<PAGE>
As filed with the Securities and Exchange Commission on February 26, 1999
Registration No. 333-_________________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
RHYTHMS NETCONNECTIONS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0747515
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
6933 SOUTH REVERE PARKWAY ENGLEWOOD, COLORADO 80112
(Address of principal executive offices) (Zip Code)
----------
RHYTHMS NETCONNECTIONS INC.
1997 STOCK OPTION/STOCK ISSUANCE PLAN
(Full title of the Plan)
----------
CATHERINE M. HAPKA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
RHYTHMS NETCONNECTIONS INC.
6933 SOUTH REVERE PARKWAY
ENGLEWOOD, COLORADO 80112
(Name and address of agent for service)
(303) 476-4200
(Telephone number, including area code, of agent for service)
----------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ------------------------------------------------------------------------------------------------------------
Proposed
Title of Maximum Proposed
Securities Amount Offering Maximum Amount of
to be to be Price Aggregate Registration
Registered Registered(1) per Share Offering Price Fee
---------- ------------- --------- -------------- ------------
<S> <C> <C> <C> <C>
1997 Stock Option/Stock
Issuance Plan 2,500,505 shares $3.61(2) $9,026,823.05(2) $2,509.46
Common Stock
883,749 shares $7.64(3) $6,751,842.36(3) $1,877.01
AGGREGATE AMOUNT OF $4,386.47
REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This Registration Statement shall also cover any additional shares of
Registrant's common stock which become issuable under the 1997 Stock
Option/Stock Issuance Plan with respect to the securities registered
hereunder by reason of any stock dividend, stock split, recapitalization or
other similar transaction effected without the Registrant's receipt of
consideration which results in an increase in the number of the
Registrant's outstanding shares of common stock.
(2) Calculated solely for purposes of this offering under Rule 457(h) of the
Securities Act of 1933, as amended, on the basis of the weighted average
exercise price per share in effect under the outstanding options covering
these securities.
(3) Calculated solely for purposes of this offering under Rule 457(h) of the
Securities Act of 1933, as amended, on the basis of the fair market value
per share of Registrant's common stock on February 22, 1999, as determined
by the Registrant's Board of Directors.
<PAGE>
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
ITEM 3. INCORPORATION OF DOCUMENTS BY REFERENCE
Rhythms NetConnections Inc. (the "Registrant") hereby incorporates by
reference into this Registration Statement the following documents previously
filed with the Securities and Exchange Commission (the "Commission"):
(a) The Registrant's prospectus filed with the Commission on October 22,
1998 under Rule 424(b) promulgated under the Securities Act of 1933,
as amended (the "1933 Act"), in connection with the Registrant's
Registration Statement No. 333-59393, in which there is set forth the
audited financial statements for the period from February 27, 1997
(inception) through December 31, 1997.
(b) The Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1998 filed with the Commission on December 7, 1998.
All reports and definitive proxy or information statements filed
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended (the "1934 Act"), after the date of this Registration Statement
and prior to the filing of a post-effective amendment which indicates that all
securities offered hereby have been sold or which de-registers all securities
then remaining unsold shall be deemed to be incorporated by reference into this
Registration Statement and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Registration Statement to the extent that a statement
contained herein or in any subsequently filed document which also is deemed to
be incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Registration Statement.
ITEM 4. DESCRIPTION OF SECURITIES
COMMON STOCK. The holders of the Registrant's 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. Upon liquidation, dissolution or winding-up of the
Registrant, the holders of common stock are entitled to share ratably in all
assets available for distributions after payment in full to creditors and
holders of preferred stock. All outstanding shares of common stock are fully
paid and nonassessable.
POSSIBLE ANTI-TAKEOVER MATTERS
CERTIFICATE OF INCORPORATION AND BYLAWS. The Registrant's
certificate of incorporation provides that all stockholder action must be
effected at a duly called meeting of stockholders and not by a consent in
writing. The Registrant's bylaws provide that its Board of Directors will be
classified into three classes of directors. In addition, the Registrant's
bylaws do not permit its stockholders to call a special meeting of stockholders;
only the 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. The Registrant's bylaws also require that stockholders give
advance notice to its 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 the 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 the Registrant. Such
provisions may also have the effect of preventing changes in the Registrant's
management.
DELAWARE ANTI-TAKEOVER STATUTE. The Registrant is 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
II-1
<PAGE>
the beneficial owner of at least 15% of a corporation's voting stock -- for a
period of three years following the time that such stockholder became an
interested stockholder, unless:
- prior to such time, such corporation's board of directors
approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of such corporation's voting stock
outstanding at the time the transaction commenced, excluding, for
purposes of determining the number of shares outstanding, those
shares owned (x) by persons who are directors and also officers
and (y) by employee stock plans in which employee participants do
not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange
offer; or
- at or subsequent to such time, the business combination is
approved by such corporation's board of directors and authorized
at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least two-thirds
of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the
interested stockholder;
- any sale, lease, exchange, mortgage, transfer, pledge or other
disposition involving the interested stockholder and 10% or more
of the assets of the corporation;
- subject to certain exceptions, any transaction which results in
the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
- the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
RIGHTS PLAN. Prior to the closing of Registrant's initial public
offering of its common stock, it is anticipated that the Registrant's Board
of Directors will adopt a rights plan (the "Rights Agreement") pursuant to
which one right (a "Right") to purchase one one-thousandth of a share of a
series of preferred stock, par value $0.001 per share (the "Rights Plan
preferred stock"), would be issued as a dividend for each outstanding share
of common stock. Each Right, when exercisable, would represent the right to
purchase one one-thousandth of a share of Rights Plan preferred stock at a
specified price. The Rights would become exercisable ten days after a person
or group acquires 15% or more of the outstanding common stock or commences or
announces a tender or exchange offer which would result in such ownership.
If, after the Right becomes exercisable, the Registrant were to be acquired
through a merger or other business combination transaction or 50% or more of
the Registrant's assets or earning power were sold, each Right would permit
the holder to purchase, for the exercise price, common stock of the acquiring
company having a market value of twice the exercise price. In addition, if
any person acquires 15% or more of the outstanding common stock, each Right
not owned by such person would permit the purchase, for the exercise price,
of common stock having a market value of twice the exercise price. The Rights
would expire ten years after the adoption of the Rights Agreement, unless
earlier redeemed by the Registrant 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, the
Registrant's Board of Directors would retain the authority to redeem, at
$0.001 per Right, and replace the Rights with new rights at anytime, 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
II-2
<PAGE>
equal to the greater of (1) $10 per share or (2) 1,000 times the dividend
declared per share of common stock. In the event of liquidation, the holders
of shares of Rights Plan preferred stock will be entitled to a preferential
liquidation payment equal to the greater of (a) $1,000 per share or (b) 1,000
times the payment made per share of common stock. Each share of Rights Plan
preferred stock will entitle the holder to 1,000 votes, voting together with
the common stock. Finally, in the event of any merger, consolidation or
other transaction in which common stock is exchanged, each share of Rights
Plan preferred stock will be entitled to receive 1,000 times the amount
received per share of common stock. The foregoing rights would be subject to
antidilution adjustments.
ITEM 5. INTERESTS OF NAMED EXPERTS AND COUNSEL
Not Applicable.
ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS
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 6 of the Registrant's bylaws provides that the
Registrant shall indemnify its directors and executive officers to the
fullest extent permitted by the Delaware General Corporation Law. The rights
to indemnify 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 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.
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.
II-3
<PAGE>
ITEM 7. EXEMPTION FROM REGISTRATION CLAIMED
Not Applicable.
ITEM 8. EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Exhibit
- -------------- -------
<C> <S>
4.1* Instruments Defining the Rights of Stockholders. Registrant's
Restated Certificate of Incorporation filed with the
Delaware Secretary of State on March 6, 1998 and Certificate
of Amendment thereto filed with the Delaware Secretary of
State on April 28, 1998.
4.2* Instruments Defining the Rights of Stockholders.
Registrant's Bylaws and amendments thereto dated as of July
1, 1997 and March 6, 1998, respectively.
5 Opinion and Consent of Brobeck, Phleger & Harrison LLP.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Brobeck, Phleger & Harrison LLP is contained in Exhibit 5.
24 Power of Attorney. Reference is made to page II-5 of this Registration Statement.
99.1 1997 Stock Option/Stock Issuance Plan.
99.2 Form of Notice of Grant of Stock Option.
99.3 Form of Stock Option Agreement.
99.4 Form of Stock Purchase Agreement.
</TABLE>
* Exhibits 4.1 and 4.2 are incorporated herein by reference to Exhibits
3.1 and 3.2, respectively, of Registrant's Registration Statement No.
333-59393 on Form S-4, filed with the Commission on July 17, 1998, as
amended by Forms S-4/A, filed with the Commission on September 4, 1998,
September 25, 1998 and October 19, 1998.
ITEM 9. UNDERTAKINGS
A. The undersigned Registrant hereby undertakes: (1) to file,
during any period in which offers or sales are being made, a post-effective
amendment to this Registration Statement: (i) to include any prospectus required
by Section 10(a)(3) of the 1933 Act, (ii) to reflect in the prospectus any facts
or events arising after the effective date of this Registration Statement (or
the most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in this
Registration Statement and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in this
Registration Statement or any material change to such information in this
Registration Statement; provided, however, that clauses (1)(i) and (1)(ii) shall
not apply if the information required to be included in a post-effective
amendment by those clauses is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the 1934 Act that are
incorporated by reference into this Registration Statement; (2) that for the
purpose of determining any liability under the 1933 Act each such post-effective
amendment 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; and (3) to remove
from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the Rhythms
NetConnections Inc. 1997 Stock Option/Stock Issuance Plan.
B. The undersigned Registrant hereby undertakes that, for purposes
of determining any liability under the 1933 Act, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the 1934 Act that is
incorporated by reference into this Registration Statement 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.
C. Insofar as indemnification for liabilities arising under the 1933
Act may be permitted to directors, officers or controlling persons of the
Registrant pursuant to the indemnification provisions summarized in Item 6 or
otherwise, the Registrant has been advised that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
1933 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 1933 Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-8, and 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 this 26th day of February, 1999.
RHYTHMS NETCONNECTIONS INC.
By: /s/ CATHERINE M. HAPKA
-------------------------------------
Catherine M. Hapka
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Catherine M. Hapka and Scott
C. Chandler, and each of them, as such person's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for such person and in such person's name, place and stead,
in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as such person might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes, may lawfully
do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ CATHERINE M. HAPKA President, Chief Executive February 26, 1999
- ---------------------- Officer and Director
Catherine M. Hapka (Principal Executive Officer)
/s/ SCOTT C. CHANDLER Chief Financial Officer February 26, 1999
- ---------------------- (Principal Financial and
Scott C. Chandler Accounting Officer)
/s/ KEVIN R. COMPTON Director February 26, 1999
- ----------------------
Kevin R. Compton
/s/ KEITH B. GEESLIN Director February 26, 1999
- ----------------------
Keith B. Geeslin
- ---------------------- Director February ____, 1999
Ken L. Harrison
II-5
<PAGE>
<CAPTION>
<S> <C> <C>
- ---------------------- Director February ____, 1999
William R. Stensrud
/s/ JOHN. L. WALECKA Director February 26, 1999
- ----------------------
John. L. Walecka
</TABLE>
II-6
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM S-8
UNDER
SECURITIES ACT OF 1933
RHYTHMS NETCONNECTIONS INC.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT
- -------------- -------
<C> <S>
4.1* Instruments Defining the Rights of Stockholders. Registrant's
Restated Certificate of Incorporation filed with the
Delaware Secretary of State on March 6, 1998 and Certificate
of Amendment thereto filed with the Delaware Secretary of
State on April 28, 1998.
4.2* Instruments Defining the Rights of Stockholders.
Registrant's Bylaws and amendments thereto dated as of July
1, 1997 and March 6, 1998, respectively.
5 Opinion and Consent of Brobeck, Phleger & Harrison LLP.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Brobeck, Phleger & Harrison LLP is contained in Exhibit 5.
24 Power of Attorney. Reference is made to page II-5 of this Registration Statement.
99.1 1997 Stock Option/Stock Issuance Plan.
99.2 Form of Notice of Grant of Stock Option.
99.3 Form of Stock Option Agreement.
99.4 Form of Stock Purchase Agreement.
</TABLE>
* Exhibits 4.1 and 4.2 are incorporated herein by reference to Exhibits
3.1 and 3.2, respectively, of Registrant's Registration Statement No.
333-59393 on Form S-4, filed with the Commission on July 17, 1998, as amended
by Forms S-4/A, filed with the Commission on September 4, 1998, September 25,
1998 and October 19, 1998.
<PAGE>
EXHIBIT 5
OPINION AND CONSENT OF BROBECK, PHLEGER & HARRISON LLP
February 26, 1999
Rhythms NetConnections Inc.
6933 South Revere Parkway
Englewood, Colorado 80112
Re: Rhythms NetConnections Inc. - Registration Statement for Offering of
an Aggregate of 3,384,254 Shares of Common Stock
Dear Ladies and Gentlemen:
We have acted as counsel to Rhythms NetConnections Inc., a Delaware
corporation (the "Company"), in connection with the registration on Form S-8
(the "Registration Statement") under the Securities Act of 1933, as amended,
of 3,384,254 shares of common stock (the "Shares") and related stock options
under the Rhythms NetConnections Inc. 1997 Stock Option/Stock Issuance Plan
(the "Option Plan").
This opinion is being furnished in accordance with the requirements
of Item 8 of Form S-8 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the corporate
proceedings taken by the Company in connection with the establishment and
administration of the Option Plan. Based on such review, we are of the
opinion that if, as and when the Shares are issued and sold (and the
consideration therefor received) pursuant to the provisions of option
agreements or stock issuance agreements duly authorized under the Option Plan
and in accordance with the Registration Statement, such Shares will be duly
authorized, legally issued, fully paid and nonassessable.
We consent to the filing of this opinion letter as Exhibit 5 to the
Registration Statement.
This opinion letter is rendered as of the date first written above
and we disclaim any obligation to advise you of facts, circumstances, events
or developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is
expressly limited to the matters set forth above and we render no opinion,
whether by implication or otherwise, as to any other matters relating to the
Company, the Option Plan or the Shares.
Very truly yours,
/s/ BROBECK, PHLEGER & HARRISON LLP
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-8 (File
No. 333-_____) of our report dated March 13, 1998, except as to note 3 which
is as of October 15, 1998, on our audit of the financial statements of
Rhythms NetConnections Inc.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Diego, California
February 26, 1999
<PAGE>
EXHIBIT 99.1
RHYTHMS NETCONNECTIONS INC.
1997 STOCK OPTION/STOCK ISSUANCE PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1997 Stock Option/Stock Issuance Plan is intended to promote
the interests of Rhythms NetConnections Inc. by providing eligible persons with
the opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two separate equity programs:
-- the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock, and
-- the Stock Issuance Program under which eligible persons may,
at the discretion of the Plan Administrator, be issued shares of Common Stock
directly, either through the immediate purchase of such shares or as a bonus for
services rendered the Corporation (or any Parent or Subsidiary).
B. The provisions of Articles One and Four shall apply to all
equity programs under the Plan and shall govern the interests of all persons
under the Plan.
III. ADMINISTRATION OF THE PLAN
A. Except as provided in Paragraph B of this Section III, the
Plan shall be administered by the Board or one or more committees appointed by
the Board, provided that (1) beginning with the Section 12 Registration Date,
the Primary Committee shall have sole and exclusive authority to administer the
Plan with respect to Section 16 Insiders, and (2) administration of the Plan may
otherwise, at the Board's discretion, be vested in the Primary Committee or a
Secondary Committee.
B. Members of the Primary Committee or any Secondary Committee
shall serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may also at any time terminate the
functions of any Secondary Committee and reassume all powers and authority
previously delegated to such committee.
<PAGE>
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.
D. Service on the Primary Committee or the Secondary Committee
shall constitute service as a Board member, and members of each such committee
shall accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary
Option Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or times
when such option grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option
or a Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.
C. The Plan Administrator shall have the absolute discretion
either to grant options in accordance with the Discretionary Option Grant
Program or to effect stock issuances in accordance with the Stock Issuance
Program.
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V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares repurchased
by the Corporation on the open market. The maximum number of shares of Common
Stock initially reserved for issuance over the term of the Plan shall not exceed
4,863,971 shares.
B. Shares of Common Stock subject to outstanding options shall
be available for subsequent issuance under the Plan to the extent those options
expire or terminate for any reason prior to exercise in full. Unvested shares
issued under the Plan and subsequently cancelled or repurchased by the
Corporation, at the original issue price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall not be added back to the
number of shares of Common Stock reserved for issuance under the Plan.
C. If any change is made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan, (ii) the number and/or class of securities for which any one
person may be granted stock options, separately exercisable stock appreciation
rights and direct stock issuances under this Plan per calendar year, and (iii)
the number and/or class of securities and the exercise price per share in effect
under each outstanding option under the Plan. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; PROVIDED, however, that each such
document shall comply with the terms specified below. Each document
evidencing an Incentive Option shall, in addition, be subject to the
provisions of the Plan applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the option grant date, provided that
the Plan Administrator may fix the exercise price at less than 85% if the
optionee, at the time of the option grant, shall have made a payment to the
Company (including payment made by means of a salary reduction) equal to the
excess of the Fair Market Value of the Common Stock on the option grant date
over such exercise price.
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2. The exercise price shall become immediately due upon
exercise of the option and may, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in one or more
of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) with respect to the exercise of options after the
Section 12 Registration Date, shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(iii) with respect to the exercise of options for vested
shares after the Section 12 Registration Date and to the extent the sale
complies with all applicable laws relating to the regulation and sale of
securities, through a special sale and remittance procedure pursuant to
which the Optionee shall concurrently provide irrevocable written
instructions to (a) a Corporation-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the Corporation, out of
the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the purchased shares plus
all applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise, and
(b) the Corporation to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be
exercisable at such time or times, during such period and for such number of
shares as shall be determined by the Plan Administrator and set forth in the
documents evidencing the option. However, no option shall have a term in excess
of ten (10) years measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option (which shall in no
event be less than six (6) months in the case of death or disability nor
less than thirty (30) days in the case of any other cessation of Service),
provided no such option shall be exercisable after the expiration of the
option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by the personal
representative of the Optionee's estate or by the person or persons to whom
the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution.
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(iii) Subject to clause C.2.(ii) below of this Section I,
during the applicable post-Service exercise period, the option may not be
exercised in the aggregate for more than the number of vested shares for
which the option is exercisable on the date of the Optionee's cessation of
Service. Upon the expiration of the applicable exercise period or (if
earlier) upon the expiration of the option term, the option shall terminate
and cease to be outstanding for any vested shares for which the option has
not been exercised.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
limited exercise period otherwise in effect for that option to such greater
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the Optionee
would have vested had the Optionee continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock and to reserve the right to repurchase any or all of those unvested shares
should the optionee thereafter cease to be in Service to the Corporation. The
terms upon which such repurchase right shall be exercisable (including the
period and procedure for exercise and the appropriate vesting schedule for the
purchased shares) shall be established by the Plan Administrator and set forth
in the document evidencing such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of
the Optionee, options shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Four shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall NOT be subject to the terms of this Section
II.
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
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B. EXERCISE PRICE. The exercise price per share shall not be
less than one hundred percent (100%) of the Fair Market Value per share of
Common Stock on the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the
shares of Common Stock (determined as of the respective date or dates of grant)
for which one or more options granted to any Employee under the Plan (or any
other option plan of the Corporation or any Parent or Subsidiary) may for the
first time become exercisable as Incentive Options during any one calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive
Option is granted is a 10% Stockholder, then the exercise price per share shall
not be less than one hundred ten percent (110%) of the Fair Market Value per
share of Common Stock on the option grant date, and the option term shall not
exceed five (5) years measured from the option grant date.
III. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders,
the cancellation of any or all outstanding options under the Discretionary
Option Grant Program and to grant in substitution new options covering the
same or different number of shares of Common Stock but with an exercise price
per share based on the Fair Market Value per share of Common Stock on the new
grant date.
ARTICLE THREE
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCES
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
II. STOCK ISSUANCE TERMS
A. PURCHASE PRICE.
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Four,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
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(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. VESTING PROVISIONS.
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program, namely:
(i) the Service period to be completed by the Participant
or the performance objectives to be attained,
(ii) the number of installments in which the shares are to
vest,
(iii) the interval or intervals (if any) which are to lapse
between installments, and
(iv) the effect which death, Permanent Disability or other
event designated by the Plan Administrator is to have upon the vesting
schedule,
shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or 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
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indebtedness), the Corporation shall repay to the Participant the cash
consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares as to which the waiver applies. Such waiver may be effected at any
time, whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.
ARTICLE FOUR
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to
pay the option exercise price under the Discretionary Option Grant Program or
the purchase price of shares issued under the Stock Issuance Program by
delivering a full-recourse, interest bearing promissory note payable in one or
more installments. The terms of any such promissory note (including the
interest rate and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion. In no event may the maximum credit
available to the Optionee or Participant exceed the sum of (i) the aggregate
option exercise price or purchase price payable for the purchased shares plus
(ii) any Federal, state and local income and employment tax liability incurred
by the Optionee or the Participant in connection with the option exercise or
share purchase.
II. SHARE ESCROW/LEGENDS
Unvested shares issued under the Plan may, in the Plan
Administrator's discretion, be held in escrow by the Corporation until the
Participant's interest in such shares vests or may be issued directly to the
Participant with restrictive legends on the certificates evidencing those
unvested shares.
III. CORPORATE TRANSACTION
A. Except as otherwise provided in the agreements evidencing an
option, a portion of each outstanding option under the Discretionary Option
Grant Program shall automatically accelerate in the event of a Corporate
Transaction so that such portion shall, immediately prior to the effective date
of the Corporate Transaction, become fully exercisable for vested shares of
Common Stock, provided that no portion of any outstanding option shall so
accelerate if and to the extent: (i) such option is, in connection with the
Corporate Transaction, either to be assumed by the successor corporation (or
parent thereof) or to be replaced with a comparable option to purchase shares of
the capital stock of the successor corporation (or parent thereof), (ii) such
option is to be replaced with a cash incentive program of the successor
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corporation which preserves the spread existing on the unvested option shares at
the time of the Corporate Transaction and provides for subsequent payout in
accordance with the same vesting schedule applicable to those option shares or
(iii) the acceleration of such option is subject to other limitations imposed by
the Plan Administrator at the time of the option grant. The determination of
option comparability under clause (i) above shall be made by the Plan
Administrator, and its determination shall be final, binding and conclusive.
The portion of the option which will automatically accelerate hereunder shall be
a number of shares equal to the number of unvested shares immediately prior to
the Corporate Transaction available under the option multiplied by a fraction,
the NUMERATOR of which is the number of complete months of which elapsed after
the vesting commencement date under the option and the date of the Corporate
Transaction, and the DENOMINATOR of which is the number of months required under
the option agreement for the rights of the optionee to become fully vested.
B. Except as otherwise provided in the agreements creating the
repurchase rights, outstanding repurchase rights, if any, shall terminate
automatically with respect to a portion of the shares subject to repurchase
rights, and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, provided
that such repurchase right shall not lapse to the extent: (i) those repurchase
rights are to be assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction or (ii) such accelerated vesting is
precluded by other limitations imposed by the Plan Administrator at the time the
option is issued or the repurchase right is created. The portion of the shares
with respect to which the repurchase rights will terminate shall be a number of
shares equal to the total number of shares subject to repurchase rights
immediately prior to the Corporate Transaction multiplied by a fraction, the
NUMERATOR of which is the number of complete months which elapsed after the
vesting commencement date under the option or stock issuance agreement pursuant
to which the shares were issued and the date of the Corporate Transaction, and
the DENOMINATOR of which is the number of months required under the option or
stock issuance agreement for the rights of the optionee to become fully vested.
Any and all repurchase rights which will not terminate at the time of the
Corporate Transaction may be exercised by the Company immediately prior to the
Corporate Transaction.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
PROVIDED the aggregate exercise price payable for such securities shall remain
the same, (ii) the maximum 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.
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E. Repurchase rights which are assigned in connection with a
Corporate Transaction shall be exercisable with respect to the property issued
to the Optionee of Participant upon consummation of such Corporate Transaction
in exchange for the Common Stock held by the Optionee or Participant subject to
the repurchase rights immediately prior to the Corporate Transaction.
F. Except as otherwise limited by the Plan Administrator at the
time an Option is granted, vesting under outstanding options will automatically
accelerate in the event the Optionee's Service subsequently terminates by reason
of an Involuntary Termination within twenty-four (24) months following the
effective date of any Corporate Transaction in which those options are assumed
or replaced and do not otherwise accelerate. Any options so accelerated shall
remain exercisable for fully-vested shares until the EARLIER of (i) the
expiration of the option term or (ii) the expiration of the one (1)-year period
measured from the effective date of the Involuntary Termination. The portion of
any Incentive Option accelerated in connection with a Corporate Transaction or
Hostile Change in Control shall remain exercisable as an Incentive Option only
to the extent the applicable One Hundred Thousand Dollar limitation is not
exceeded and the provisions governing the exercise and holding period are met.
To the extent such dollar limitation is exceeded, the accelerated portion of
such option shall be exercisable as a Non-Statutory Option under the Federal tax
laws.
G. Except as otherwise limited by the Plan Administrator at the
time the option is granted under the Discretionary Option Program or the
repurchase rights are created, the outstanding repurchase rights with respect
to shares held by an Optionee or Participant will automatically lapse and
cease to be exercisable in the event the Optionee's or the Participant's
Service subsequently terminates by means of an Involuntary Termination within
twenty-four (24) months following the effective date of any Corporate
Transaction in which those repurchase rights are assigned or otherwise
continue.
H. The outstanding options or repurchase rights shall in no way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
IV. HOSTILE CHANGE IN CONTROL
A. In the event of any Hostile Change in Control, each
outstanding option under the Discretionary Option Grant Program shall
automatically accelerate so that each such option shall, immediately prior to
the effective date of the Hostile Change in Control, become fully exercisable
with respect to the total number of shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock.
B. Outstanding repurchase rights, if any, shall terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Hostile Change in Control.
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V. VESTING
Notwithstanding any other provision of this agreement, the
vesting schedule imposed with respect to any option grant or share issuance
shall not result in the Optionee or Participant vesting in fewer than 20% per
year for five years from the date of the option grant or share issuance.
VI. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common
Stock upon the exercise of options or the issuance or vesting of such shares
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any
or all holders of Non-Statutory Options or unvested shares of Common Stock under
the Plan with the right to use shares of Common Stock in satisfaction of all or
part of the Taxes incurred by such holders in connection with the exercise of
their options or the vesting of their shares. Such right may be provided to any
such holder in either or both of the following formats:
STOCK WITHHOLDING: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.
STOCK DELIVERY: The election to deliver to the Corporation, at
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
VII. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately upon the Plan
Effective Date. Options may be granted under the Discretionary Option Grant at
any time on or after the Plan Effective Date. However, no options granted under
the Plan may be exercised, and no shares shall be issued under the Plan, until
the Plan is approved by the Corporation's stockholders. If such stockholder
approval is not obtained within twelve (12) months after the Plan Effective
Date, then all options previously granted under this Plan shall terminate and
cease to be outstanding, and no further options shall be granted and no shares
shall be issued under the Plan.
B. The Plan shall terminate upon the EARLIEST of (i) the tenth
anniversary of the Plan Effective Date, (ii) the date on which all shares
available for issuance under the Plan shall have been issued as fully-vested
shares or (iii) the termination of all outstanding options in connection with a
Corporate Transaction. Upon such plan termination, all outstanding option
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grants and unvested stock issuances shall thereafter continue to have force and
effect in accordance with the provisions of the documents evidencing such grants
or issuances.
VIII. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, no such
amendment or modification shall adversely affect the rights and obligations with
respect to stock options or unvested stock issuances at the time outstanding
under the Plan unless the Optionee or the Participant consents to such amendment
or modification. In addition, certain amendments may require stockholder
approval if so determined by the Board or pursuant to applicable laws or
regulations.
B. Options to purchase shares of Common Stock may be granted
under the Discretionary Option Grant and shares of Common Stock may be issued
under the Stock Issuance Program that are in each instance in excess of the
number of shares then available for issuance under the Plan, provided any excess
shares actually issued under those programs shall be held in escrow until there
is obtained any required approval of an amendment sufficiently increasing the
number of shares of Common Stock available for issuance under the Plan. If such
approval is not obtained within twelve (12) months after the date the first such
excess issuances are made, then (i) any unexercised options granted on the basis
of such excess shares shall terminate and cease to be outstanding and (ii) the
Corporation shall promptly refund to the Optionees and the Participants the
exercise or purchase price paid for any excess shares issued under the Plan and
held in escrow, together with interest (at the applicable Short Term Federal
Rate) for the period the shares were held in escrow, and such shares shall
thereupon be automatically cancelled and cease to be outstanding.
IX. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
X. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock
option under the Plan and the issuance of any shares of Common Stock (i) upon
the exercise of any granted option or (ii) under the Stock Issuance Program
shall be subject to the Corporation's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the stock
options granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
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XI. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
XII. FINANCIAL REPORTS
The Corporation shall deliver a balance sheet and an income
statement at least annually to each individual holding an outstanding option
under the Plan, unless such individual is a key Employee whose duties in
connection with the Corporation (or any Parent or Subsidiary) assure such
individual access to equivalent information.
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APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CODE shall mean the Internal Revenue Code of 1986, as
amended.
C. COMMON STOCK shall mean the Corporation's common stock.
D. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting power
of the Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets.
E. CORPORATION shall mean Rhythms NetConnections Inc., a
Delaware corporation, and its successors.
F. DISCRETIONARY OPTION GRANT PROGRAM shall mean the
discretionary option grant program in effect under the Plan.
G. EMPLOYEE shall mean an individual who is in the employ of
the Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance.
H. EXERCISE DATE shall mean the date on which the Corporation
shall have received written notice of the option exercise.
I. FAIR MARKET VALUE per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be deemed equal to
the closing selling price per share of Common Stock on the date in
question, as such price is reported on the Nasdaq National Market or any
successor system. If there is no closing selling price for the Common
Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be deemed equal to the
closing selling price per share of Common Stock on the date in question on
the Stock Exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially
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quoted in the composite tape of transactions on such exchange. If there is
no closing selling price for the Common Stock on the date in question, then
the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to the
price per share at which the Common Stock is to be sold in the initial
public offering pursuant to the Underwriting Agreement.
(iv) For purposes of any option grants made prior to the
Underwriting Date, the Fair Market Value shall be determined by the Plan
Administrator, after taking into account such factors as it deems
appropriate.
J. HOSTILE CHANGE IN CONTROL shall mean a change in ownership
or control of the Corporation effected through either of the following
transactions:
(i) the acquisition, directly or indirectly by any person
or related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders which the Board does not recommend such
stockholders to accept, or
(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a majority
of the Board members ceases, by reason of one or more contested elections
for Board membership, to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such period or (B)
have been elected or nominated for election as Board members during such
period by at least a majority of the Board members described in clause (A)
who were still in office at the time the Board approved such election or
nomination.
K. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
L. INVOLUNTARY TERMINATION shall mean the termination of the
Service of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge
by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A)
a change in his or her position with the Corporation which materially
reduces his or her level of responsibility, (B) a reduction in his or her
level of compensation (including base salary, fringe benefits and
participation in any corporate-performance based bonus or incentive
programs) by more than fifteen percent (15%) or (C) a relocation of such
individual's
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<PAGE>
place of employment by more than fifty (50) miles, provided and only if
such change, reduction or relocation is effected by the Corporation without
the individual's consent.
M. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
N. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.
O. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.
P. OPTIONEE shall mean any person to whom an option is granted
under the Discretionary Option Grant Program.
Q. PARENT shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations ending with the Corporation,
provided each corporation in the unbroken chain (other than the Corporation)
owns, at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
R. PARTICIPANT shall mean any person who is issued shares of
Common Stock under the Stock Issuance Program.
S. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more.
T. PLAN shall mean the Corporation's 1997 Stock Option/Stock
Issuance Plan, as set forth in this document.
U. PLAN ADMINISTRATOR shall mean the particular entity, whether
the Primary Committee, the Board or the Secondary Committee, which is authorized
to administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
V. PLAN EFFECTIVE DATE shall mean the date on which the Plan
was adopted by the Board.
W. PRIMARY COMMITTEE shall mean the committee of two (2) or
more non-employee Board members appointed by the Board to administer the
Discretionary Option Grant
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and Stock Issuance Programs with respect to Section 16 Insiders following the
Section 12 Registration Date.
X. SECONDARY COMMITTEE shall mean a committee of two (2) or
more Board members appointed by the Board to administer any aspect of Plan not
required hereunder to be administered by the Primary Committee. The members of
the Secondary Committee may be Board members who are Employees eligible to
receive discretionary option grants or direct stock issuances under the Plan or
any other stock option, stock appreciation, stock bonus or other stock plan of
the Corporation (or any Parent or Subsidiary).
Y. SECTION 12 REGISTRATION DATE shall mean the date on which
the Common Stock is first registered under Section 12(g) or Section 15 of the
1934 Act.
Z. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
AA. SERVICE shall mean the performance of services for the
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.
BB. STOCK EXCHANGE shall mean either the American Stock Exchange
or the New York Stock Exchange.
CC. STOCK ISSUANCE AGREEMENT shall mean the agreement entered
into by the Corporation and the Participant at the time of issuance of shares of
Common Stock under the Stock Issuance Program.
DD. STOCK ISSUANCE PROGRAM shall mean the stock issuance program
in effect under the Plan.
EE. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
FF. TAXES shall mean the Federal, state and local income and
employment tax liabilities incurred by the holder of Non-Statutory Options or
unvested shares of Common Stock in connection with the exercise of those options
or the vesting of those shares.
GG. 10% STOCKHOLDER shall mean the owner of stock (as determined
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
HH. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
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II. UNDERWRITING DATE shall mean the date on which the
Underwriting Agreement is executed and priced in connection with an initial
public offering of the Common Stock.
A-5
<PAGE>
EXHIBIT 99.2
IMMEDIATELY EXERCISABLE
RHYTHMS NETCONNECTIONS INC.
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following stock option grant (the
"Option") pursuant to the 1997 STOCK OPTION/STOCK ISSUANCE PLAN (the "Plan")
to purchase shares of the Common Stock of Accelerated Connections, Inc. (the
"Corporation"):
OPTIONEE: ______________________________________________
GRANT DATE: ____________________________________________
GRANT NUMBER: _______ Option Price: $______ per share
VESTING COMMENCEMENT DATE: _____________________________
NUMBER OF OPTION SHARES: __________ shares
EXPIRATION DATE: _______________________________________
TYPE OF OPTION: _____ Incentive Stock Option
_____ Non-Statutory Stock Option
DATE EXERCISABLE:
----------------
The Option shall be immediately exercisable for all vested and
unvested shares.
VESTING SCHEDULE
----------------
The Option Shares shall be vest in accordance with the following
vesting schedule:
(a) Unless vesting is accelerated pursuant to (b) below, no Option
Shares shall vest until the Optionee has completed seven (7) full years of
Service (as defined in the Plan) measured from the Vesting Commencement Date.
(b) In the event that Optionee sells [INSERT NUMBER]
[DESCRIBE SALES UNITS] on or before [INSERT DATE], [INSERT NUMBER] Option
Shares shall immediately become vested. Thereafter, at each such time as
Optionee sells [INSERT NUMBER] additional [UNITS] on or before [INSERT DATE],
an additional [INSERT NUMBER] of the balance remaining of the Option Shares
shall immediately become vested.
Optionee understands that the Option is granted pursuant to the
Corporation's Plan; PROVIDED, HOWEVER, that the Board of Directors of the
Corporation has specifically waived the vesting restrictions of Section V of
the Plan with respect to this Option. By signing below,
<PAGE>
Optionee agrees to be bound by the terms and conditions of the Plan and the
terms and conditions of the Option as set forth in the Stock Option Agreement
attached hereto as Exhibit A. Optionee understands that any Option Shares
purchased under the Option will be subject to the terms and conditions set
forth in the Stock Purchase Agreement attached hereto as Exhibit B.
Optionee hereby acknowledges receipt of a copy of the Plan in the
form attached hereto as Exhibit C (as modified by the waiver of Section V of
the Plan by the Board of Directors).
REPURCHASE RIGHTS. THE OPTIONEE HEREBY AGREES THAT ALL OPTION
SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO
REPURCHASE RIGHTS AND RIGHTS OF FIRST REFUSAL EXERCISABLE BY THE CORPORATION
AND ITS ASSIGNS UPON ANY PROPOSED SALE, ASSIGNMENT, TRANSFER, ENCUMBRANCE OR
OTHER DISPOSITION OF THE CORPORATION'S SHARES. THE TERMS AND CONDITIONS OF
SUCH RIGHTS ARE SPECIFIED IN THE STOCK PURCHASE AGREEMENT.
NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or in
the Plan shall confer upon the Optionee any right to continue in the Service
of the Corporation for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation or the Optionee,
which rights are hereby expressly reserved by each, to terminate Optionee's
Service at any time for any reason whatsoever, with or without cause.
____________________, 199__
Date
RHYTHMS NETCONNECTIONS INC.
By ______________________________________
Title ___________________________________
__________________________________________
Optionee
Address:
__________________________________________
__________________________________________
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<PAGE>
EXHIBIT A
STOCK OPTION AGREEMENT
A-1
<PAGE>
EXHIBIT B
STOCK PURCHASE AGREEMENT
B-1
<PAGE>
EXHIBIT C
1997 STOCK OPTION/STOCK ISSUANCE PLAN
C-1
<PAGE>
EXHIBIT 99.3
RHYTHMS NETCONNECTIONS INC.
STOCK OPTION AGREEMENT
RECITALS
A. The Board of Directors of the Corporation has adopted the Rhythms
NetConnections Inc. 1997 Stock Option/Stock Issuance Plan (the "Plan") for
the purpose of attracting and retaining the services of persons who
contribute to the growth and financial success of the Corporation.
B. Optionee is a person who the Plan Administrator believes has and
will contribute to the growth and financial success of the Corporation and
this Agreement is executed pursuant to and is intended to carry out the
purposes of the Plan.
AGREEMENT
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. Subject to and upon the terms and conditions set
forth in this Agreement, the Corporation hereby grants to Optionee, as of the
grant date (the "Grant Date") specified in the accompanying Notice of Grant
of Stock Option (the "Grant Notice"), a stock option to purchase up to that
number of shares of the Corporation's Common Stock (the "Option Shares") as
is specified in the Grant Notice. The Option Shares shall be purchasable
from time to time during the option term at the option price per share (the
"Option Price") specified in the Grant Notice. Capitalized terms used herein
which are not otherwise defined shall have the meaning ascribed to such terms
in the Plan.
2. OPTION TERM. This option shall have a maximum term of ten (10)
years measured from the Grant Date and shall expire at the close of business
on the expiration date (the "Expiration Date") specified in the Grant Notice,
unless sooner terminated in accordance with Paragraph 5, 6 or 17.
3. LIMITED TRANSFERABILITY. This option shall be neither transferable
nor assignable by Optionee other than by will or by the laws of descent and
distribution following Optionee's death and may be exercised, during
Optionee's lifetime, only by Optionee.
4. DATES OF EXERCISE. This option may not be exercised in whole or in
part at any time prior to the time the Plan is approved by the Corporation's
shareholders in accordance with Paragraph 17. Provided such shareholder
approval is obtained, this option shall thereupon become exercisable for the
Option Shares in one or more installments as is specified in the Grant
Notice. As the option becomes exercisable in one or more installments, the
installments shall accumulate and the option shall remain exercisable for
such installments until the Expiration Date or the sooner termination of the
option term under Paragraph 5 or Paragraph 6 of this Agreement.
<PAGE>
5. SPECIAL TERMINATION OF OPTION TERM. The option term specified in
Paragraph 2 shall terminate (and this option shall cease to be exercisable)
prior to the Expiration Date should any of the following provisions become
applicable:
(i) Except as otherwise provided in subparagraph (ii) or
(iii) below, should Optionee cease to remain in Service while this option
is outstanding, then the period for exercising this option shall be reduced
to a three (3)-month period commencing with the date of such cessation of
Service, but in no event shall this option be exercisable at any time after
the Expiration Date. Upon the expiration of such three (3)-month period or
(if earlier) upon the Expiration Date, this option shall terminate and
cease to be outstanding.
(ii) Should Optionee die while this option is outstanding,
then the personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the law of descent and distribution shall have the
right to exercise this option. Such right shall lapse and this option
shall cease to be exercisable upon the EARLIER of (A) the expiration of the
twelve (12) month period measured from the date of Optionee's death or (B)
the Expiration Date. Upon the expiration of such twelve (12) month period
or (if earlier) upon the Expiration Date, this option shall terminate and
cease to be outstanding.
(iii) Should Optionee become permanently disabled and cease
by reason thereof to remain in Service while this option is outstanding,
then the Optionee shall have a period of twelve (12) months (commencing
with the date of such cessation of Service) during which to exercise this
option, but in no event shall this option be exercisable at any time after
the Expiration Date. Optionee shall be deemed to be permanently disabled
if Optionee is unable to engage in any substantial gainful activity for the
Corporation or the parent or subsidiary corporation retaining his/her
services by reason of any medically determinable physical or mental
impairment, which can be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than twelve
(12) months. Upon the expiration of such limited period of exercisability
or (if earlier) upon the Expiration Date, this option shall terminate and
cease to be outstanding.
(iv) During the limited period of exercisability
applicable under subparagraph (i), (ii) or (iii) above, this option may be
exercised for any or all of the Option Shares for which this option is, at
the time of the Optionee's cessation of Service, exercisable in accordance
with the exercise schedule specified in the Grant Notice and the provisions
of Paragraph 6 of this Agreement.
(v) For purposes of this Paragraph 5 and for all other
purposes under this Agreement:
A. The Optionee shall be deemed to remain in SERVICE for so long
as the Optionee continues to render periodic services to the Corporation or
any parent or subsidiary corporation, whether as an Employee, a non-employee
member of the board of directors, or an independent contractor or consultant.
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<PAGE>
B. The Optionee shall be deemed to be an EMPLOYEE of the
Corporation and to continue in the Corporation's employ for so long as the
Optionee remains in the employ of the Corporation or one or more of its
parent or subsidiary corporations, subject to the control and direction of
the employer entity as to both the work to be performed and the manner and
method of performance.
C. A corporation shall be considered to be a SUBSIDIARY
corporation of the Corporation if it is a member of an unbroken chain of
corporations beginning with the Corporation, provided each such corporation
in the chain (other than the last corporation) owns, at the time of
determination, stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
D. A corporation shall be considered to be a PARENT corporation
of the Corporation if it is a member of an unbroken chain ending with the
Corporation, provided each such corporation in the chain (other than the
Corporation) owns, at the time of determination, stock possessing 50% or more
of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
6. EFFECT OF CORPORATE TRANSACTION.
A. Optionee shall automatically vest with respect to a portion of
the Option Shares in the event of a Corporate Transaction so that such
portion shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for vested shares of Common Stock,
provided that no Option Shares shall automatically vest in full if and to the
extent: (i) this option is, in connection with the Corporate Transaction,
either to be assumed by the successor corporation (or parent thereof) or to
be replaced with a comparable option to purchase shares of the capital stock
of the successor corporation (or parent thereof), or (ii) such option is to
be replaced with a cash incentive program of the successor corporation which
preserves the spread existing on the unvested option shares at the time of
the Corporate Transaction and provides for subsequent payout in accordance
with the same vesting schedule applicable to those option shares. The
determination of option comparability under clause (i) above shall be made by
the Plan Administrator, and its determination shall be final, binding and
conclusive. The portion of the Option Shares which will automatically vest
hereunder shall be a number of shares equal to the number of unvested Option
Shares immediately prior to the Corporate Transaction multiplied by a
fraction, the NUMERATOR of which is the number of complete months of which
elapsed after the Vesting Commencement Date set forth in the Grant Notice and
the date of the Corporate Transaction, and the DENOMINATOR of which is the
number of months required under the Grant Notice for the rights of Optionee
to become fully vested.
B. To the extent not previously exercised, this Option shall
terminate and cease to be exercisable upon the consummation of a Corporate
Transaction unless it is expressly assumed by the successor corporation or
parent thereof.
C. Option Shares available under any options which are assumed or
replaced in the Corporate Transaction and do not otherwise accelerate at that
time, shall automatically vest in full in the event the Optionee's Service
should subsequently terminated by reason of an Involuntary Termination within
twenty-four (24) months following the effective date of such Corporate
Transaction. Any options so accelerated shall remain exercisable for
fully-vested
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<PAGE>
shares until the EARLIER of (i) the expiration of the option term or (ii) the
expiration of the one (1)-year period measured from the effective date of the
Involuntary Termination.
D. This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise make changes in
its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
7. EFFECT OF HOSTILE CHANGE IN CONTROL.
In the event of any Hostile Change in Control, Optionee shall
automatically vest in full with respect to all Option Shares so that each
such option shall, immediately prior to the effective date of the Hostile
Change in Control, be fully exercisable for any or all of Option Shares as
fully-vested shares of Common Stock.
8. ADJUSTMENT IN OPTION SHARES.
A. In the event any change is made to the Corporation's
outstanding Common Stock by reason of any stock split, stock dividend,
combination of shares, exchange of shares, or other change affecting the
outstanding Common Stock as a class without receipt of consideration, then
appropriate adjustments shall be made to (i) the total number of Option
Shares subject to this option, (ii) the number of Option Shares for which
this option is to be exercisable from and after each installment date
specified in the Grant Notice and (iii) the Option Price payable per share in
order to reflect such change and thereby preclude a dilution or enlargement
of benefits hereunder.
B. If this option is to be assumed in connection with a Corporate
Transaction described in Paragraph 6 or is otherwise to remain outstanding,
then this option shall be appropriately adjusted, immediately after such
Corporate Transaction, to apply and pertain to the number and class of
securities which would have been issuable to the Optionee in the consummation
of such Corporate Transaction had the option been exercised immediately prior
to such Corporate Transaction, and appropriate adjustments shall also be made
to the Option Price payable per share, PROVIDED the aggregate Option Price
payable hereunder shall remain the same.
9. PRIVILEGE OF STOCK OWNERSHIP. The holder of this option shall not
have any of the rights of a shareholder with respect to the Option Shares
until such individual shall have exercised the option and paid the Option
Price.
10. MANNER OF EXERCISING OPTION.
A. In order to exercise this option with respect to all or any
part of the Option Shares for which this option is at the time exercisable,
Optionee (or in the case of exercise after Optionee's death, the Optionee's
executor, administrator, heir or legatee, as the case may be) must take the
following actions:
(i) Execute and deliver to the Secretary of the
Corporation a stock purchase agreement (the "Purchase Agreement") in
substantially the form of Exhibit B to the Grant Notice.
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<PAGE>
(ii) Pay the aggregate Option Price for the purchased
shares in one or more forms approved under the Plan.
(iii) Furnish to the Corporation appropriate documentation
that the person or persons exercising the option, if other than Optionee,
have the right to exercise this option.
B. For purposes of this Agreement, the Exercise Date shall be the
date on which the executed Purchase Agreement shall have been delivered to
the Corporation, and the fair market value of a share of Common Stock on any
relevant date shall be determined in accordance with subparagraphs (i)
through (iii) below:
(i) If the Common Stock is not at the time listed or
admitted to trading on any stock exchange but is traded on the Nasdaq
National Market System, the fair market value shall be the closing selling
price of one share of Common Stock on the date in question, as such price
is reported by the National Association of Securities Dealers through its
Nasdaq system or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the closing
selling price on the last preceding date for which such quotation exists
shall be determinative of fair market value.
(ii) If the Common Stock is at the time listed or admitted
to trading on any stock exchange, then the fair market value shall be the
closing selling price per share of Common Stock on the date in question on
the stock exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no reported
sale of Common Stock on such exchange on the date in question, then the
fair market value shall be the closing selling price on the exchange on the
last preceding date for which such quotation exists.
(iii) If the Common Stock at the time is neither listed nor
admitted to trading on any stock exchange nor traded in the over-the-
counter market, or if the Plan Administrator determines that the value
determined pursuant to subparagraphs (i) and (ii) above does not accurately
reflect the fair market value of the Common Stock, then such fair market
value shall be determined by the Plan Administrator after taking into
account such factors as the Plan Administrator shall deem appropriate.
C. As soon after the Exercise Date as practical, the Corporation
shall mail or deliver to Optionee or to the other person or persons
exercising this option a certificate or certificates representing the shares
so purchased and paid for, with the appropriate legends affixed thereto.
D. In no event may this option be exercised for any fractional
shares.
11. COMPLIANCE WITH LAWS AND REGULATIONS.
A. The exercise of this option and the issuance of Option Shares
upon such exercise shall be subject to compliance by the Corporation and the
Optionee with all applicable
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requirements of law relating thereto and with all applicable regulations of
any stock exchange on which shares of the Corporation's Common Stock may be
listed at the time of such exercise and issuance.
B. B. In connection with the exercise of this option, Optionee
shall execute and deliver to the Corporation such representations in writing
as may be requested by the Corporation in order for it to comply with the
applicable requirements of Federal and State securities laws.
12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in
Paragraph 3 or 6, the provisions of this Agreement shall inure to the benefit
of, and be binding upon, the successors, administrators, heirs, legal
representatives and assigns of Optionee and the successors and assigns of the
Corporation.
13. LIABILITY OF CORPORATION.
A. If the Option Shares covered by this Agreement exceed, as of
the Grant Date, the number of shares of Common Stock which may without
shareholder approval be issued under the Plan, then this option shall be void
with respect to such excess shares, unless shareholder approval of an
amendment sufficiently increasing the number of shares of Common Stock
issuable under the Plan is obtained in accordance with the provisions of
Article IV, Section 3, of the Plan.
B. The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be necessary to
the lawful issuance and sale of any Common Stock pursuant to this option
shall relieve the Corporation of any liability with respect to the
non-issuance or sale of the Common Stock as to which such approval shall not
have been obtained. The Corporation, however, shall use its best efforts to
obtain all such approvals.
14. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation in care of the Corporate Secretary at its
principal corporate offices. Any notice required to be given or delivered to
Optionee shall be in writing and addressed to Optionee at the address
indicated below Optionee's signature line on the Grant Notice. All notices
shall be deemed to have been given or delivered upon personal delivery or
upon deposit in the U.S. mail, postage prepaid and properly addressed to the
party to be notified.
15. LOANS. The Plan Administrator may, in its absolute discretion and
without any obligation to do so, assist the Optionee in the exercise of this
option by (i) authorizing the extension of a loan to the Optionee from the
Corporation or (ii) permitting the Optionee to pay the option price for the
purchased Common Stock in installments over a period of years. The terms of
any such loan or installment method of payment (including the interest rate,
the requirements for collateral and the terms of repayment) shall be
established by the Plan Administrator in its sole discretion.
16. CONSTRUCTION. This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects limited by and
subject to the express terms
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<PAGE>
and provisions of the Plan. All decisions of the Plan Administrator with
respect to any question or issue arising under the Plan or this Agreement
shall be conclusive and binding on all persons having an interest in this
option.
17. GOVERNING LAW. The interpretation, performance, and enforcement of
this Agreement shall be governed by the laws of the State of California
without resort to that State's conflict-of-laws rules.
18. SHAREHOLDER APPROVAL. The grant of this option is subject to
approval of the Plan by the Corporation's shareholders within twelve (12)
months after the adoption of the Plan by the Board of Directors.
NOTWITHSTANDING ANY PROVISION OF THIS AGREEMENT TO THE CONTRARY, THIS OPTION
MAY NOT BE EXERCISED IN WHOLE OR IN PART UNTIL SUCH SHAREHOLDER APPROVAL IS
OBTAINED. In the event that such shareholder approval is not obtained, then
this option shall thereupon terminate in its entirety and the Optionee shall
have no further rights to acquire any Option Shares hereunder.
19. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE STOCK OPTION. In the
event this option is designated an incentive stock option in the Grant
Notice, the following terms and conditions shall also apply to the grant:
A. This option shall cease to qualify for favorable tax treatment
as an incentive stock option under the Federal tax laws if (and to the
extent) this option is exercised for one or more Option Shares: (i) more
than three (3) months after the date the Optionee ceases to be an Employee
for any reason other than death or permanent disability (as defined in
Paragraph 5) or (ii) more than one (1) year after the date the Optionee
ceases to be an Employee by reason of permanent disability.
B. Should this option be designated as immediately exercisable in
the Grant Notice, then this option shall not become exercisable in the
calendar year in which granted if (and to the extent) the aggregate fair
market value (determined at the Grant Date) of the Corporation's Common Stock
for which this option would otherwise first become exercisable in such
calendar year would, when added to the aggregate fair market value
(determined as of the respective date or dates of grant) of the Corporation's
Common Stock for which this option or one or more other incentive stock
options granted to the Optionee prior to the Grant Date (whether under the
Plan or any other option plan of the Corporation or its parent or subsidiary
corporations) first become exercisable during the same calendar year, exceed
One Hundred Thousand Dollars ($100,000) in the aggregate. To the extent the
exercisability of this option is deferred by reason of the foregoing
limitation, the deferred portion will first become exercisable in the first
calendar year or years thereafter in which the One Hundred Thousand Dollar
($100,000) limitation of this Paragraph 18.B would not be contravened.
C. Should this option be designated as exercisable in
installments in the Grant Notice, then no installment under this option
(whether annual or monthly) shall qualify for favorable tax treatment as an
incentive stock option under the Federal tax laws if (and to the extent) the
aggregate fair market value (determined at the Grant Date) of the
Corporation's Common Stock for which such installment first becomes
exercisable hereunder will, when added to the aggregate fair market value
(determined as of the respective date or dates of grant) of the Corporation's
Common Stock for which one or more other incentive stock options granted to
the
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<PAGE>
Optionee prior to the Grant Date (whether under the Plan or any other option
plan of the Corporation or any parent or subsidiary corporation) first become
exercisable during the same calendar year, exceed One Hundred Thousand
Dollars ($100,000) in the aggregate.
20. WITHHOLDING. Optionee hereby agrees to make appropriate
arrangements with the Corporation or parent or subsidiary corporation
employing Optionee for the satisfaction of all Federal, State or local income
tax withholding requirements and Federal social security employee tax
requirements applicable to the exercise of this option.
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<PAGE>
EXHIBIT 99.4
IMMEDIATELY EXERCISABLE
RHYTHMS NETCONNECTIONS INC.
STOCK PURCHASE AGREEMENT
AGREEMENT made as of this _____ day of ____________, 19___, by and among
Rhythms NetConnections Inc., (the "Corporation"), ________________________,
the holder of a stock option (the "Optionee") under the Corporation's 1997
Stock Option/Stock Issuance Plan and ________________________, the Optionee's
spouse.
I. EXERCISE OF OPTION
1.1 EXERCISE. Optionee hereby purchases ____________ shares
("Purchased Shares") of the Corporation's common stock ("Common Stock")
pursuant to that certain option ("Option") granted Optionee on _____________,
19___ ("Grant Date") to purchase up to ____________ shares of the Common
Stock ("Total Purchasable Shares") under the Corporation's 1997 Stock
Option/Stock Issuance Plan (the "Plan") at an option price of $__________ per
share ("Option Price").
1.2 PAYMENT. Concurrently with the delivery of this Agreement
to the Corporate Secretary of the Corporation, Optionee shall pay the Option
Price for the Purchased Shares in accordance with the provisions of the
agreement between the Corporation and Optionee evidencing the Option (the
"Option Agreement") and shall deliver whatever additional documents may be
required by the Option Agreement as a condition for exercise, together with a
duly-executed blank Assignment Separate from Certificate (in the form
attached hereto as Exhibit I) with respect to the Purchased Shares.
1.3 DELIVERY OF CERTIFICATES. The certificates representing the
Purchased Shares hereunder shall be held in escrow by the Corporate Secretary
of the Corporation in accordance with the provisions of Article VII.
1.4 SHAREHOLDER RIGHTS. Until such time as the Corporation
actually exercises its repurchase right, rights of first refusal or special
purchase right under this Agreement, Optionee (or any successor in interest)
shall have all the rights of a shareholder (including voting and dividend
rights) with respect to the Purchased Shares, including the Purchased Shares
held in escrow under Article VII, subject, however, to the transfer
restrictions of Article IV.
II. SECURITIES LAW COMPLIANCE
2.1 EXEMPTION FROM REGISTRATION. The Purchased Shares have not
been registered under the Securities Act of 1933, as amended (the "1933
Act"), and are accordingly being issued to Optionee in reliance upon the
exemption from such registration provided by Rule 701 of the Securities and
Exchange Commission for stock issuances under compensatory benefit plans such
as the Plan. Optionee hereby acknowledges previous receipt of a copy of the
documentation for such Plan in the form of Exhibit C to the Notice of Grant
of Stock Option (the "Grant Notice") accompanying the Option Agreement.
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2.2 RESTRICTED SECURITIES.
A. Optionee hereby confirms that Optionee has been informed
that the Purchased Shares are restricted securities under the 1933 Act and
may not be resold or transferred unless the Purchased Shares are first
registered under the Federal securities laws or unless an exemption from such
registration is available. Accordingly, Optionee hereby acknowledges that
Optionee is prepared to hold the Purchased Shares for an indefinite period
and that Optionee is aware that Rule 144 of the Securities and Exchange
Commission issued under the 1933 Act is not presently available to exempt the
sale of the Purchased Shares from the registration requirements of the 1933
Act.
B. Upon the expiration of the ninety (90)-day period
immediately following the date on which the Corporation first becomes subject
to the reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Purchased Shares, to the extent vested
under Article V, may be sold (without registration) pursuant to the
applicable requirements of Rule 144. If Optionee is at the time of such sale
an affiliate of the Corporation for purposes of Rule 144 or was such an
affiliate during the preceding three (3) months, then the sale must comply
with all the requirements of Rule 144 (including the volume limitation on the
number of shares sold, the broker/market-maker sale requirement and the
requisite notice to the Securities and Exchange Commission); however, the two
(2)-year holding period requirement of the Rule will not be applicable. If
Optionee is not at the time of the sale an affiliate of the Corporation nor
was such an affiliate during the preceding three (3) months, then none of the
requirements of Rule 144 (other than the broker/market-maker sale requirement
for Purchased Shares held for less than three (3) years following payment in
cash of the Option Price therefor) will be applicable to the sale.
C. Should the Corporation not become subject to the
reporting requirements of the Exchange Act, then Optionee may, provided
he/she is not at the time an affiliate of the Corporation (nor was such an
affiliate during the preceding three (3) months), sell the Purchased Shares
(without registration) pursuant to paragraph (k) of Rule 144 after the
Purchased Shares have been held for a period of three (3) years following the
payment in cash of the Option Price for such shares.
2.3 DISPOSITION OF SHARES. Optionee hereby agrees that Optionee
shall make no disposition of the Purchased Shares (other than a permitted
transfer under paragraph 4.1) unless and until there is compliance with all
of the following requirements:
(a) Optionee shall have notified the Corporation of the
proposed disposition and provided a written summary of the terms and
conditions of the proposed disposition.
(b) Optionee shall have complied with all requirements of
this Agreement applicable to the disposition of the Purchased Shares.
(c) Optionee shall have provided the Corporation with
written assurances, in form and substance satisfactory to the Corporation,
that (i) the proposed disposition does not require registration of the
Purchased Shares under the 1933 Act or (ii) all appropriate action
necessary for compliance with the registration requirements of
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the 1933 Act or of any exemption from registration available under the
1933 Act (including Rule 144) has been taken.
(d) Optionee shall have provided the Corporation with
written assurances, in form and substance satisfactory to the Corporation,
that the proposed disposition will not result in the contravention of any
transfer restrictions applicable to the Purchased Shares pursuant to the
provisions of the Commissioner Rules identified in paragraph 2.5.
The Corporation shall NOT be required (i) to transfer on its books
any Purchased Shares which have been sold or transferred in violation of the
provisions of this Article II NOR (ii) to treat as the owner of the Purchased
Shares, or otherwise to accord voting or dividend rights to, any transferee
to whom the Purchased Shares have been transferred in contravention of this
Agreement.
2.4 RESTRICTIVE LEGENDS. In order to reflect the restrictions
on disposition of the Purchased Shares, the stock certificates for the
Purchased Shares will be endorsed with restrictive legends, including one or
more of the following legends:
(i) "The shares represented by this certificate have
not been registered under the Securities Act of 1933. The shares may not be
sold or offered for sale in the absence of (a) an effective registration
statement for the shares under such Act, (b) a `no action' letter of the
Securities and Exchange Commission with respect to such sale or offer, or (c)
satisfactory assurances to the Corporation that registration under such Act
is not required with respect to such sale or offer."
(ii) "The shares represented by this certificate are
unvested and accordingly may not be sold, assigned, transferred, encumbered,
or in any manner disposed of except in conformity with the terms of a written
agreement dated ____________, 19__ between the Corporation and the registered
holder of the shares (or the predecessor in interest to the shares). Such
agreement grants certain repurchase rights and rights of first refusal to the
Corporation (or its assignees) upon the sale, assignment, transfer, encumbrance
or other disposition of the Corporation's shares or upon termination of service
with the Corporation. The Corporation will upon written request furnish a copy
of such agreement to the holder hereof without charge."
III. SPECIAL TAX ELECTION
3.1 SECTION 83(b) ELECTION APPLICABLE TO THE EXERCISE OF A
NON-STATUTORY STOCK OPTION. If the Purchased Shares are acquired hereunder
pursuant to the exercise of a NON-STATUTORY STOCK OPTION, as specified in the
Grant Notice, then the Optionee understands that under Section 83 of the
Internal Revenue Code of 1986, as amended (the "Code"), the excess of the
fair market value of the Purchased Shares on the date any forfeiture
restrictions applicable to such shares lapse over the Option Price paid for
such shares will be reportable as ordinary income on such lapse date. For
this purpose, the term "forfeiture restrictions" includes the right of the
Corporation to repurchase the Purchased Shares pursuant to the Repurchase
Right provided under Article V of this Agreement. Optionee understands that
he/she may elect under Section 83(b) of the Code to be taxed at the time the
Purchased Shares are acquired hereunder, rather
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than when and as such Purchased Shares cease to be subject to such forfeiture
restrictions. Such election must be filed with the Internal Revenue Service
within thirty (30) days after the date of this Agreement. Even if the fair
market value of the Purchased Shares at the date of this Agreement equals the
Option Price paid (and thus no tax is payable), the election must be made to
avoid adverse tax consequences in the future. THE FORM FOR MAKING THIS
ELECTION IS ATTACHED AS EXHIBIT II HERETO. OPTIONEE UNDERSTANDS THAT FAILURE
TO MAKE THIS FILING WITHIN THE THIRTY (30)-DAY PERIOD WILL RESULT IN THE
RECOGNITION OF ORDINARY INCOME BY THE OPTIONEE AS THE FORFEITURE RESTRICTIONS
LAPSE.
3.2 CONDITIONAL SECTION 83(b) ELECTION APPLICABLE TO THE
EXERCISE OF AN INCENTIVE STOCK OPTION. If the Purchased Shares are acquired
hereunder pursuant to the exercise of an INCENTIVE STOCK OPTION under the
Federal tax laws, as specified in the Grant Notice, then the following tax
principles shall be applicable to the Purchased Shares:
A. For regular tax purposes, no taxable income will be
recognized at the time the Option is exercised.
B. The excess of (i) the fair market value of the Purchased
Shares on the date the Option is exercised or (if later) on the date any
forfeiture restrictions applicable to the Purchased Shares lapse over (ii)
the Option Price paid for the Purchased Shares will be includible in the
Optionee's taxable income for alternative minimum tax purposes.
C. If the Optionee makes a disqualifying disposition of the
Purchased Shares, then the Optionee will recognize ordinary income in the
year of such disposition equal in amount to the excess of (i) the fair market
value of the Purchased Shares on the date the Option is exercised or (if
later) on the date any forfeiture restrictions applicable to the Purchased
Shares lapse over (ii) the Option Price paid for the Purchased Shares. Any
additional gain recognized upon the disqualifying disposition will be either
short-term or long-term capital gain depending upon the period for which the
Purchased Shares are held prior to the disposition.
D. For purposes of the foregoing, the term "forfeiture
restrictions" will include the right of the Corporation to repurchase the
Purchased Shares pursuant to the Repurchase Right provided under Article V of
this Agreement. The term "disqualifying disposition" means any sale or other
disposition(1) of the Purchased Shares within two (2) years after the Grant
Date or within one (1) year after the execution date of this Agreement.
E. In the absence of final Treasury Regulations relating
to incentive stock options, it is not certain whether the Optionee may, in
connection with the exercise of the Option for any Purchased Shares at the time
subject to forfeiture restrictions, file a protective
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(1) Generally, a disposition of shares purchased under an incentive stock
option includes any transfer of legal title, including a transfer by
sale, exchange or gift, but does not include a transfer to the
Optionee's spouse, a transfer into joint ownership with right of
survivorship if Optionee remains one of the joint owners, a pledge, a
transfer by bequest or inheritance or certain tax free exchanges
permitted under the Code.
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election under Section 83(b) of the Code which would limit (I) the Optionee's
alternative minimum taxable income upon exercise and (II) the Optionee's
ordinary income upon a disqualifying disposition, to the excess of (i) the
fair market value of the Purchased Shares on the date the Option is exercised
over (ii) the Option Price paid for the Purchased Shares. THE APPROPRIATE
FORM FOR MAKING SUCH A PROTECTIVE ELECTION IS ATTACHED AS EXHIBIT II TO THIS
AGREEMENT AND MUST BE FILED WITH THE INTERNAL REVENUE SERVICE WITHIN THIRTY
(30) DAYS AFTER THE DATE OF THIS AGREEMENT. HOWEVER, SUCH ELECTION IF
PROPERLY FILED WILL ONLY BE ALLOWED TO THE EXTENT THE FINAL TREASURY
REGULATIONS PERMIT SUCH A PROTECTIVE ELECTION.
3.3 OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE
RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER
SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE CORPORATION OR ITS
REPRESENTATIVES TO MAKE THIS FILING ON HIS/HER BEHALF. This filing should be
made by registered or certified mail, return receipt requested, and Optionee
must retain two (2) copies of the completed form for filing with his or her
State and Federal tax returns for the current tax year and an additional copy
for his or her records.
IV. TRANSFER RESTRICTIONS
4.1 RESTRICTION ON TRANSFER. Optionee shall not transfer,
assign, encumber or otherwise dispose of any of the Purchased Shares which
are subject to the Corporation's Repurchase Right under Article V. In
addition, Purchased Shares which are released from the Repurchase Right shall
not be transferred, assigned, encumbered or otherwise made the subject of
disposition in contravention of the Corporation's First Refusal Right under
Article VI. Such restrictions on transfer, however, shall NOT be applicable
to (i) a gratuitous transfer of the Purchased Shares made to the Optionee's
spouse or issue, including adopted children, or to a trust for the exclusive
benefit of the Optionee or the Optionee's spouse or issue, PROVIDED AND ONLY
IF the Optionee obtains the Corporation's prior written consent to such
transfer, (ii) a transfer of title to the Purchased Shares effected pursuant
to the Optionee's will or the laws of intestate succession or (iii) a
transfer to the Corporation in pledge as security for any purchase-money
indebtedness incurred by the Optionee in connection with the acquisition of
the Purchased Shares.
4.2 TRANSFEREE OBLIGATIONS. Each person (other than the
Corporation) to whom the Purchased Shares are transferred by means of one of
the permitted transfers specified in paragraph 4.1 must, as a condition
precedent to the validity of such transfer, acknowledge in writing to the
Corporation that such person is bound by the provisions of this Agreement and
that the transferred shares are subject to (i) both the Corporation's
Repurchase Right and the Corporation's First Refusal Right granted hereunder
and (ii) the market stand-off provisions of paragraph 4.4, to the same extent
such shares would be so subject if retained by the Optionee.
4.3 DEFINITION OF OWNER. For purposes of Articles IV, V, VI and
VII and Section 9.4 of this Agreement, the term "Owner" shall include the
Optionee and all subsequent holders of the Purchased Shares who derive their
chain of ownership through a permitted transfer from the Optionee in
accordance with paragraph 4.1.
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4.4 MARKET STAND-OFF PROVISIONS.
A. In connection with any underwritten public offering
by the Corporation of its equity securities pursuant to an effective
registration statement filed under the 1933 Act, including the Corporation's
initial public offering, Owner shall not sell, make any short sale of, loan,
hypothecate, pledge, grant any option for the purchase of, or otherwise dispose
or transfer for value or otherwise agree to engage in any of the foregoing
transactions with respect to, any Purchased Shares without the prior written
consent of the Corporation or its underwriters. Such limitations shall be in
effect for such period of time from and after the effective date of such
registration statement as may be requested by the Corporation or such
underwriters; PROVIDED, however, that in no event shall such period exceed one
hundred-eighty (180) days. The limitations of this paragraph 4.4 shall remain
in effect for the two-year period immediately following the effective date of
the Corporation's initial public offering and shall thereafter terminate and
cease to have any force or effect.
B. Owner shall be subject to the market stand-off
provisions of this paragraph 4.4 PROVIDED AND ONLY IF the officers and directors
of the Corporation are also subject to similar arrangements.
C. In the event of any stock dividend, stock split,
recapitalization or other change affecting the Corporation's outstanding Common
Stock effected as a class without receipt of consideration, then any new,
substituted or additional securities distributed with respect to the Purchased
Shares shall be immediately subject to the provisions of this paragraph 4.4, to
the same extent the Purchased Shares are at such time covered by such
provisions.
D. In order to enforce the limitations of this paragraph
4.4, the Corporation may impose stop-transfer instructions with respect to the
Purchased Shares until the end of the applicable stand-off period.
V. REPURCHASE RIGHT
5.1 GRANT. The Corporation is hereby granted the right (the
"Repurchase Right"), exercisable at any time during the sixty (60)-day period
following the date the Optionee ceases for any reason to remain in Service or
(if later) during the sixty (60)-day period following the execution date of this
Agreement, to repurchase at the Option Price all or (at the discretion of the
Corporation and with the consent of the Optionee) any portion of the Purchased
Shares in which the Optionee has not acquired a vested interest in accordance
with the vesting provisions of paragraph 5.3 (such shares to be hereinafter
called the "Unvested Shares"). For purposes of this Agreement, the Optionee
shall be deemed to remain in Service for so long as the Optionee continues to
render periodic services to the Corporation or any parent or subsidiary
corporation, whether as an employee, a non-employee member of the board of
directors, or an independent contractor or consultant.
5.2 EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall
be exercisable by written notice delivered to the Owner of the Unvested Shares
prior to the expiration of the applicable sixty (60)-day period specified in
paragraph 5.1. The notice shall indicate the number of Unvested Shares to be
repurchased and the date on which the repurchase is to be effected, such date to
be not more than thirty (30) days after the date of notice. To the
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extent one or more certificates representing Unvested Shares may have been
previously delivered out of escrow to the Owner, then Owner shall, prior to
the close of business on the date specified for the repurchase, deliver to
the Secretary of the Corporation the certificates representing the Unvested
Shares to be repurchased, each certificate to be properly endorsed for
transfer. The Corporation shall, concurrently with the receipt of such stock
certificates (either from escrow in accordance with paragraph 7.3 or from
Owner as herein provided), pay to Owner in cash or cash equivalents
(including the cancellation of any purchase-money indebtedness), an amount
equal to the Option Price previously paid for the Unvested Shares which are
to be repurchased.
5.3 TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right
shall terminate with respect to any Unvested Shares for which it is not timely
exercised under paragraph 5.2. In addition, the Repurchase Right shall
terminate, and cease to be exercisable, with respect to any and all Purchased
Shares in which the Optionee vests in accordance with the vesting schedule
specified in the Grant Notice. All Purchased Shares as to which the Repurchase
Right lapses shall, however, continue to be subject to (i) the First Refusal
Right of the Corporation and its assignees under Article VI, (ii) the market
stand-off provisions of paragraph 4.4 and (iii) the Special Purchase Right under
Article VIII.
5.4 AGGREGATE VESTING LIMITATION. If the Option is exercised in
more than one increment so that the Optionee is a party to one or more other
Stock Purchase Agreements ("Prior Purchase Agreements") which are executed prior
to the date of this Agreement, then the total number of Purchased Shares as to
which the Optionee shall be deemed to have a fully-vested interest under this
Agreement and all Prior Purchase Agreements shall not exceed in the aggregate
the number of Purchased Shares in which the Optionee would otherwise at the time
be vested, in accordance with the vesting provisions of paragraph 5.3, had all
the Purchased Shares been acquired exclusively under this Agreement.
5.5 FRACTIONAL SHARES. No fractional shares shall be repurchased
by the Corporation. Accordingly, should the Repurchase Right extend to a
fractional share (in accordance with the vesting provisions of paragraph 5.3) at
the time the Optionee ceases Service, then such fractional share shall be added
to any fractional share in which the Optionee is at such time vested in order to
make one whole vested share no longer subject to the Repurchase Right.
5.6 ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of
any stock dividend, stock split, recapitalization or other change affecting the
Corporation's outstanding Common Stock as a class effected without receipt of
consideration, then any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which is
by reason of any such transaction distributed with respect to the Purchased
Shares shall be immediately subject to the Repurchase Right, but only to the
extent the Purchased Shares are at the time covered by such right. Appropriate
adjustments to reflect the distribution of such securities or property shall be
made to the number of Purchased Shares and Total Purchasable Shares hereunder
and to the price per share to be paid upon the exercise of the Repurchase Right
in order to reflect the effect of any such transaction upon the Corporation's
capital structure; PROVIDED, however, that the aggregate purchase price shall
remain the same.
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5.7 CORPORATE TRANSACTION.
A. The Repurchase Rights shall automatically terminate
and cease to be exercisable with respect to a portion of the Purchased Shares
upon the consummation of any Corporate Transaction, provided that such
repurchase right shall not terminate if and to the extent the repurchase rights
are assigned to the successor corporation (or parent thereof) in connection with
such Corporate Transaction. The portion of the Purchased Shares with respect to
which the repurchase rights will terminate shall be a number of Purchased Shares
equal to the total number of Unvested Shares immediately prior to the Corporate
Transaction multiplied by a fraction, the NUMERATOR of which is the number of
complete months which elapsed after the Vesting Commencement Date set forth in
the Grant Notice and the date of the Corporate Transaction, and the DENOMINATOR
of which is the number of months required under the Grant Notice for all of the
Purchased Shares to become fully vested. Any and all repurchase rights which
will not be either assigned or terminated at the time of the Corporate
Transaction may be exercised by the Company immediately prior to the Corporate
Transaction.
B. Repurchase rights which are assigned in connection
with a Corporate Transaction shall be exercisable with respect to the property
issued to the Optionee upon consummation of such Corporate Transaction in
exchange for the Common Stock held by the Optionee subject to the repurchase
rights immediately prior to the Corporate Transaction.
C. Any Repurchase Rights which are assigned in a
Corporate Transaction and do not otherwise become vested at that time, shall
automatically terminate and cease to be exercisable in the event the Optionee's
Service should subsequently terminate by reason of an Involuntary Termination
within twenty-four (24) months following the effective date of such Corporate
Transaction.
D. This Agreement shall not in any way affect the right
of the Corporation to adjust, reclassify, reorganize or otherwise make changes
in its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
VI. RIGHT OF FIRST REFUSAL
6.1 GRANT. The Corporation is hereby granted rights of first
refusal (the "First Refusal Right"), exercisable in connection with any proposed
transfer of the Purchased Shares in which the Optionee has vested in accordance
with the vesting provisions of Article V. For purposes of this Article VI, the
term "transfer" shall include any sale, assignment, pledge, encumbrance or other
disposition for value of the Purchased Shares intended to be made by the Owner,
but shall not include any of the permitted transfers under paragraph 4.1.
6.2 NOTICE OF INTENDED DISPOSITION. In the event the Owner
desires to accept a bona fide third-party offer for the transfer of any or all
of the Purchased Shares (the shares subject to such offer to be hereinafter
called the "Target Shares"), Owner shall promptly (i) deliver to the Corporate
Secretary of the Corporation written notice (the "Disposition Notice") of the
terms and conditions of the offer, including the purchase price and the identity
of the third-party offeror, and (ii) provide satisfactory proof that the
disposition of the Target Shares to such
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third-party offeror would not be in contravention of the provisions set forth
in Articles II and IV of this Agreement.
6.3 EXERCISE OF RIGHT. The Corporation shall, for a period of
forty-five (45) days following receipt of the Disposition Notice, have the right
to repurchase any or all of the Target Shares specified in the Disposition
Notice upon the same terms and conditions specified therein or upon terms and
conditions which do not materially vary from those specified therein. Such
right shall be exercisable by delivery of written notice (the "Exercise Notice")
to Owner prior to the expiration of the forty-five (45)-day exercise period. If
such right is exercised with respect to all the Target Shares specified in the
Disposition Notice, then the Corporation (or its assignees) shall effect the
repurchase of the Target Shares, including payment of the purchase price, not
more than ten (10) business days after delivery of the Exercise Notice; and at
such time Owner shall deliver to the Corporation the certificates representing
the Target Shares to be repurchased, each certificate to be properly endorsed
for transfer. To the extent any of the Target Shares are at the time held in
escrow under Article VII, the certificates for such shares shall automatically
be released from escrow and delivered to the Corporation for purchase. Should
the purchase price specified in the Disposition Notice be payable in property
other than cash or evidences of indebtedness, the Corporation (or its assignees)
shall have the right to pay the purchase price in the form of cash equal in
amount to the value of such property. If the Owner and the Corporation (or its
assignees) cannot agree on such cash value within ten (10) days after the
Corporation's receipt of the Disposition Notice, the valuation shall be made by
an appraiser of recognized standing selected by the Owner and the Corporation
(or its assignees) or, if they cannot agree on an appraiser within twenty (20)
days after the Corporation's receipt of the Disposition Notice, each shall
select an appraiser of recognized standing and the two appraisers shall
designate a third appraiser of recognized standing, whose appraisal shall be
determinative of such value. The cost of such appraisal shall be shared equally
by the Owner and the Corporation. The closing shall then be held on the LATER
of (i) the tenth business day following delivery of the Exercise Notice or (ii)
the tenth business day after such cash valuation shall have been made.
6.4 NON-EXERCISE OF RIGHT. In the event the Exercise Notice is
not given to Owner within forty-five (45) days following the date of the
Corporation's receipt of the Disposition Notice, Owner shall have a period of
thirty (30) days thereafter in which to sell or otherwise dispose of the Target
Shares to the third-party offeror identified in the Disposition Notice upon
terms and conditions (including the purchase price) no more favorable to such
third-party offeror than those specified in the Disposition Notice; PROVIDED,
however, that any such sale or disposition must not be effected in contravention
of the provisions of Article II of this Agreement. To the extent any of the
Target Shares are at the time held in escrow under Article VII, the certificates
for such shares shall automatically be released from escrow and surrendered to
the Owner. The third-party offeror shall acquire the Target Shares free and
clear of the Corporation's Repurchase Right under Article V and the
Corporation's First Refusal Right hereunder, but the acquired shares shall
remain subject to (i) the securities law restrictions of paragraph 2.2(a) and
(ii) the market stand-off provisions of paragraph 4.4. In the event Owner does
not effect such sale or disposition of the Target Shares within the specified
thirty (30)-day period, the Corporation's First Refusal Right shall continue to
be applicable to any subsequent disposition of the Target Shares by Owner until
such right lapses in accordance with paragraph 6.7.
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6.5 PARTIAL EXERCISE OF RIGHT. In the event the Corporation (or
its assignees) makes a timely exercise of the First Refusal Right with respect
to a portion, but not all, of the Target Shares specified in the Disposition
Notice, Owner shall have the option, exercisable by written notice to the
Corporation delivered within thirty (30) days after the date of the Disposition
Notice, to effect the sale of the Target Shares pursuant to one of the following
alternatives:
(i) sale or other disposition of all the Target Shares to
the third-party offeror identified in the Disposition Notice, but in full
compliance with the requirements of paragraph 6.4, as if the Corporation
did not exercise the First Refusal Right hereunder; or
(ii) sale to the Corporation (or its assignees) of the
portion of the Target Shares which the Corporation (or its assignees) has
elected to purchase, such sale to be effected in substantial conformity
with the provisions of paragraph 6.3.
Failure of Owner to deliver timely notification to the Corporation
under this paragraph 6.5 shall be deemed to be an election by Owner to sell the
Target Shares pursuant to alternative (i) above.
6.6 RECAPITALIZATION/MERGER.
(a) In the event of any stock dividend, stock split,
recapitalization or other transaction affecting the Corporation's
outstanding Common Stock as a class effected without receipt of
consideration, then any new, substituted or additional securities or other
property which is by reason of such transaction distributed with respect to
the Purchased Shares shall be immediately subject to the Corporation's
First Refusal Right hereunder, but only to the extent the Purchased Shares
are at the time covered by such right.
(b) In the event of any of the following transactions:
(i) a merger or consolidation in which the
Corporation is not the surviving entity,
(ii) a sale, transfer or other disposition of all
or substantially all of the Corporation's assets,
(iii) a reverse merger in which the Corporation is
the surviving entity but in which the Corporation's outstanding voting
securities are transferred in whole or in part to person or persons other
than those who held such securities immediately prior to the merger, or
(iv) any transaction effected primarily to change
the State in which the Corporation is incorporated, or to create a holding
company structure,
the Corporation's First Refusal Right shall remain in full
force and effect and shall apply to the new capital stock or other property
received in exchange for the
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Purchased Shares in consummation of the transaction but only to the extent
the Purchased Shares are at the time covered by such right.
6.7 LAPSE. The First Refusal Right under this Article VI shall
lapse and cease to have effect upon the EARLIEST to occur of (i) the first date
on which shares of the Corporation's Common Stock are held of record by more
than five hundred (500) persons, (ii) a determination is made by the
Corporation's Board of Directors that a public market exists for the outstanding
shares of the Corporation's Common Stock, or (iii) a firm commitment
underwritten public offering pursuant to an effective registration statement
under the 1933 Act, covering the offer and sale of the Corporation's Common
Stock in the aggregate amount of at least $20,000,000. However, the market
stand-off provisions of paragraph 4.4 shall continue to remain in full force and
effect following the lapse of the First Refusal Right hereunder.
VII. ESCROW
7.1 DEPOSIT. Upon issuance, the certificates for any Unvested
Shares purchased hereunder shall be deposited in escrow with the Corporate
Secretary of the Corporation to be held in accordance with the provisions of
this Article VII. Each deposited certificate shall be accompanied by a
duly-executed Assignment Separate from Certificate in the form of Exhibit I.
The deposited certificates, together with any other assets or securities from
time to time deposited with the Corporate Secretary pursuant to the
requirements of this Agreement, shall remain in escrow until such time or
times as the certificates (or other assets and securities) are to be released
or otherwise surrendered for cancellation in accordance with paragraph 7.3.
Upon delivery of the certificates (or other assets and securities) to the
Corporate Secretary of the Corporation, the Owner shall be issued an
instrument of deposit acknowledging the number of Unvested Shares (or other
assets and securities) delivered in escrow.
7.2 RECAPITALIZATION. All regular cash dividends on the Unvested
Shares (or other securities at the time held in escrow) shall be paid directly
to the Owner and shall not be held in escrow. However, in the event of any
stock dividend, stock split, recapitalization or other change affecting the
Corporation's outstanding Common Stock as a class effected without receipt of
consideration or in the event of a Corporate Transaction, any new, substituted
or additional securities or other property which is by reason of such
transaction distributed with respect to the Unvested Shares shall be immediately
delivered to the Corporate Secretary to be held in escrow under this Article
VII, but only to the extent the Unvested Shares are at the time subject to the
escrow requirements of paragraph 7.1.
7.3 RELEASE/SURRENDER. The Unvested Shares, together with any
other assets or securities held in escrow hereunder, shall be subject to the
following terms and conditions relating to their release from escrow or their
surrender to the Corporation for repurchase and cancellation:
(i) Should the Corporation (or its assignees) elect to
exercise the Repurchase Right under Article V with respect to any Unvested
Shares, then the escrowed certificates for such Unvested Shares (together
with any other assets or securities issued with respect thereto) shall be
delivered to the Corporation concurrently with the payment to the Owner, in
cash or cash equivalent (including the cancellation of any purchase-money
indebtedness), of an amount equal to the aggregate Option Price for
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such Unvested Shares, and the Owner shall cease to have any further rights
or claims with respect to such Unvested Shares (or other assets or
securities attributable to such Unvested Shares).
(ii) Should the Corporation (or its assignees) elect to
exercise its First Refusal Right under Article VI with respect to any
vested Target Shares held at the time in escrow hereunder, then the
escrowed certificates for such Target Shares (together with any other
assets or securities attributable thereto) shall, concurrently with the
payment of the paragraph 6.3 purchase price for such Target Shares to the
Owner, be surrendered to the Corporation, and the Owner shall cease to have
any further rights or claims with respect to such Target Shares (or other
assets or securities).
(iii) Should the Corporation (or its assignees) elect NOT
to exercise its First Refusal Right under Article VI with respect to any
Target Shares held at the time in escrow hereunder, then the escrowed
certificates for such Target Shares (together with any other assets or
securities attributable thereto) shall be surrendered to the Owner for
disposition in accordance with provisions of paragraph 6.4.
(iv) As the interest of the Optionee in the Unvested
Shares (or any other assets or securities attributable thereto) vests in
accordance with the provisions of Article V, the certificates for such
vested shares (as well as all other vested assets and securities) shall be
released from escrow and delivered to the Owner in accordance with the
following schedule:
a. The initial release of vested shares (or other
vested assets and securities) from escrow shall be effected within
thirty (30) days following the expiration of the initial twelve
(12)-month period measured from the Grant Date.
b. Subsequent releases of vested shares (or other
vested assets and securities) from escrow shall be effected at
semi-annual intervals thereafter, with the first such semi-annual
release to occur eighteen (18) months after the Grant Date.
c. Upon the Optionee's cessation of Service, any
escrowed Purchased Shares (or other assets or securities) in which the
Optionee is at the time vested shall be promptly released from escrow.
d. Upon any earlier termination of the Corporation's
Repurchase Right in accordance with the applicable provisions of
Article V, any Purchased Shares (or other assets or securities) at the
time held in escrow hereunder shall promptly be released to the Owner
as fully-vested shares or other property.
(v) All Purchased Shares (or other assets or securities)
released from escrow in accordance with the provisions of subparagraph (iv)
above shall nevertheless remain subject to (I) the Corporation's First
Refusal Right under Article VI until such right lapses pursuant to
paragraph 6.7, (II) the market stand-off provisions of
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paragraph 4.4 until such provisions terminate in accordance therewith and
(III) the Special Purchase Right under Article VIII.
VIII. MARITAL DISSOLUTION OR LEGAL SEPARATION
8.1 GRANT. In connection with the dissolution of the Optionee's
marriage or the legal separation of the Optionee and the Optionee's spouse, the
Corporation shall have the right (the "Special Purchase Right"), exercisable at
any time during the thirty (30)-day period following the Corporation's receipt
of the required Dissolution Notice under paragraph 8.2, to purchase from the
Optionee's spouse, in accordance with the provisions of paragraph 8.3, all or
any portion of the Purchased Shares which would otherwise be awarded to such
spouse in settlement of any community property or other marital property rights
such spouse may have in such shares.
8.2 NOTICE OF DECREE OR AGREEMENT. The Optionee shall promptly
provide the Secretary of the Corporation with written notice (the "Dissolution
Notice") of (i) the entry of any judicial decree or order resolving the property
rights of the Optionee and the Optionee's spouse in connection with their
marital dissolution or legal separation or (ii) the execution of any contract or
agreement relating to the distribution or division of such property rights. The
Dissolution Notice shall be accompanied by a copy of the actual decree of
dissolution or settlement agreement between the Optionee and the Optionee's
spouse which provides for the award to the spouse of one or more Purchased
Shares in settlement of any community property or other marital property rights
such spouse may have in such shares.
8.3 EXERCISE OF SPECIAL PURCHASE RIGHT. The Special Purchase
Right shall be exercisable by delivery of written notice (the "Purchase Notice")
to the Optionee and the Optionee's spouse within thirty (30) days after the
Corporation's receipt of the Dissolution Notice. The Purchase Notice shall
indicate the number of shares to be purchased by the Corporation, the date such
purchase is to be effected (such date to be not less than five (5) business
days, nor more than ten (10) business days, after the date of the Purchase
Notice), and the fair market value to be paid for such Purchased Shares. The
Optionee (or the Optionee's spouse, to the extent such spouse has physical
possession of the Purchased Shares) shall, prior to the close of business on the
date specified for the purchase, deliver to the Corporate Secretary of the
Corporation the certificates representing the shares to be purchased, each
certificate to be properly endorsed for transfer. To the extent any of the
shares to be purchased by the Corporation are at the time held in escrow under
Article VII, the certificates for such shares shall be promptly delivered out of
escrow to the Corporation. The Corporation shall, concurrently with the receipt
of the stock certificates, pay to the Optionee's spouse (in cash or cash
equivalents) an amount equal to the fair market value specified for such shares
in the Purchase Notice.
If the Optionee's spouse does not agree with the fair market
value specified for the shares in the Purchase Notice, then the spouse shall
promptly notify the Corporation in writing of such disagreement and the fair
market value of such shares shall thereupon be determined by an appraiser of
recognized standing selected by the Corporation and the spouse. If they cannot
agree on an appraiser within twenty (20) days after the date of the Purchase
Notice, each shall select an appraiser of recognized standing, and the two
appraisers shall designate a third appraiser of recognized standing whose
appraisal shall be determinative of
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such value. The cost of the appraisal shall be shared equally by the
Corporation and the Optionee's spouse. The closing shall then be held on the
fifth business day following the completion of such appraisal; PROVIDED,
however, that if the appraised value is more than fifteen percent (15%)
greater than the fair market value specified for the shares in the Purchase
Notice, the Corporation shall have the right, exercisable prior to the
expiration of such five (5)-business-day period, to rescind the exercise of
the Special Purchase Right and thereby revoke its election to purchase the
shares awarded to the spouse.
8.4 LAPSE. The Special Purchase Right under this Article VIII
shall lapse and cease to have effect upon the EARLIER to occur of (i) the first
date on which the First Refusal Right under Article VI lapses or (ii) the
expiration of the thirty (30)-day exercise period specified in paragraph 8.3, to
the extent the Special Purchase Right is not timely exercised in accordance with
such paragraph.
IX. GENERAL PROVISIONS
9.1 ASSIGNMENT. The Corporation may assign its Repurchase Right
under Article V, its First Refusal Right under Article VI and/or its Special
Purchase Right under Article VIII to any person or entity selected by the
Corporation's Board of Directors, including (without limitation) one or more
shareholders of the Corporation.
If the assignee of the Repurchase Right is other than a one
hundred percent (100%) owned subsidiary corporation of the Corporation or the
parent corporation owning one hundred percent (100%) of the Corporation, then
such assignee must make a cash payment to the Corporation, upon the assignment
of the Repurchase Right, in an amount equal to the excess (if any) of (i) the
fair market value of the Unvested Shares at the time subject to the assigned
Repurchase Right over (ii) the aggregate repurchase price payable for the
Unvested Shares thereunder.
9.2 DEFINITIONS. For purposes of this Agreement, the following
provisions shall be applicable in determining the parent and subsidiary
corporations of the Corporation:
(i) Any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation shall be
considered to be a parent corporation of the Corporation, provided each
such corporation in the unbroken chain (other than the Corporation) owns,
at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
(ii) Each corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation shall be
considered to be a subsidiary of the Corporation, provided each such
corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
9.3 NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement
or in the Plan shall confer upon the Optionee any right to continue in the
Service of the Corporation
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(or any parent or subsidiary corporation of the Corporation employing or
retaining Optionee) for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any parent or
subsidiary corporation of the Corporation employing or retaining Optionee) or
the Optionee, which rights are hereby expressly reserved by each, to
terminate the Optionee's Service at any time for any reason whatsoever, with
or without cause.
9.4 CERTAIN POOLING TRANSACTIONS. In the event that the Board of
Directors of the Corporation and holders of a majority of the Common Stock
issuable or issued upon conversion of the Series A Preferred Stock of the
Corporation vote in favor of a Pooling Corporate Transaction (as defined below),
each Optionee and Owner hereby agrees not to take any action inconsistent with
the pooling-of-interest accounting treatment to the extent applicable to such
Pooling Corporate Transaction, as reasonably deemed necessary by the
Corporation's Board of Directors. For purposes of this Section 9.4, Pooling
Corporate Transaction shall mean the acquisition of the Corporation by another
entity by means of any transaction or series of related transactions (including,
without limitation, any reorganization, merger or consolidation) that results in
the transfer of fifty percent (50%) or more of the outstanding voting power of
the Corporation.
9.5 NOTICES. Any notice required in connection with (i) the
Repurchase Right, the Special Purchase Right or the First Refusal Right or (ii)
the disposition of any Purchased Shares covered thereby shall be given in
writing and shall be deemed effective upon personal delivery or upon deposit in
the United States mail, registered or certified, postage prepaid and addressed
to the party entitled to such notice at the address indicated below such party's
signature line on this Agreement or at such other address as such party may
designate by ten (10) days advance written notice under this paragraph 9.4 to
all other parties to this Agreement.
9.6 NO WAIVER. The failure of the Corporation (or its assignees)
in any instance to exercise the Repurchase Right granted under Article V, or the
failure of the Corporation (or its assignees) in any instance to exercise the
First Refusal Right granted under Article VI, or the failure of the Corporation
(or its assignees) in any instance to exercise the Special Purchase Right
granted under Article VIII shall not constitute a waiver of any other repurchase
rights and/or rights of first refusal that may subsequently arise under the
provisions of this Agreement or any other agreement between the Corporation and
the Optionee or the Optionee's spouse. No waiver of any breach or condition of
this Agreement shall be deemed to be a waiver of any other or subsequent breach
or condition, whether of like or different nature.
9.7 CANCELLATION OF SHARES. If the Corporation (or its assignees)
shall make available, at the time and place and in the amount and form provided
in this Agreement, the consideration for the Purchased Shares to be repurchased
in accordance with the provisions of this Agreement, then from and after such
time, the person from whom such shares are to be repurchased shall no longer
have any rights as a holder of such shares (other than the right to receive
payment of such consideration in accordance with this Agreement), and such
shares shall be deemed purchased in accordance with the applicable provisions
hereof and the Corporation (or its assignees) shall be deemed the owner and
holder of such shares, whether or not the certificates therefor have been
delivered as required by this Agreement.
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X. MISCELLANEOUS PROVISIONS
10.1 OPTIONEE UNDERTAKING. Optionee hereby agrees to take whatever
additional action and execute whatever additional documents the Corporation may
in its judgment deem necessary or advisable in order to carry out or effect one
or more of the obligations or restrictions imposed on either the Optionee or the
Purchased Shares pursuant to the express provisions of this Agreement.
10.2 AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the
entire contract between the parties hereto with regard to the subject matter
hereof. This Agreement is made pursuant to the provisions of the Plan and shall
in all respects be construed in conformity with the express terms and provisions
of the Plan.
10.3 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California, as such laws
are applied to contracts entered into and performed in such State without resort
to that State's conflict-of-laws rules.
10.4 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
10.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement
shall inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and the Optionee and the Optionee's legal
representatives, heirs, legatees, distributees, assigns and transferees by
operation of law, whether or not any such person shall have become a party to
this Agreement and have agreed in writing to join herein and be bound by the
terms and conditions hereof.
10.6 POWER OF ATTORNEY. Optionee's spouse hereby appoints Optionee
his or her true and lawful attorney in fact, for him or her and in his or her
name, place and stead, and for his or her use and benefit, to agree to any
amendment or modification of this Agreement and to execute such further
instruments and take such further actions as may reasonably be necessary to
carry out the intent of this Agreement. Optionee's spouse further gives and
grants unto Optionee as his or her attorney in fact full power and authority to
do and perform every act necessary and proper to be done in the exercise of any
of the foregoing powers as fully as he or she might or could do if personally
present, with full power of substitution and revocation, hereby ratifying and
confirming all that Optionee shall lawfully do and cause to be done by virtue of
this power of attorney.
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IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first indicated above.
RHYTHMS NETCONNECTIONS INC.
By:
Title:
------------------------------------------
Address: -------------------------------------------------
-------------------------------------------------
-------------------------------------------------
Optionee*
Address: -------------------------------------------------
-------------------------------------------------
The undersigned spouse of Optionee has read and hereby approves the
foregoing Stock Purchase Agreement. In consideration of the Corporation's
granting the Optionee the right to acquire the Purchased Shares in accordance
with the terms of such Agreement, the undersigned hereby agrees to be
irrevocably bound by all the terms and provisions of such Agreement, including
(specifically) the right of the Corporation (or its assignees) to purchase any
and all interest or right the undersigned may otherwise have in such shares
pursuant to community property laws or other marital property rights.
-------------------------------------------------
Optionee's Spouse
Address: -------------------------------------------------
-------------------------------------------------
- --------------------
* I have executed the Section 83(b) election that was attached hereto as
an Exhibit. As set forth in Article III, I understand that I, and NOT
the Corporation, will be responsible for comleting the form and filing
the election with the appropriate office of the Federal and State tax
authorities and that if such filing is not completed within thirty
(30) days after the date of this Agreement, I will not be entitled to
the tax benefits provided by Section 83(b).
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<PAGE>
EXHIBIT I
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED _____________________ hereby sell(s), assign(s) and
transfer(s) unto Rhythms NetConnections Inc. (the "Corporation"),
_____________________ (____________) shares of the Common Stock of the
Corporation standing in his\her name on the books of the Corporation represented
by Certificate No. _________________ and do hereby irrevocably constitute and
appoint ________________________ as Attorney to transfer the said stock on the
books of the Corporation with full power of substitution in the premises.
Dated:
-------------------
Signature
------------------------------
INSTRUCTION: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Corporation to exercise its
Repurchase Right set forth in the Agreement without requiring additional
signatures on the part of the Optionee.
<PAGE>
REPURCHASE RIGHTS
EXHIBIT II
SECTION 83(b) TAX ELECTION
This statement is being made under Section 83(b) of the Internal Revenue Code,
pursuant to Treas. Reg. Section 1.83-2.
(1) The taxpayer who performed the services is:
Name:
Address:
Taxpayer Ident. No.:
(2) The property with respect to which the election is being made is
____________ shares of the common stock of Rhythms NetConnections Inc.
(3) The property was issued on ____________, 19___.
(4) The taxable year in which the election is being made is the calendar year
19__.
(5) The property is subject to a repurchase right pursuant to which the issuer
has the right to acquire the property at the original purchase price if for
any reason taxpayer's employment with the issuer is terminated. The
issuer's repurchase right lapses in a series of annual and monthly
installments over a four year period ending on ____________, 19___.
(6) The fair market value at the time of transfer (determined without regard to
any restriction other than a restriction which by its terms will never
lapse) is $____________ per share.
(7) The amount paid for such property is $____________ per share.
(8) A copy of this statement was furnished to Rhythms NetConnections Inc. for
whom taxpayer rendered the services underlying the transfer of property.
(9) This statement is executed as of: ________________________.
- --------------------------------- -----------------------------
Spouse (if any) Taxpayer
This form must be filed with the Internal Revenue Service Center with which
taxpayer files his/her Federal income tax returns. The filing must be made
within 30 days after the execution date of the Stock Purchase Agreement.
<PAGE>
SPECIAL PROTECTIVE ELECTION PURSUANT TO SECTION 83(b) OF THE
INTERNAL REVENUE CODE WITH RESPECT TO PROPERTY ACQUIRED UPON
EXERCISE OF AN INCENTIVE STOCK OPTION
The property described in the above Section 83(b) election is comprised of
shares of common stock acquired pursuant to the exercise of an incentive stock
option under Section 422 of the Code. Accordingly, it is the intent of the
Taxpayer to utilize this election to achieve the following tax results:
1. The purpose of this election is to have the alternative
minimum taxable income attributable to the purchased shares measured by the
amount by which the fair market value of such shares at the time of their
transfer to the Taxpayer exceeds the purchase price paid for the shares. In the
absence of this election, such alternative minimum taxable income would be
measured by the spread between the fair market value of the purchased shares and
the purchase price which exists on the various lapse dates in effect for the
forfeiture restrictions applicable to such shares. The election is to be
effective to the full extent permitted under the Internal Revenue Code.
2. Section 421(a)(1) of the Code expressly excludes from income
any excess of the fair market value of the purchased shares over the amount paid
for such shares. Accordingly, this election is also intended to be effective in
the event there is a "disqualifying disposition" of the shares, within the
meaning of Section 421(b) of the Code, which would otherwise render the
provisions of Section 83(a) of the Code applicable at that time. Consequently,
the Taxpayer hereby elects to have the amount of disqualifying disposition
income measured by the excess of the fair market value of the purchased shares
on the date of transfer to the Taxpayer over the amount paid for such shares.
Since Section 421(a) presently applies to the shares which are the subject of
this Section 83(b) election, no taxable income is actually recognized for
regular tax purposes at this time, and no income taxes are payable, by the
Taxpayer as a result of this election.
This form should be filed with the Internal Revenue Service Center with which
taxpayer files his/her Federal income tax returns. The filing must be made
within 30 days after the execution date of the Stock Purchase Agreement.
NOTE: PAGE 2 SHOULD BE ATTACHED ONLY IF YOU ARE EXERCISING
AN INCENTIVE STOCK OPTION.
