Company, its
officers, directors and shareholders necessary for the authorization, execution
and delivery of this Agreement and the Investors' Rights Agreement, the
performance of all obligations of the Company hereunder and thereunder and the
authorization, issuance (or reservation for issuance), sale and delivery of the
Series D Preferred Stock being sold hereunder and the Common Stock issuable upon
conversion of the Series D Preferred Stock has been taken or will be taken prior
to the Closing, and this Agreement and the Investors' Rights Agreement
constitute valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally, (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief, or other equitable remedies, and (iii) to the extent the indemnification
provisions contained in the Investors' Rights Agreement may be limited by
applicable federal or state securities laws.
2.5 VALID ISSUANCE OF PREFERRED STOCK AND COMMON STOCK.
(a) The Series D Preferred Stock 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 D Preferred Stock purchased
under this Agreement has been duly and validly reserved for issuance and, upon
issuance in accordance with the terms of the Restated Certificate, shall be duly
and validly issued, fully paid and nonassessable, and issued in compliance with
all applicable securities laws and will be free of restrictions on transfer
other than restrictions on transfer under this Agreement and the Investors'
Rights Agreement and under applicable state and federal securities law, as
presently in effect, of the United States and each of the states whose
securities laws govern the issuance of any of the Securities (as defined in
Section 3.2) hereunder.
(b) The outstanding shares of Common Stock, 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
3
<PAGE>
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.
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 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
4
<PAGE>
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 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.
(a) 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.
(b) 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,
5
<PAGE>
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, 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.
6
<PAGE>
2.14 PERMITS. The Company has all franchises, permits, licenses, and
other similar authorities necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company and
believes it can obtain, without undue burden or expense, any similar authority
for the conduct of its business as planned to be conducted. The Company is not
in default in any material respect under any of such franchises, permits,
licenses, or other similar authority.
2.15 ENVIRONMENTAL AND SAFETY LAWS.
(a) 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.
(b) 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.
(c) 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.
(d) 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.
(e) 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
7
<PAGE>
("CERCLA"), the Solid Waste Disposal Act, as amended ("SWDA"), or any of the
Environmental, Health, and Safety Requirements.
(f) 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.
(g) 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.
(h) 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 D 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.
8
<PAGE>
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 December
31, 1998 and for the period then ended (the "Financial Statements"). The
Financial Statements are true, complete and correct, present fairly the
financial condition of the Company and the results of operations as of the date
of such statements and have been prepared in accordance with generally accepted
accounting principles ("GAAP"), except that the unaudited Financial Statements
do not contain the footnotes required by GAAP. The Financial Statements
accurately set forth and describe the financial condition and operating results
of the Company as of the date, and for the period, indicated therein, subject to
normal year-end audit adjustments.
2.23 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed all tax
returns and reports required by law. These returns and reports are true and
correct in all material respects. The Company has paid all taxes and other
assessments due, except those contested by it in good faith which are listed in
the Schedule of Exceptions. The provision for taxes of the Company as shown in
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
9
<PAGE>
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.
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 and the Investors' Rights 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.
10
<PAGE>
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the
Investor in reliance upon such Investor's representation to the Company that the
Series D Preferred Stock to be received by such Investor and the Common Stock
issuable upon conversion thereof (collectively, the "Securities") will be
acquired for investment for such Investor's own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof,
and that such Investor has no present intention of selling, granting any
participation in, or otherwise distributing the same. 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.
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 D Preferred Stock. The foregoing,
however, does not limit or modify the representations and warranties of the
Company in Section 2 of this Agreement or the right of the 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 D Preferred
Stock. If other than an individual, it has not been organized for the purpose of
acquiring the Series D Preferred Stock.
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 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.
3.7 QUALIFIED PASSIVE INVESTOR. The Investor represents and warrants to
the Company that the voting securities of the Company are being acquired by, and
will be held by the Investor solely for the purpose of investment within the
meaning of Section 7A(c)(9) of the Clayton Act, and 16 C.F.R. Sections 801.1(j)
and 802.9, and that the Investor has no intention of participating in the
formulation, determination, or direction of the basic business decisions of the
Company.
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
11
<PAGE>
unless and until the transferee has agreed in writing for the benefit of the
Company to be bound by this Section 4.1, provided and to the extent such
sections are then applicable, and the Investors' Rights Agreement and:
(i) There is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
(ii) (A) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (B) if
reasonably requested by the Company, such Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such shares under the Act. It
is agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule 144 except in unusual circumstances.
(b) Notwithstanding the provisions of paragraph (a) above, (i) no
such Registration Statement or opinion of counsel shall be necessary for a
transfer (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 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 Colorado.
4.3 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 Agreement; PROVIDED, HOWEVER,
that such waiver shall only be deemed effective if the Company
12
<PAGE>
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. Any 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 D Preferred Stock pursuant to this Agreement, shall be duly obtained by
the Company 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 INVESTORS' RIGHTS AGREEMENT. The Company and the Investor shall
have entered into the Investors' Rights Agreement in the form attached as
EXHIBIT B.
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:
13
<PAGE>
6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Investor contained in Section 3 shall be true on and as of the 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 D Preferred Stock and the Common Stock issuable upon the
conversion thereof or such offer and sale shall be exempt from such
qualification under the California Corporate Securities Law of 1968, as amended.
Any other authorizations, approvals, or permits, if any, of any governmental
authority or regulatory body of the United States or of any state that are
required in connection with the lawful issuance and sale of the securities
pursuant to this Agreement shall be duly obtained and effective as of the
Closing.
6.3 PERFORMANCE. 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..
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. 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 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. 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
14
<PAGE>
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 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.
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.
15
<PAGE>
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 D 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.
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.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
16
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
RHYTHMS NETCONNECTIONS INC.
By: /s/ Catherine Hapka
-------------------------------------
Catherine Hapka, President
Address: 6933 South Revere Parkway
Englewood, CO 80112-3931
INVESTOR:
U.S. TELESOURCE, INC.
By: /s/ Marc B. Weisberg
-------------------------------------
Its: President & Chief Executive Officer
------------------------------------
Address: 700 Qwest Tower
555 17th Street
Denver, CO 80202
[SIGNATURE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT]
<PAGE>
SCHEDULE A
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>
A-1
<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>
A-2
<PAGE>
SCHEDULE B
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>
B-1
<PAGE>
SCHEDULE C
Schedule of Common Holders
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
<S> <C>
Enterprise Partners III, L.P. 1,325,882
Enterprise Partners III Associates, L.P. 115,294
Enterprise Partners IV, L.P. 720,588
Employees of the Company who have exercised
stock options 7,481,896
---------
TOTAL 9,643,660
---------
---------
</TABLE>
C-1
<PAGE>
EXHIBIT A
RESTATED CERTIFICATE OF INCORPORATION
See Exhibit 3.1 to Registration Statement on Form S-1
Exhibit A-1
<PAGE>
EXHIBIT B
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
See Exhibit 10.29 to Registration Statement on Form S-1
Exhibit B-1
<PAGE>
Exhibit 10.29
RHYTHMS NETCONNECTIONS INC.
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
April 6, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. REGISTRATION RIGHTS...............................................1
1.1 DEFINITIONS..................................................1
1.2 REQUEST FOR REGISTRATION.....................................2
1.3 COMPANY REGISTRATION.........................................7
1.4 OBLIGATIONS OF THE COMPANY...................................7
1.5 FURNISH INFORMATION..........................................8
1.6 EXPENSES OF DEMAND REGISTRATION..............................8
1.7 EXPENSES OF COMPANY REGISTRATION.............................9
1.8 UNDERWRITING REQUIREMENTS....................................9
1.9 DELAY OF REGISTRATION........................................9
1.10 INDEMNIFICATION.............................................10
1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934...............11
1.12 FORM S-3 REGISTRATION.......................................12
1.13 ASSIGNMENT OF REGISTRATION RIGHTS...........................13
1.14 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS...............14
1.15 "MARKET STAND-OFF"AGREEMENT.................................14
1.16 TERMINATION OF REGISTRATION RIGHTS..........................14
2. COVENANTS OF THE COMPANY.........................................15
2.1 DELIVERY OF FINANCIAL STATEMENTS............................15
2.2 INSPECTION..................................................15
2.3 TERMINATION OF INFORMATION AND INSPECTION COVENANTS.........15
2.4 RIGHT OF FIRST OFFER........................................15
2.5 EMPLOYEE STOCK POOL.........................................17
3. COVENANTS OF THE INVESTORS.......................................17
3.1 CERTAIN CORPORATE TRANSACTIONS..............................18
3.2 STANDSTILL..................................................18
3.3 ADDITIONAL PREFERRED INVESTORS..............................18
4. CORPORATE OPPORTUNITY MATTERS....................................18
5. MISCELLANEOUS....................................................20
5.1 SUCCESSORS AND ASSIGNS......................................20
5.2 GOVERNING LAW...............................................20
5.3 COUNTERPARTS................................................20
5.4 TITLES AND SUBTITLES........................................21
5.5 NOTICES.....................................................21
5.6 EXPENSES....................................................21
5.7 AMENDMENTS AND WAIVERS......................................21
5.8 SEVERABILITY................................................21
5.9 AGGREGATION OF STOCK........................................21
5.10 ENTIRE AGREEMENT; AMENDMENT; WAIVER.........................21
</TABLE>
(i)
<PAGE>
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (this
"Agreement") is made as of the 6th day of April, 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 Purchase Agreement and the Series D Preferred Stock
Purchase Agreement of even date herewith (individually, a "Preferred Stock
Agreement" and collectively, the "Preferred Stock Agreements");
WHEREAS, certain of the Investors are presently holders of the
Company's Series A Preferred Stock, Series B Preferred Stock and/or Series C
Preferred Stock and have entered into an Amended and Restated Investors' Rights
Agreement with the Company dated March 16, 1999 (the "Existing Rights
Agreement"); and
WHEREAS, in order to induce the Company to enter into the Preferred
Stock Agreements and to induce one or more Investors to invest funds in the
Company pursuant to the Preferred Stock Agreements, 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, Series C Preferred Stock or Series D Preferred Stock, (2) the
900,735 shares of Common Stock held by Enterprise Partners as of the date of
this Agreement, and (3) any Common Stock of the Company issued as (or issuable
upon the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of, such Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred
<PAGE>
Stock, Series D 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(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 the Holders request to be registered within
twenty (20) days of the mailing of such notice by the Company in accordance with
Section 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 Investments Corp. or any assignee of the rights of Enron
Communications Investments Corp. pursuant to Section 1.13 ("Enron") that the
Company file a registration statement under the Act covering the registration of
at least twenty percent (20%) of the Registrable Securities then held by Enron
(or a lesser percent if the anticipated aggregate offering price, net of
underwriting discounts and commissions, would exceed $20,000,000), then the
Company shall, within ten (10) days of the receipt thereof, give written notice
of such request
-2-
<PAGE>
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
Enron and the Holders request to be registered within twenty (20) days of the
mailing of such notice by the Company in accordance with Section 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(h), 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
Section 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(i), 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 Section 5.5.
(e) In the event that on or before April 1, 2000, any of
AT&T Corporation, Sprint Corporation, Global Crossings Ltd./Frontier Corp.,
WilTel, LLC or Equant N.V. acquires greater than five percent (5%) of the
Company's Common Stock (on a fully diluted, as converted to Common Stock basis)
(the "U.S. Telesource Excluded Investment"), then if the Company shall receive a
written request from U.S. Telesource, Inc. ("U.S. Telesource") that the Company
file a registration statement under the Act covering the
-3-
<PAGE>
registration of all of the Registrable Securities then held by U.S. Telesource,
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(k), 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 U.S. Telesource Excluded
Investment, the registration under the Act of all Registrable Securities which
U.S. Telesource and the Holders request to be registered within twenty (20) days
of the mailing of such notice by the Company in accordance with Section 5.5.
(f) If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 1.2 and the Company shall include such information in the written
notice referred to in subsection 1.2(a). The underwriter will be selected by
Initiating Holders holding a majority of the Registrable Securities proposed to
be included in the registration and shall be reasonably acceptable to the
Company. In such event, the right of any Holder to include his Registrable
Securities in such registration shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall (together with the Company as provided in subsection
1.4(e)) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by the Initiating
Holders holding a majority of the Registrable Securities proposed to be included
in the registration. Notwithstanding any other provision of this Section 1.2, if
the underwriter advises the Initiating Holders in writing that marketing factors
require a limitation of the number of shares to be underwritten, then the
Initiating Holders shall so advise all Holders of Registrable Securities which
would otherwise be underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the underwriting shall be
allocated: (i) first, among all Holders thereof, including the Initiating
Holders, allocated among such Holders in proportion (as nearly as practicable)
to the amount of Registrable Securities of the Company proposed to be included
in the registration by each Holder; and (ii) second, to the extent of any
remaining shares that may be underwritten, to the holders of any other
securities.
(g) 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
-4-
<PAGE>
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.
(h) 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 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) 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
-5-
<PAGE>
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.
(j) If U.S. Telesource intends to distribute the Registrable
Securities covered by its request under subsection 1.2(e) 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(e). The underwriter will be
selected by U.S. Telesource 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
U.S. Telesource and such Holder) to the extent provided herein. U.S. Telesource
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 U.S. Telesource. 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 U.S. Telesource 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.
(k) 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), (iv) one (1) such registration pursuant to subsection 1.2(d)
and (v) one (1) such registration pursuant to subsection 1.2(e).
(l) Notwithstanding the foregoing, if the Company shall
furnish to either Holders requesting a registration statement pursuant to this
Section 1.2, to Enron, to MCI WorldCom or to U.S. Telesource, 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, MCI WorldCom or U.S.
Telesource, as applicable; provided, however, that the Company may not utilize
this right more than twice in any twelve month period.
-6-
<PAGE>
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 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.
-7-
<PAGE>
(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(k).
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),
by MCI WorldCom if under subsections 1.2(c) or 1.2(d) or by U.S. Telesource if
under subsection 1.2(e)) ("Holders' Counsel") shall be borne by the Company;
provided, however, that the Company shall not be required to pay for any
expenses of any registration proceeding begun pursuant to Section 1.2 if the
registration request is subsequently withdrawn at the request of the Holders of
a majority of the Registrable Securities to be registered if under subsection
1.2(a), of Enron if under subsection 1.2(b), of MCI WorldCom if under
subsections 1.2(c) or 1.2(d), or of U.S. Telesource under subsection 1.2(e) (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), of
MCI WorldCom if under subsection 1.2(c) or (d), or of U.S. Telesource if under
subsection 1.2(e), agree to forfeit their or its
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right to one demand registration pursuant to Section 1.2; provided further,
however, that if at the time of such withdrawal, the Holders, Enron, MCI
WorldCom or U.S. Telesource, 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, MCI WorldCom or U.S. Telesource, 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, MCI WorldCom or
U.S. Telesource, 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 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.
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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 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.
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(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.
(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:
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(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times after ninety (90)
days after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) file with the SEC in a timely manner all reports and
other documents required of the Company under the Act and the 1934 Act; and
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Act and the 1934 Act (at any
time after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
1.12 FORM S-3 REGISTRATION. In case the Company shall receive
from the Holders of forty percent (40%) or more of the Registrable Securities a
written request or requests that the Company effect a registration on Form S-3
and any related qualification or compliance with respect to all or a part of the
Registrable Securities owned by such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other Holders;
and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within 15 days after receipt of such written notice from the Company; provided,
however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this section 1.12: (1) if
Form S-3 is not available for such offering by the Holders; (2) if the Holders,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than $5,000,000; (3) if the
Company shall furnish to the Holders a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
shareholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration 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.
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(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All expenses incurred in connection with a
registration requested pursuant to Section 1.12, including (without limitation)
all registration, filing, qualification, printer's and accounting fees and the
reasonable fees and disbursements of Holders' Counsel and counsel for the
Company, shall be borne pro rata by the Holder or Holders participating in the
Form S-3 Registration. Registrations effected pursuant to this Section 1.12
shall not be counted as demands for registration or registrations effected
pursuant to Section 1.2.
1.13 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to subsection 1.2(a) may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of such securities who, after such assignment or transfer, holds at
least 1,200,000 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) 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. The rights to cause the Company to register
Registrable Securities pursuant to subsection 1.2(e) may be assigned (but only
with all related obligations) by U.S. Telesource to a transferee or assignee of
such securities who, after such assignment or transfer, holds at least 900,000
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
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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
(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
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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 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 Section 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
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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, Series C Preferred Stock or Series D
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"), (C) those certain Series C Preferred Stock and Warrant
Purchase Agreements dated March 3, 1999 and March 16, 1999 (collectively, the
"Series C Agreements") and (D) the Preferred Stock Agreements, 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,
(C) 10% of the Series C Preferred Stock (or the common stock issued upon
conversion thereof) issued pursuant to a Series C Agreement or a Preferred Stock
Agreement or (D) 10% of the Series D Preferred Stock (or the common stock issued
upon conversation thereof) issued pursuant to a 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, Series C Preferred Stock and/or Series D Preferred Stock then held, by
such Major Investor bears to the total number of shares of common stock of the
Company then outstanding (assuming full conversion and exercise of all
convertible or exercisable securities) as of the date of the Notice. The Company
shall promptly, in writing, inform each Major Investor which purchases all the
shares available to it ("Fully-Exercising Investor") of any other Major
Investor's failure to do likewise. During the ten-day period commencing after
receipt of such information, each Fully-Exercising Investor shall be entitled to
obtain that portion of the Shares for which Major Investors were entitled to
subscribe but which were not subscribed for by the Major Investors which is
equal to the proportion that the number of shares of common stock issued and
held, or issuable upon conversion of Series A Preferred Stock, Series B
Preferred Stock, Series C
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Preferred Stock and/or Series D 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, Series C Preferred Stock and/or Series D 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 Section 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 March 3, 1999 (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. ("Qwest") (except with
respect to a one time investment in the Company by a wholly-owned subsidiary
of Qwest for the purchase from the Company of 932,836 shares of Series C
Preferred Stock, 441,176 shares of Series D Preferred Stock and a warrant to
acquire 180,000 shares of Common Stock pursuant to the terms of the Preferred
Stock Agreements), Level 3 Communications, Inc., WilTel, LLC, Frontier
Corporation, British Telecommunications plc, GTE Corp. and the Regional Bell
Operating Companies. Notwithstanding anything else in this 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 March 3, 1999 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.
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<PAGE>
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, Series C Preferred Stock and Series D Preferred Stock 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.
4.1 ENRON. 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 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
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<PAGE>
Affiliate of the Company or any other person or entity, or otherwise account to
the Rhythms Stockholders, the Company, any Affiliate of the Company or any other
persons or entities in respect of any such business ventures, (ii) the
activities of Enron or any of its Affiliates that are in direct or indirect
competition with the activities of the Company or any of its Affiliates are
hereby approved by the Rhythms Stockholders and the Company, and (iii) it shall
be deemed not to be a breach of any fiduciary or other duties, if any and
whether express or implied, that may be owed by Enron or its Affiliates to the
Rhythms Stockholders or the Company for Enron to permit itself or one of its
Affiliates to engage in a business opportunity in preference or to the exclusion
of the Rhythms Stockholders, the Company, its Affiliates or any other person or
entity.
4.2 MCI WORLDCOM.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 owed 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.
4.3 U.S. TELESOURCE. Except as expressly provided in this Section
4, the Investors other than U.S. Telesource (the "Rhythms Stockholders" for
purposes of this Section 4.3) and the Company acknowledge and agree that neither
U.S. Telesource nor any of its Affiliates shall be expressly or implicitly
restricted or proscribed pursuant to this Agreement, the relationship that
exists between U.S. Telesource, and the Rhythms Stockholders, the relationship
between U.S. Telesource 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
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<PAGE>
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 U.S.
Telesource and the Rhythms Stockholders, the relationship between U.S.
Telesource and the Company or otherwise, in any business venture or business
opportunity of U.S. Telesource or any of its Affiliates, and U.S. Telesource 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 U.S. Telesource 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 U.S.
Telesource or its Affiliates to the Rhythms Stockholders or the Company for U.S.
Telesource 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.
4.4 DEFINITIONS. 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, MCI WorldCom
or U.S. Telesource), 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, MCI WorldCom or U.S. Telesource,
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.
-20-
<PAGE>
5.4 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
5.5 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon receipt addressed to the party to be notified at the
address indicated for such party on the signature page hereof, or at such other
address as such party may designate by ten (10) days' advance written notice to
the other parties.
5.6 EXPENSES. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
5.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
60% or more of the Registrable Securities then outstanding. Any amendment or
waiver effected in accordance with this Section 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]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
RHYTHMS NETCONNECTIONS INC.
By: /s/ Catherine Hapka
-----------------------------------
Catherine Hapka, President
Address: 6933 South Revere Parkway
Englewood, CO 80112-3931
INVESTORS:
U.S. TELESOURCE, INC.
By: /s/ Marc B. Weisberg
-------------------------------------
Its: President & Chief Executive Officer
------------------------------------
Address: 700 Qwest Tower
555 17th Street
Denver, CO 80202
MICROSOFT CORPORATION
By: /s/ Illegible
-----------------------------------
Its:
----------------------------------
Address: One Microsoft Way
Redmond, WA 98052-6399
MCI WORLDCOM VENTURE FUND, INC.
By: /s/ Susan Mayer
-----------------------------------
Its: President
----------------------------------
Address: 1801 Pennsylvania Avenue, N.W.
Washington, DC 20006-3606
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
ENRON COMMUNICATIONS INVESTMENTS CORP.
By: /s/ Ken Harrison
-----------------------------------
Its:
----------------------------------
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
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
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
BRENTWOOD ASSOCIATES VII, L.P.
By: BRENTWOOD VII VENTURES, L.P.
Its General Partner
By: /s/ John Walecka
-----------------------------------
Its: General Partner
----------------------------------
Address: 3000 Sand Hill Road
Bldg. 1, Suite 260
Menlo Park, CA 94025
Attn: John Walecka
BRENTWOOD AFFILIATES FUND, L.P.
By: BRENTWOOD VII VENTURES, L.P.
Its General Partner
By: /s/ John Walecka
-----------------------------------
Its: General Partner
----------------------------------
Address: 3000 Sand Hill Road
Bldg. 1, Suite 260
Menlo Park, CA 94025
Attn: John Walecka
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
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
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
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
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
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
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
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
INVESTORS
U.S. Telesource, Inc.
Microsoft Corporation
MCI Worldcom Venture Fund, Inc.
Enron Communications Investments Corp.
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>
[CISCO SYSTEMS LOGO]
Master Lease No. 2324
MASTER AGREEMENT TO LEASE EQUIPMENT
THIS MASTER AGREEMENT TO LEASE EQUIPMENT (this "AGREEMENT") is entered
into as of APRIL 5, 1999 by and between CISCO SYSTEMS CAPITAL CORPORATION
("LESSOR"), having its principal place of business at 170 West Tasman Drive,
San Jose, California 95134 and RHYTHMS NETCONNECTIONS, INC., a Delaware
corporation ("LESSEE"), having a principal place of business at 7337 South
Revere Parkway, Suite 100, Englewood, CO 80112.
I. THE LEASE
1.1 LEASE OF EQUIPMENT. In accordance with the terms and conditions of
this Agreement, Lessor shall lease to Lessee, and Lessee shall lease from
Lessor, the personal property, including all substitutions, replacements,
repairs, parts and attachments, improvements and accessions thereto and
therein (the "EQUIPMENT"), described in the lease schedule(s) (each, a
"LEASE") to be entered into from time to time into which this Agreement is
incorporated, a form of which Lease is attached hereto as Annex C. Each
Lease shall constitute a separate, distinct, and independent lease and
contractual obligation of Lessee. Lessor or its assignee shall at all times
retain the full legal title to the Equipment, it being expressly agreed by
both parties that each Lease is an agreement of lease only.
1.2 TERM OF LEASE. The original term (the "ORIGINAL TERM") of the
Lease shall commence on the Commencement Date and, subject to Sections 3.3
and 3.5 below, shall terminate on the date specified in the Lease.
Notwithstanding the foregoing, the Original Term for the Equipment shall
automatically extend for successive 1-month periods after its expiration
(each, an "EXTENDED TERM") unless either party gives the other party written
notice, at least thirty (30) days prior to the expiration of the Original
Term or any Extended Term, as the case may be, of its intent not to so extend
the applicable Lease. Except as specifically provided in this Section 1.2,
no Lease may be terminated by Lessor or Lessee, for any reason whatsoever,
prior to the end of the Original Term or any Extended Term (collectively, the
"LEASE TERM"). Notwithstanding any provision to the contrary contained in
this Agreement, Lessee shall be deemed to accept the Equipment on the
Commencement Date (as specified in each Lease).
1.3 RENTAL PAYMENTS. Lessee shall pay Lessor rent ("RENT") for the
Equipment in the amounts and at the times specified in the Lease. All Rent
and other amounts payable by Lessee to Lessor hereunder shall be paid to
Lessor at the address specified above, or at such other place as Lessor may
designate in writing to Lessee from time to time.
1.
<PAGE>
1.4 RETURN OF EQUIPMENT. Upon expiration of the Lease Term of the
Equipment, Lessee shall immediately return the Equipment to Lessor as
provided in Section 3.3 below. If Lessee fails to return any of the
Equipment upon demand therefor by Lessor, Lessee shall pay Lessor, as the
measure of Lessor's damages, the Casualty Value (as defined in the applicable
Lease) of such Equipment.
II. DISCLAIMERS AND WARRANTIES; INTELLECTUAL PROPERTY
2.1 DISCLAIMERS; WARRANTIES. Lessee represents and acknowledges that
the Equipment is of a size, design, capacity and manufacture selected by it,
and that it is satisfied that the Equipment is suitable for its purposes.
LESSOR LEASES THE EQUIPMENT AS IS, AND, NOT BEING THE MANUFACTURER OF THE
EQUIPMENT, THE MANUFACTURER'S AGENT OR THE SELLER'S AGENT, MAKES NO WARRANTY
OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, AS TO THE MERCHANTABILITY,
FITNESS FOR ANY PARTICULAR PURPOSE, DESIGN OR CONDITION OF THE EQUIPMENT.
LESSOR SHALL NOT BE RESPONSIBLE FOR ANY LOSS OR DAMAGE RESULTING FROM THE
INSTALLATION, OPERATION OR OTHER USE, OR DEINSTALLATION OF THE EQUIPMENT,
INCLUDING, WITHOUT LIMITATION, ANY DIRECT, INDIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGE OR LOSS. Lessee shall look solely to the manufacturer or
the supplier of the Equipment for correction of any problems that may arise
with respect thereto, and, provided no Event of Default (as defined in
Section 4.1) has occurred and is continuing, all warranties made by the
manufacturer or such supplier are, to the degree possible, hereby assigned to
Lessee for the Lease Term. To the extent any such warranty requires
performance of any kind by the beneficiary of the warranty, Lessee shall
perform in accordance therewith.
2.2 INTELLECTUAL PROPERTY. Except as otherwise expressly provided in
each Lease, LESSOR MAKES NO WARRANTIES OR REPRESENTATIONS WHATSOEVER WITH
RESPECT TO THE INTELLECTUAL PROPERTY RIGHTS, INCLUDING, WITHOUT LIMITATION,
ANY PATENT, COPYRIGHT AND TRADEMARK RIGHTS, OF ANY THIRD PARTY WITH RESPECT
TO THE EQUIPMENT, WHETHER RELATING TO INFRINGEMENT OR OTHERWISE. Lessor
shall, when requested in writing by Lessee and at Lessee's cost and expense,
exercise, rights of indemnification, if any, for patent, copyright or other
intellectual property infringement obtained from the manufacturer under any
agreement for purchase of the Equipment. If notified promptly in writing of
any action brought against Lessee based on a claim that the Equipment
infringes a United States patent, copyright or other intellectual property
right, Lessor shall promptly notify the manufacturer thereof for purposes of
exercising, for the benefit of Lessee, Lessor's rights with respect to such
claim under any such agreement.
III. COVENANTS OF LESSEE
3.1 PAYMENTS UNCONDITIONAL; TAX BENEFITS; ACCEPTANCE. EACH LEASE SHALL
BE A NET LEASE, AND LESSEE'S OBLIGATION TO PAY ALL RENT AND OTHER
2.
<PAGE>
SUMS THEREUNDER, AND THE RIGHTS OF LESSOR IN AND TO SUCH PAYMENTS, SHALL BE
ABSOLUTE AND UNCONDITIONAL, AND SHALL NOT BE SUBJECT TO ANY ABATEMENT,
REDUCTION, SETOFF, DEFENSE, COUNTERCLAIM, INTERRUPTION, DEFERMENT OR
RECOUPMENT, FOR ANY REASON WHATSOEVER. It is the intent of Lessor, and an
inducement to Lessor, to enter into each Lease, to claim all available tax
benefits of ownership with respect to the Equipment subject thereto. Lease
acceptance of the Equipment subject to a Lease shall be conclusively and
irrevocably evidenced by Lessee executing an Acceptance Certificate with
respect to such Equipment, and upon acceptance, such Lease shall be
noncancellable for the Lease Term unless otherwise agreed to in writing by
Lessor. Any nonpayment of Rent or other amounts payable under any Lease
shall result in Lessee's obligation to promptly pay Lessor as additional Rent
on such overdue payment, for the period of time during which it is overdue
(without regard to any grace period), interest at a rate equal to the lesser
of (a) fourteen percent (14%) per annum, or (b) the maximum rate of interest
permitted by law.
3.2 USE OF EQUIPMENT. Lessee shall use the Equipment solely in the
conduct of its business, in a manner and for the use contemplated by the
manufacturer thereof, and in compliance with all laws, rules and regulations
of every governmental authority having jurisdiction over the Equipment or
Lessee and with the provisions of all policies of insurance carried by Lessee
pursuant to Section 3.6 below. Lessee shall pay all costs, expenses, fees
and charges incurred in connection with the use and operation of the
Equipment.
3.3 DELIVERY; INSTALLATION; RETURN; MAINTENANCE AND REPAIR; INSPECTION.
Lessee shall be solely responsible, at its own expense, for (a) the delivery
of the Equipment to Lessee, (b) the packing, rigging and delivery of the
Equipment back to Lessor, upon expiration or termination of the Lease Term,
in good repair, condition and working order, ordinary wear and tear excepted,
at the location(s) within the continental United States specified by Lessor,
and (c) the installation, de-installation, maintenance and repair of the
Equipment. During the Lease Term, Lessee shall ensure that the Equipment is
covered by a maintenance agreement, to the extent available, with the
manufacturer of the Equipment or such other party, reasonably acceptable to
Lessor. Lessee shall, at its expense, keep the Equipment in good repair,
condition and working order, ordinary wear and tear excepted, and, at the
expiration or termination of the Lease Term, or any renewal term, with
respect to any of the Equipment, have such Equipment inspected and certified
acceptable for maintenance service by the manufacturer. In the event any of
the Equipment, upon its return to Lessor, is not in good repair, condition
and working order, ordinary wear and tear excepted, Lessee shall be obligated
to pay Lessor for the out-of-pocket expenses Lessor incurs in bringing such
Equipment up to such status, but not in excess of the Casualty Value (as
defined in the applicable Lease) for such Equipment, promptly after its
receipt of an invoice for such expenses. Lessor shall be entitled to inspect
the Equipment at Lessee's location of reasonable times.
3.4 TAXES. Lessee shall be obligated to pay, and hereby indemnifies
Lessor and its successor and assigns against, and holds each of them harmless
from, all license fees, assessments, and sales, use, property, excise and
other taxes and charges, other than those
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measured by Lessor's net income, now and hereafter imposed by any
governmental body or agency upon or with respect to any of the Equipment, or
the possession, ownership, use or operation thereof, or any Lease or the
consummation of the transactions contemplated in any Lease or this Agreement.
Notwithstanding the foregoing, Lessor shall file all required personal
property tax returns, and shall pay all personal property taxes payable, with
respect to the Equipment, Lessee shall pay to Lessor, as additional Rent, the
amount of all such personal property taxes within fifteen (15) days of its
receipt of an invoice for such taxes.
3.5 LOSS OF EQUIPMENT. Lessee shall bear the entire risk of the
Equipment being lost, destroyed or otherwise permanently unfit or unavailable
for use from any cause whatsoever (an "EVENT OF LOSS") after it has been
delivered to common carrier for shipment to Lessee. If an Event of Loss
shall occur with respect to any item of Equipment, Lessee shall promptly
notify Lessor thereof in writing. On the rental payment date following
Lessor's receipt of such notice, Lessee shall pay to Lessor an amount equal
to the rental payment or payments due and payable with respect to such item
of Equipment on or prior to such date, plus a sum equal to the Casualty Value
of such item of Equipment as of the date of such payment as set forth in such
Lease. Upon the making of such payment by Lessee regarding any item of
Equipment, the Rent for such item of Equipment shall cease to accrue, the
term of this Lease as to such item of Equipment shall terminate and (except
in the case of loss, theft or complete destruction) Lessor shall be entitled
to recover possession of such item of Equipment in accordance with the
provisions of Section 3.3 above. Provided that Lessor has received the
Casualty Value of any item of Equipment, Lessee shall be entitled to the
proceeds of any recovery in respect of such item of Equipment from insurance
or otherwise.
3.6 INSURANCE. Lessee shall obtain and maintain for the Lease Term at
its own expense, property damage and liability insurance and insurance
against loss or damage to the Equipment (including so-called extended
coverage), as a result of theft and such other risks of loss as are normally
maintained on equipment of the type leased hereunder by company's carrying on
the business in which Lessee is engaged, in such amounts, in such form and
with such insurers as shall be satisfactory to Lessor. Each insurance policy
will name Lessee as insured and Lessor as an additional insured and loss
payee thereof as Lessor's interests may appear, and shall provide that it may
not be canceled or altered without at least thirty (30) days prior written
notice thereof being given to Lessor or its successor and assigns.
3.7 INDEMNITY. Except with respect to the negligence or willful
misconduct of Lessor, Lessee hereby indemnifies, protects, defends and holds
harmless Lessor and its successors and assigns, from and against any and all
claims, liabilities (including negligence, tort and strict liabilities),
demands, actions, suits, and proceedings, losses, costs, expenses and
damages, including without limitation, reasonable attorneys' fees and costs
(collectively, "CLAIMS"), arising out of, connected with, or resulting from
this Agreement, any Lease or any of the Equipment, including, without
limitation, the manufacture, selection, purchase, delivery, possession,
condition, use, operation, or return of the Equipment. Each of the parties
shall give the other prompt written notice of any Claim of which it becomes
aware. The provisions of this Section 3.7 shall survive the expiration or
termination of this Agreement or any Lease.
4.
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3.8 PROHIBITIONS RELATED TO LEASE AND EQUIPMENT. Without the prior
written consent of Lessor, which consent as it pertains to subsections (a),
(b) and (d) below shall not be unreasonably withheld, Lessee shall not: (a)
assign, transfer, pledge, encumber, hypothecate or otherwise dispose of this
Lease or any rights or obligations thereunder; (b) sublease any of the
Equipment; (c) create or incur, or permit to exist, any lien or encumbrance
with respect to any of the Equipment, or any part thereof; (d) move any of
the Equipment from the location at which it is first installed; or (e) permit
any of the Equipment to be moved outside the continental limits of the United
States.
3.9 IDENTIFICATION. Lessee shall place and maintain permanent markings
provided by Lessor on the Equipment evidencing ownership, security and other
interests therein, as specified from time to time by Lessor.
3.10 ALTERATIONS AND MODIFICATIONS. Lessee shall not make any
additions, attachments, alterations or improvements to the Equipment without
the prior written consent of Lessor. Any addition, attachment, alteration
or improvement to any item of Equipment shall belong to and become the
property of Lessor unless, at the request of Lessor, it is removed prior to
the return of such item of Equipment by Lessee. Lessee shall be responsible
for all costs relating to such removal and shall restore such item of
Equipment to its operating condition that existed at the time it became
subject to the applicable Lease.
3.11 EQUIPMENT TO BE PERSONAL PROPERTY. Lessee acknowledges and
represents that the Equipment shall be and remain personal property,
notwithstanding the manner in which it may be attached or affixed to realty,
and Lessee shall do all reasonable acts and enter into all agreements
reasonably necessary to ensure that the Equipment remains personal property.
3.12 FINANCIAL STATEMENTS. Lessee shall promptly furnish to Lessor such
financial or other statements respecting the condition and operations of
Lessee, and information respecting the Equipment, as Lessor may from time to
time reasonably request.
3.13 LESSEE REPRESENTATIONS. Lessee hereby represents that, with
respect to this Agreement and each Lease: (a) the execution, delivery and
performance thereof by Lessee have been duly authorized by all necessary
corporate action; and (b) the individual executing such document is duly
authorized to do so; (c) such document constitutes a legal, valid and binding
obligations of Lessee, enforceable in accordance with its terms.
IV. DEFAULT AND REMEDIES
4.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "Event of Default" hereunder: (a) Lessee shall fail to pay any
Rent or other payment due hereunder and such failure shall continue for a
period of ten (10) days after Lessee's receipt of notice thereof; (b) any
representation or warranty of Lessee made in this Agreement, any Lease, or in
any document furnished pursuant to the provisions of this Agreement or
otherwise, shall
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prove to have been false or misleading in any material respect as of the date
when it was made; (c) Lessee shall fail to perform any covenant, condition or
agreement made by it under any Lease, and such failure shall continue for
twenty (20) days after its receipt of notice thereof; (d) bankruptcy,
receivership, insolvency, reorganization, dissolution, liquidation or other
similar proceedings shall be instituted by or against Lessee or all or any
part of its property under the Federal Bankruptcy Code or other law of the
United States or of any other competent jurisdiction, and, if such proceeding
is brought against Lessee, it shall consent thereto or shall fail to cause
the same to be discharged within thirty (30) days after it is filed; (e)
Lessee shall default under any agreement with respect to the purchase or
installation of any of the Equipment and such default shall continue for a
period of ten (10) days after Lessee's receipt of notice thereof (to the
extent that notice is required under any such agreement); or (f) Lessee or
any guarantor of Lessee's obligations under any Lease shall default under any
other agreement with Lessor or Cisco Systems, Inc. and such default shall
continue for a period of ten (10) days after Lessee's receipt of notice
thereof.
4.2 REMEDIES. If an Event of Default hereunder shall occur and be
continuing, Lessor may exercise any one or more of the following remedies:
(a) terminate any or all of the Leases and Lessee's rights thereunder; (b)
proceed, by appropriate court action or actions, to enforce performance by
Lessee of the applicable covenants of any or all of the Leases or to recover
damages for the breach thereof; (c) recover from Lessee an amount equal to
the sum of (i) all accrued and unpaid Rent and other amounts due under any or
all of the Leases (ii) as liquidated damages for loss of a bargain and not as
a penalty, the present value of (A) the balance of all Rent and other amounts
under any or all of the Leases discounted at a rate of five percent (5%) per
annum, and (B) Lessor's estimated fair market value of the Equipment at the
expiration of the Original Term (d) personally, or by its agents, take
immediate possession of any or all of the Equipment from Lessee and, for such
purpose, enter upon Lessee's premises where any of the Equipment is located
with or without notice or process of law and free from all claims by Lessee;
and (e) require the Lessee to assemble the Equipment and deliver the
Equipment to Lessor at a location which is reasonably convenient to Lessor
and Lessee. The exercise of any of the foregoing remedies by Lessor shall
not constitute a termination of any Lease or this Agreement unless Lessor so
notifies Lessee in writing.
4.3 DISPOSITION OF EQUIPMENT. In the event, upon the occurrence of an
Event of Default, Lessor repossesses any of the Equipment, Lessor shall use
its reasonable efforts (consistent with its customary business practices) to
sell or lease any or all of such Equipment, at one or more public or private
sales. The proceeds of (i) any rental of the Equipment for the balance of
the Original Term (discounted to present value at the rate of five percent
(5%) per annum) or (ii) any sale of the Equipment shall be applied to the
payment of (A) all costs and expenses (including, without limitation,
reasonable attorneys' fees) incurred by Lessor in retaking possession of, and
removing, storing, repairing, refurbishing and selling or leasing such
Equipment and (B) the obligations of Lessee to Lessor pursuant to this
Agreement. Lessee shall remain liable to Lessor for any deficiency.
6.
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V. MISCELLANEOUS
5.1 PERFORMANCE OF LESSEE'S OBLIGATIONS. Upon Lessee's failure to pay
Rent (or any other sum due hereunder) or perform any obligation hereunder
when due, Lessor shall have the right, but shall not be obligated, to pay
such sum or perform such obligation, whereupon such sum or cost of such
performance shall immediately become due and payable hereunder as additional
Rent, with interest thereon at the highest legal rate from the date such
payment or performance was made.
5.2 QUIET ENJOYMENT. So long as no Event of Default shall have
occurred and be continuing, neither Lessor nor its assignee shall interfere
with Lessee's right of quiet enjoyment and use of the Equipment.
5.3 FURTHER ASSURANCES. Lessee shall, upon the request of Lessor, from
time to time, execute and deliver such further documents and do such further
acts as Lessor may reasonably request in order fully to effect the purpose of
any Lease and Lessor's rights thereunder. Lessor is authorized to file a
financing statement, signed only by Lessor in accordance with the Uniform
Commercial Code or signed by Lessor as Lessee's attorney in fact, with
respect to any of the Equipment.
5.4 RIGHT AND REMEDIES. Each and every right and remedy granted to
Lessor under any Lease shall be cumulative and in addition to any other right
or remedy therein specifically granted or now or hereafter existing in
equity, at law, by virtue of statute or otherwise, and may be exercised by
Lessor from time to time concurrently or independently and as often and in
such order as Lessor may deem expedient. Any failure or delay on the part of
Lessor in exercising any such right or remedy, or abandonment or
discontinuance of steps to enforce the same, shall not operate as a waiver
thereof or affect Lessor's right thereafter to exercising the same. Waiver
of any right or remedy on one occasion shall not be deemed to be a waiver of
any other right or remedy or of the same right or remedy on any other
occasion.
5.5 NOTICES. Any notice, request, demand, consent, approval or other
communication provided for or permitted hereunder shall be in writing and
shall be conclusively deemed to have been received by a party hereto on the
day it is delivered to such party at its address set forth above (or at such
other addresses such party shall specify to the other party in writing), or
if sent by registered or certified mail, return receipt requested, on the
fifth day after the day on which it is mailed, postage prepaid, addressed to
such party.
5.6 SECTION HEADINGS; COUNTERPARTS. Section headings are inserted for
convenience of reference only and shall not affect any construction or
interpretation of this Agreement. This Agreement and each Lease may be
executed in counterparts, and when so executed each counterpart shall be
deemed to be an original, and such counterparts together shall constitute one
and the same instrument.
5.7 ENTIRE LEASE. This Agreement and each Lease constitute the entire
agreement between Lessor and Lessee with respect to the lease of the
Equipment. No amendment of, or any
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consent with respect to, any provision of this Agreement or any Lease shall
bind either party unless set forth in a writing, specifying such waiver,
consent, or amendment, signed by both parties. TO THE EXTENT PERMITTED BY
APPLICABLE LAW AND NOT OTHERWISE SPECIFICALLY PROVIDED TO LESSEE IN THIS
AGREEMENT, LESSEE HEREBY WAIVES ANY AND ALL RIGHTS OR REMEDIES CONFERRED UPON
A LESSEE UNDER THE CALIFORNIA COMMERCIAL CODE, AND ANY OTHER APPLICABLE
SIMILAR CODE OR STATUTES OF ANOTHER JURISDICTION, WITH RESPECT TO A DEFAULT
BY LESSOR UNDER THIS AGREEMENT OR ANY LEASE.
5.8 SEVERABILITY. Should any provision of this Agreement or any Lease be
or become invalid, illegal, or unenforceable under applicable law, the other
provisions of this Agreement and such Lease shall not be affected and shall
remain in full force and effect.
5.9 ATTORNEYS' FEES. Should either party institute any action or
proceeding to enforce this Agreement or any Lease prevailing party shall be
entitled to receive from the other party all reasonable out-of-pocket costs and
expenses, including, without limitation, attorneys' fees.
8.
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5.10 GOVERNING LAW AND JURISDICTION. THIS LEASE SHALL BE GOVERNED IN
ALL RESPECTS BY THE LAWS OF THE STATE OF CALIFORNIA WITH RESPECT TO
AGREEMENTS ENTERED INTO, AND TO BE PERFORMED, ENTIRELY IN CALIFORNIA. LESSOR
AND LESSEE WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY LITIGATION ARISING FROM
THIS AGREEMENT OR ANY LEASE. LESSEE CONSENTS TO THE NON-EXCLUSIVE
JURISDICTION OF THE STATE COURTS OF CALIFORNIA, AND THE FEDERAL COURTS
SITTING IN THE STATE OF CALIFORNIA, FOR THE RESOLUTION OF ANY DISPUTES
HEREUNDER.
5.11 SURVIVAL. All obligations of Lessee to make payments to Lessor
under any Lease or to indemnify Lessor, pursuant to Section 3.4 or 3.7 above,
with respect to a Lease, and all rights of Lessor hereunder with respect to a
Lease, shall survive the termination of such Lease.
LESSEE, BY THE SIGNATURE BELOW OF ITS AUTHORIZED REPRESENTATIVE, ACKNOWLEDGES
THAT IT HAS READ THIS LEASE, UNDERSTANDS IT, AND AGREES TO BE BOUND BY ITS
TERMS AND CONDITIONS.
LESSOR: LESSEE:
CISCO SYSTEMS CAPITAL CORPORATION RHYTHMS NETCONNECTIONS INC.
By: /s/ Brian Fukahara By: /s/ Scott C. Chandler
-------------------------------- --------------------------------
(Authorized Signature) (Authorized Signature)
Scott C. Chandler/Chief Financial
Brian Fukahara Officer
-------------------------------- --------------------------------
(Name/Title) (Name/Title)
April 5, 1999 April 5, 1999
-------------------------------- --------------------------------
(Date) (Date)
9.
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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 4, 1999, except for the last
paragraph of Note 11 as to which the date is March 19, 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
April 6, 1999
