<PAGE>
As filed with the Securities and Exchange Commission on January 14, 2000
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)
-----------
OPTION GRANT TO MR. STRINGER
(Full title of the Plans)
-----------
CATHERINE M. HAPKA
CHAIRMAN 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>
<CAPTION>
====================================================================================================================
Proposed Proposed
Title of Securities to be Amount to be Maximum Offering Maximum Aggregate Amount of
Registered Registered(1) Price per Share(2) Offering Price(2) Registration Fee
- ------------------------------- ---------------- -------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
OPTION GRANT TO MR. STRINGER
- ------------------------------
Common Stock, $0.001 par value 70,252 shares $14.23 $999,685.96 $277.92
OPTION GRANTS TO CERTAIN
INDIVIDUALS(3)
- ------------------------------
Common Stock, $0.001 par value 319,000 shares $16.00 $5,104,000.00 $1,347.46
-------------- ---------
Aggregate Registration Fee 389,252 shares $1,611.38
-------------- ---------
-------------- ---------
====================================================================================================================
</TABLE>
(1) This Registration Statement shall also cover any additional shares of
Registrant's Common Stock which become issuable 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 exercise price of
the listed option granted.
(3) The options were granted pursuant to written compensation agreements to
the following individuals in the Registrant's service: Harper Thorpe,
Carol Manning, Karen Breen, Stephen C. Francis, Kurt Wieneke, David
Ochsner, Donald B. Roberts, Tiffany A. Vasilik, Jillian J. Roberts,
Randy L. Gilbert, Kurt M. Bozarth, Richard M. Fiorella, James D. Cone,
Matthew S. Jebbia, Daniel R. Ryan, June Summers, Torre Mckiver, Richard
J. Schell, Wallie G. Lacks, Todd E. Swisher, David J. Proch and David M.
Stam.
<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 Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 filed with the Commission on
March 31, 1999.
(b) The Registrant's Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1999; June 30, 1999; and September
30, 1999, filed May 17, 1999; August 11, 1999 (as amended by
Forms 10-Q/A filed September 3, 1999 and October 8, 1999); and
November 15, 1999, respectively.
(c) The Registrant's Registration Statement on Form 8-A filed with
the Commission on April 1, 1999, including any amendments or
reports filed for the purpose of updating such description, in
which there is described the terms, rights and provisions
applicable to the Registrant's Common Stock.
(d) The Registrant's Registration Statement on Form 8-A filed with
the Commission on April 8, 1999, including any amendments or
reports filed for the purpose of updating such description, in
which there is described the terms, rights and provisions
applicable to the Registrant's Preferred Stock Purchase
Rights.
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
Not Applicable.
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.
II-1
<PAGE>
Article VII, Section 1 of the Registrant's Restated Bylaws
provides that the Registrant shall indemnify its directors and executive
officers to the fullest extent not prohibited by the Delaware General
Corporation Law. The rights to 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 Restated
Certificate of Incorporation provides that a director of the Registrant shall
not be personally liable for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not
in good faith or acts or omissions that involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived
any improper personal benefit.
The Registrant has entered into indemnification agreements
with each of its directors and executive officers. Generally, the
indemnification agreements attempt to provide the maximum protection
permitted by Delaware law as it may be amended from time to time. Moreover,
the indemnification agreements provide for certain additional
indemnification. Under such additional indemnification provisions, however,
an individual will not receive indemnification for judgments, settlements or
expenses if he or she is found liable to the Registrant (except to the extent
the court determines he or she is fairly and reasonably entitled to indemnity
for expenses), for settlements not approved by the Registrant or for
settlements and expenses if the settlement is not approved by the court. The
indemnification agreements provide for the Registrant to advance to the
individual any and all reasonable expenses (including legal fees and
expenses) incurred in investigating or defending any such action, suit or
proceeding. In order to receive an advance of expenses, the individual must
submit to the Registrant copies of invoices presented to him or her for such
expenses. Also, the individual must repay such advances upon a final judicial
decision that he or she is not entitled to indemnification.
The Registrant has purchased directors' and officers'
liability insurance. The Registrant intends to enter into additional
indemnification agreements with each of its directors and executive officers
to effectuate these indemnity provisions.
The Registrant has an insurance policy covering the
directors and officers of the Registrant with respect to certain liabilities,
including liabilities arising under the Securities Act or otherwise.
ITEM 7. EXEMPTION FROM REGISTRATION CLAIMED
Not Applicable.
ITEM 8. EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Exhibit
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<S> <C>
4 Instruments Defining the Rights of Stockholders.
Reference is made to Registrant's Registration
Statements on Form 8-A, together with the amendments
and exhibits thereto, which are incorporated herein by
reference pursuant to Items 3(c) and 3(d).
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
5 Opinion and Consent of Brobeck, Phleger & Harrison LLP.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of Brobeck, Phleger & Harrison LLP is contained
in Exhibit 5.
24 Power of Attorney. Reference is made to the Signature
Page of this Registration Statement.
99.1 Notice of Grant of Stock Option to Mr. Stringer.
99.2 Stock Option Agreement between the Registrant and
Mr. Stringer.
99.3 Form of Notice of Grant of Stock Option to Certain
Individuals.
99.4 Form of Stock Option Agreement between the
Registrant and Certain Individuals.
</TABLE>
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 Securities Act of 1933, as
amended (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 Option Grant made to Mr. Stringer and the Option Grants
to Certain Individuals.
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-3
<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 13th day of January, 2000.
RHYTHMS NETCONNECTIONS, INC.
By: /s/ CATHERINE M. HAPKA
-------------------------------------------
Catherine M. Hapka
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 Chairman of the Board and Chief Executive January 13, 2000
- --------------------------------------------- Officer (Principal Executive Officer)
Catherine M. Hapka
/s/ Scott C. Chandler Chief Financial Officer (Principal January 13, 2000
- --------------------------------------------- Financial and Accounting Officer)
Scott C. Chandler
/s/ Kevin R. Compton Director and President January 13, 2000
- ---------------------------------------------
Kevin R. Compton
/s/ Keith B. Geeslin Director January 13, 2000
- ---------------------------------------------
Keith B. Geeslin
/s/ Susan Mayer Director January 13, 2000
- ---------------------------------------------
Susan Mayer
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------------------ ------------------------
<S> <C> <C>
/s/ William R. Stensrud Director January 13, 2000
- ---------------------------------------------
William R. Stensrud
/s/ John L. Walecka Director January 13, 2000
- ---------------------------------------------
John L. Walecka
/s/ Edward J. Zander Director January 13, 2000
- ---------------------------------------------
Edward J. Zander
</TABLE>
<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
-------------- -------
<S> <C>
4 Instruments Defining the Rights of Stockholders.
Reference is made to Registrant's Registration
Statements on Form 8-A, together with the amendments
and exhibits thereto, which are incorporated herein by
reference pursuant to Items 3(c) and 3(d).
5 Opinion and Consent of Brobeck, Phleger & Harrison LLP.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of Brobeck, Phleger & Harrison LLP is contained
in Exhibit 5.
24 Power of Attorney. Reference is made to the Signature
Page of this Registration Statement.
99.1 Notice of Grant of Stock Option to Mr. Stringer.
99.2 Stock Option Agreement between the Registrant and
Mr. Stringer.
99.3 Form of Notice of Grant of Stock Option to Certain
Individuals.
99.4 Form of Stock Option Agreement between the
Registrant and Certain Individuals.
</TABLE>
<PAGE>
EXHIBIT 5
OPINION AND CONSENT OF BROBECK, PHLEGER & HARRISON LLP
January 13, 2000
Rhythms NetConnections Inc.
6933 South Revere Parkway
Englewood, Colorado 80112
Re: Rhythms NetConnections Inc. - Registration Statement
for Offering of 389,252 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 (i) 70,252 shares of common stock (the "Shares") subject to the
stock option granted to Steve Stringer (the "Stringer Shares"), the Company's
President and Chief Operations Officer, on June 10, 1999 (the "Stringer
Option") and (ii) an additional 319,000 shares of the Company's common stock
(the "Option Shares") issuable pursuant to stock options granted to certain
individuals in the Company's service pursuant to their written compensation
agreements with the Company (the "Non-Plan Options"). Hereafter, the Stringer
Shares and the Option Shares will be referred to as the "Shares".
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 grant of the
Option. 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 the option agreement evidencing the Option 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 Stringer Option, the Non-Plan Options or the Shares.
Very truly yours,
/s/ Brobeck, Phleger & Harrison LLP
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-8 of our report dated March 4, 1999, except for the last
paragraph of Note 11 as to which the date is March 19, 1999 relating to the
financial statements, which appears in Rhythms NetConnections, Inc., Annual
Report on Form 10-K for the year ended December 31, 1998. We also consent to
the reference to us under the heading "Experts" in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Denver, Colorado
January 12, 2000
<PAGE>
EXHIBIT 99.1
RHYTHMS NETCONNECTIONS, INC.
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following option grant (the
"Option") to purchase shares of the Common Stock of Rhythms NetConnections,
Inc. (the "Corporation"):
OPTIONEE: Steve Stringer
GRANT DATE: June 10, 1999
VESTING COMMENCEMENT DATE: June 10, 1999
EXERCISE PRICE: $14.23 per share
NUMBER OF OPTION SHARES: 70,252 shares
EXPIRATION DATE: June 9, 2009
TYPE OF OPTION: Non-Statutory Stock Option
EXERCISE SCHEDULE: The Option shall become exercisable for the
Option Shares in a series of twenty-four (24) successive equal
monthly installments upon Optionee's completion of each month
of Service over the twenty-four (24) month period measured
from the Vesting Commencement Date. In no event shall the
Option become exercisable for any additional Option Shares
after Optionee's cessation of Service.
Optionee understands and agrees that the Option is granted
subject to and in accordance with the terms of the Stock Option Agreement
attached hereto as EXHIBIT A. Optionee further agrees to be bound by the
terms of the Option as set forth in the Stock Option Agreement.
EMPLOYMENT AT WILL. Nothing in this Notice or in the
attached Stock Option Agreement shall confer upon Optionee 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 Optionee) or of Optionee, which rights are
hereby expressly reserved by each, to terminate Optionee's Service at any
time for any reason, with or without cause.
DEFINITIONS. All capitalized terms in this Notice shall
have the meaning assigned to them in this Notice or in the attached Stock
Option Agreement.
DATED: JUNE 10, 1999
RHYTHMS NETCONNECTIONS INC.
By:
-----------------------------------
Title:
--------------------------------
____OPTIONEE
ATTACHMENT
EXHIBIT A - STOCK OPTION AGREEMENT Address:
------------------------------
--------------------------------------
<PAGE>
EXHIBIT 99.2
RHYTHMS NETCONNECTIONS INC.
STOCK OPTION AGREEMENT
RECITALS
A. Optionee is to render valuable services
to the Corporation (or a Parent or Subsidiary), and this Agreement is
executed pursuant to, and is intended to carry out the purposes of, the
Corporation's grant of an option to Optionee.
C. All capitalized terms in this Agreement
shall have the meaning assigned to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
I. GRANT OF OPTION. THE CORPORATION HEREBY GRANTS TO OPTIONEE, AS OF THE
GRANT DATE, AN OPTION TO PURCHASE UP TO THE NUMBER OF OPTION SHARES
SPECIFIED IN THE GRANT NOTICE. THE OPTION SHARES SHALL BE PURCHASABLE
FROM TIME TO TIME DURING THE OPTION TERM SPECIFIED IN PARAGRAPH 2 AT
THE EXERCISE PRICE.
II. OPTION TERM. THIS OPTION SHALL HAVE A MAXIMUM TERM OF TEN (10) YEARS
MEASURED FROM THE GRANT DATE AND SHALL ACCORDINGLY EXPIRE AT THE CLOSE
OF BUSINESS ON THE EXPIRATION DATE, UNLESS SOONER TERMINATED IN
ACCORDANCE WITH PARAGRAPH 5 OR 6.
III. LIMITED TRANSFERABILITY.
A. 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.
However, Optionee may designate one or more persons as the
beneficiary or beneficiaries of this option, and this option
shall, in accordance with such designation, automatically be
transferred to such beneficiary or beneficiaries upon the
Optionee's death while holding such option. Such beneficiary
or beneficiaries shall take the transferred option subject
to all the terms and conditions of this Agreement, including
(without limitation) the limited time period during which
this option may, pursuant to Paragraph 5, be exercised
following Optionee's death.
B. This option may, in connection with the Optionee's estate plan,
be assigned in whole or in part during Optionee's lifetime
to one or more members of Optionee's immediate family or to
a trust established for the exclusive benefit of one or more
such family members. The assigned portion shall be
exercisable only by the person or persons who acquire a
proprietary interest in the option pursuant to such
assignment. The terms applicable to the assigned portion
shall be the same as those in effect for this option
immediately prior to such assignment.
IV. DATES OF EXERCISE. THIS OPTION SHALL BECOME EXERCISABLE FOR THE OPTION
SHARES IN ONE OR MORE INSTALLMENTS AS SPECIFIED IN THE GRANT NOTICE. AS
THE OPTION BECOMES EXERCISABLE FOR SUCH INSTALLMENTS, THOSE
INSTALLMENTS SHALL ACCUMULATE, AND THE OPTION SHALL REMAIN EXERCISABLE
FOR THE ACCUMULATED INSTALLMENTS UNTIL THE EXPIRATION DATE OR SOONER
TERMINATION OF THE OPTION TERM UNDER PARAGRAPH 5 OR 6.
<PAGE>
V. CESSATION OF SERVICE. THE OPTION TERM SPECIFIED IN PARAGRAPH 2 SHALL
TERMINATE (AND THIS OPTION SHALL CEASE TO BE OUTSTANDING) PRIOR TO THE
EXPIRATION DATE SHOULD ANY OF THE FOLLOWING PROVISIONS BECOME
APPLICABLE:
A. Should Optionee cease to remain in Service for any reason (other
than death, Permanent Disability or Misconduct) while
holding this option, then Optionee shall have a period of
three (3) 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.
B. Should Optionee die while holding this option, then the personal
representative of Optionee's estate or the person or persons
to whom the option is transferred pursuant to Optionee's
will or in accordance with the laws of inheritance shall
have the right to exercise this option. However, if Optionee
has designated one or more beneficiaries of this option,
then those persons shall have the exclusive right to
exercise this option following Optionee's death. Any such
right to exercise this option shall lapse, and this option
shall cease to be outstanding, upon the EARLIER of (i) the
expiration of the twelve (12)-month period measured from the
date of Optionee's death or (ii) the Expiration Date.
C. Should Optionee cease Service by reason of Permanent Disability
while holding this option, then Optionee shall have a period
of twelve (12) months (commencing with the date of such
cessation of Service) during which to exercise this option.
In no event shall this option be exercisable at any time
after the Expiration Date.
D. During the limited period of post-Service exercisability, this
option may not be exercised in the aggregate for more than
the number of Option Shares for which the option is
exercisable at the time of Optionee's cessation of Service.
Upon the expiration of such limited exercise period or (if
earlier) upon the Expiration Date, this option shall
terminate and cease to be outstanding for any exercisable
Option Shares for which the option has not been exercised.
However, this option shall, immediately upon Optionee's
cessation of Service for any reason, terminate and cease to
be outstanding with respect to any Option Shares for which
this option is not otherwise at that time exercisable.
E. Should Optionee's Service be terminated for Misconduct while this
option is outstanding, then this option shall terminate
immediately and cease to remain outstanding.
VI. SPECIAL ACCELERATION OF OPTION.
A. This option, to the extent outstanding at the time of a Corporate
Transaction but not otherwise fully exercisable, shall
automatically accelerate so that this option shall,
immediately prior to the effective date of such Corporate
Transaction, become exercisable for all of the Option Shares
at the time subject to this option and may be exercised for
any or all of those Option Shares as fully vested shares of
Common Stock. No such acceleration of this option shall
occur, however, if and to the extent: (i) this option is, in
connection with the Corporate Transaction, to be assumed by
the successor corporation (or parent thereof) or (ii) this
option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread
existing at the time of the Corporate Transaction on the
Option Shares for which this option is not otherwise at that
time exercisable (the excess of the Fair Market Value of
those Option Shares over the aggregate Exercise Price
payable for such shares) and provides for subsequent payout
in accordance with the same option exercise/vesting schedule
set forth in the Grant Notice.
B. Immediately following the Corporate Transaction, this option
shall terminate and cease to be outstanding, except to the
extent assumed by the successor corporation (or parent
thereof) in connection with the Corporate Transaction.
5
<PAGE>
C. If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately
adjusted, immediately after such Corporate Transaction, to
apply to the number and class of securities which would have
been issuable to Optionee in 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 Exercise Price, PROVIDED the
aggregate Exercise Price shall remain the same. To the
extent the actual holders of the Corporation's outstanding
Common Stock receive cash consideration for their Common
Stock in consummation of the Corporate Transaction, the
successor corporation (if any) may, in connection with the
assumption of this option, substitute one or more shares of
its own common stock with a fair market value equivalent to
the cash consideration paid per share of Common Stock in
such Corporate Transaction.
D. This Agreement shall not in any 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.
VII. ADJUSTMENT IN OPTION SHARES. SHOULD ANY CHANGE BE MADE TO THE COMMON
STOCK BY REASON OF ANY STOCK SPLIT, STOCK DIVIDEND, RECAPITALIZATION,
COMBINATION OF SHARES, EXCHANGE OF SHARES OR OTHER CHANGE AFFECTING THE
OUTSTANDING COMMON STOCK AS A CLASS WITHOUT THE CORPORATION'S RECEIPT
OF CONSIDERATION, APPROPRIATE ADJUSTMENTS SHALL BE MADE TO (I) THE
TOTAL NUMBER AND/OR CLASS OF SECURITIES SUBJECT TO THIS OPTION AND (II)
THE EXERCISE PRICE IN ORDER TO REFLECT SUCH CHANGE AND THEREBY PRECLUDE
A DILUTION OR ENLARGEMENT OF BENEFITS HEREUNDER.
VIII. STOCKHOLDER RIGHTS. THE HOLDER OF THIS OPTION SHALL NOT HAVE ANY
STOCKHOLDER RIGHTS WITH RESPECT TO THE OPTION SHARES UNTIL SUCH PERSON
SHALL HAVE EXERCISED THE OPTION, PAID THE EXERCISE PRICE AND BECOME A
HOLDER OF RECORD OF THE PURCHASED SHARES.
IX. 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 any other person or persons
exercising the option) must take the following actions:
1. Execute and deliver to the Corporation a Notice of
Exercise for the Option Shares for which the
option is exercised.
2. Pay the aggregate Exercise Price for the purchased
shares in one or more of the following forms:
a. cash or check made payable to the
Corporation;
b. shares of Common Stock held by Optionee (or
any other person or persons exercising the
option) 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
c. through a special sale and remittance
procedure pursuant to which Optionee (or any
other person or persons exercising the
option) shall concurrently provide
irrevocable instructions (i) to 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 (ii) to the Corporation to
6
<PAGE>
deliver the certificates for the purchased
shares directly to such brokerage firm in
order to complete the sale.
Except to the extent the sale and remittance
procedure is utilized in connection with the option exercise,
payment of the Exercise Price must accompany the Notice of
Exercise delivered to the Corporation in connection with the
option exercise.
3. 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.
4. Make appropriate arrangements with the Corporation
(or Parent or Subsidiary employing or retaining
Optionee) for the satisfaction of all Federal, state
and local income and employment tax withholding
requirements applicable to the option exercise.
B. As soon as practical after the Exercise Date, the Corporation
shall issue to or on behalf of Optionee (or any other person
or persons exercising this option) a certificate for the
purchased Option Shares, with the appropriate legends affixed
thereto.
C. In no event may this option be exercised for any fractional
shares.
X. COMPLIANCE WITH LAWS AND REGULATIONS.
A. The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by
the Corporation and Optionee with all applicable requirements
of law relating thereto and with all applicable regulations of
any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock may be listed for
trading at the time of such exercise and issuance.
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.
XI. SUCCESSORS AND ASSIGNS. EXCEPT TO THE EXTENT OTHERWISE PROVIDED IN
PARAGRAPHS 3 AND 6, THE PROVISIONS OF THIS AGREEMENT SHALL INURE TO THE
BENEFIT OF, AND BE BINDING UPON, THE CORPORATION AND ITS SUCCESSORS AND
ASSIGNS AND OPTIONEE, OPTIONEE'S ASSIGNS, THE LEGAL REPRESENTATIVES,
HEIRS AND LEGATEES OF OPTIONEE'S ESTATE AND ANY BENEFICIARIES OF THIS
OPTION DESIGNATED BY OPTIONEE.
XII. 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 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 EFFECTIVE UPON PERSONAL DELIVERY OR UPON DEPOSIT IN THE U.S.
MAIL, POSTAGE PREPAID AND PROPERLY ADDRESSED TO THE PARTY TO BE
NOTIFIED.
XIII. 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.
7
<PAGE>
EXHIBIT I
NOTICE OF EXERCISE
I hereby notify Rhythms NetConnections, Inc. (the
"Corporation") that I elect to purchase ________ shares of the Corporation's
Common Stock (the "Purchased Shares") at the option exercise price of $ 14.23
per share (the "Exercise Price") pursuant to that certain option (the
"Option") granted to me on June 10, 1999.
Concurrently with the delivery of this Exercise Notice to
the Corporation, I shall hereby pay to the Corporation the Exercise Price for
the Purchased Shares in accordance with the provisions of my agreement with
the Corporation (or other documents) evidencing the Option and shall deliver
whatever additional documents may be required by such agreement as a
condition for exercise. Alternatively, I may utilize the special
broker-dealer sale and remittance procedure specified in my agreement to
effect payment of the Exercise Price.
__________________________, ________
Date
_______________________________________
Optionee
Address: _____________________________
_______________________________________
Print name in exact manner it is to
appear on the stock certificate: _______________________________________
Address to which certificate is to be
sent, if different from address above: _______________________________________
_______________________________________
Social Security Number: _______________________________________
<PAGE>
APPENDIX
The following definitions shall be in effect under the
Agreement:
(i) AGREEMENT shall mean this Stock Option Agreement.
(ii) BOARD shall mean the Corporation's Board of Directors.
(iii) COMMON STOCK shall mean shares of the Corporation's
common stock.
(iv) CODE shall mean the Internal Revenue Code of 1986, as
amended.
(v) CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the
Corporation is a party:
(a) 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
(b) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in
complete liquidation or dissolution of the
Corporation.
(vi) CORPORATION shall mean Rhythms NetConnections Inc., a
Delaware corporation, and any successor corporation to
all or substantially all of the assets or voting stock
of Rhythms NetConnections Inc.
(vii) 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.
(viii) EXERCISE DATE shall mean the date on which the option
shall have been exercised in accordance with
Paragraph 9 of the Agreement.
(ix) EXERCISE PRICE shall mean the exercise price per Option
Share as specified in the Grant Notice.
(x) EXPIRATION DATE shall mean the date on which the option
expires as specified in the Grant Notice.
(xi) FAIR MARKET VALUE per share of Common Stock on any
relevant date shall be determined in accordance with
the following provisions:
<PAGE>
(a) 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 the price is reported by the National
Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling
price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing
selling price on the last preceding date for which
such quotation exists, or
(b) 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 Board to be the
primary market for the Common Stock, as such price
is officially quoted in the composite tape of
transactions on such exchange. If there is no
closing selling price for the Common Stock on the
date in question, then the Fair Market Value shall
be the closing selling price on the last preceding
date for which such quotation exists.
(xii) GRANT DATE shall mean the date of grant of the option as
specified in the Grant Notice.
(xiii) GRANT NOTICE shall mean the Notice of Grant of Stock
Option accompanying the Agreement, pursuant to which
Optionee has been informed of the basic terms of the
option evidenced hereby.
(xiv) MISCONDUCT shall mean the commission of any act of
fraud, embezzlement or dishonesty by Optionee, any
unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other
intentional misconduct by Optionee 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 Optionee or any other individual in the Service
of the Corporation (or any Parent or Subsidiary).
(xv) NOTICE OF EXERCISE shall mean the notice of exercise in
the form attached hereto as Exhibit I.
(xvi) OPTION SHARES shall mean the number of shares of Common
Stock subject to the option as specified in the Grant
Notice.
(xvii) OPTIONEE shall mean the person to whom the option is
granted as specified in the Grant Notice.
(xviii) 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.
<PAGE>
(xix) PERMANENT DISABILITY shall mean the inability of
Optionee to engage in any substantial gainful activity
by reason of any medically determinable physical or
mental impairment which is expected to result in death
or has lasted or can be expected to last for a
continuous period of twelve (12) months or more.
(xx) SERVICE shall mean the Optionee's performance of
services for the Corporation (or any Parent or
Subsidiary) in the capacity of an Employee, a
non-employee member of the board of directors or a
consultant or independent advisor.
(xxi) STOCK EXCHANGE shall mean the American Stock Exchange
or the New York Stock Exchange.
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.
<PAGE>
EXHIBIT 99.3
NON-PLAN GRANT
RHYTHMS NETCONNECTIONS INC.
NOTICE OF GRANT OF STOCK OPTION
--------------------------------
Notice is hereby given of the following option grant (the
"Option") to purchase shares of the Common Stock of Rhythms NetConnections Inc.
(the "Corporation"):
OPTIONEE:
------------------------------------------
GRANT DATE: December , 1999
----
VESTING COMMENCEMENT DATE: , 1999
-----------------
EXERCISE PRICE: $16.00 per share
NUMBER OF OPTION SHARES: shares of Common Stock
--------
EXPIRATION DATE: December , 2009
----
TYPE OF OPTION: Non-Statutory Stock Option
EXERCISE SCHEDULE: The Option shall become exercisable for
twenty-five percent (25%) of the Option Shares upon Optionee's
completion of one (1) year of Service measured from the
Vesting Commencement Date and shall become exercisable for the
balance of the Option Shares in a series of thirty-six (36)
successive equal monthly installments upon Optionee's
completion of each additional month of Service over the
thirty-six (36) month period measured from the first
anniversary of the Vesting Commencement Date. In no event
shall the Option become exercisable for any additional Option
Shares after Optionee's cessation of Service.
Optionee understands and agrees that the Option is granted
subject to and in accordance with the terms of the Stock Option Agreement
attached hereto as EXHIBIT A. Optionee further agrees to be bound by the terms
of the Option as set forth in the Stock Option Agreement.
EMPLOYMENT AT WILL. Nothing in this Notice or in the attached
Stock Option Agreement shall confer upon Optionee 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 Optionee) or of Optionee, which rights are hereby
expressly reserved by each, to terminate Optionee's Service at any time for any
reason, with or without cause.
<PAGE>
DEFINITIONS. All capitalized terms in this Notice shall have
the meaning assigned to them in this Notice or in the attached Stock Option
Agreement.
OPTIONEE HEREBY ACKNOWLEDGES AND AGREES THAT THIS OPTION IS
GRANTED IN FULL AND COMPLETE CANCELLATION OF THE OUTSTANDING OPTION PREVIOUSLY
GRANTED TO OPTIONEE UNDER THE CORPORATION'S 199 STOCK INCENTIVE PLAN ON
_________________, 1999 FOR THE SAME NUMBER OF OPTION SHARES AT THE SAME $16.00
PER SHARE EXERCISE PRICE. THAT EARLIER-GRANTED OPTION HAS BEEN DETERMINED TO
HAVE BEEN INVALIDLY ISSUED UNDER THE PLAN AND IS HEREBY CANCELLED IN ITS
ENTIRETY AND RENDERED NULL AND VOID, AND OPTIONEE HEREBY AGREES AND ACKNOWLEDGES
THAT OPTIONEE HAS NO FURTHER RIGHTS TO ACQUIRE ANY SHARES OF THE CORPORATION'S
COMMON STOCK UNDER THAT EARLIER-GRANTED INVALID OPTION.
DATED: DECEMBER , 1999
----
RHYTHMS NETCONNECTIONS INC.
By:
---------------------------
Title:
------------------------
------------------------------
OPTIONEE
Address:
----------------------
------------------------------
ATTACHMENT
- ----------
EXHIBIT A - STOCK OPTION AGREEMENT
2
<PAGE>
EXHIBIT A
---------
STOCK OPTION AGREEMENT
----------------------
<PAGE>
EXHIBIT 99.4
NON-PLAN OPTION
RHYTHMS NETCONNECTIONS INC.
STOCK OPTION AGREEMENT
---------------------------
RECITALS
- --------
A. Optionee is to render valuable services to the Corporation
(or a Parent or Subsidiary), and this Agreement is executed pursuant to, and is
intended to carry out the purposes of, the Corporation's grant of an option to
Optionee.
C. All capitalized terms in this Agreement shall have the
meaning assigned to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. The Corporation hereby grants to Optionee,
as of the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.
This option is a Non-Statutory Option under the Federal tax laws.
2. OPTION TERM. This option shall have a maximum term of ten
(10) years measured from the Grant Date and shall accordingly expire at the
close of business on the Expiration Date, unless sooner terminated in accordance
with Paragraph 5 or 6.
3. LIMITED TRANSFERABILITY.
(a) This option shall be neither transferable nor
assignable by Optionee other than by will or by the laws of inheritance
following Optionee's death and may be exercised, during Optionee's lifetime,
only by Optionee. However, Optionee may designate one or more persons as the
beneficiary or beneficiaries of this option, and this option shall, in
accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee's death while holding such
option. Such beneficiary or beneficiaries shall take the transferred option
subject to all the terms and conditions of this Agreement, including (without
limitation) the limited time period during which this option may, pursuant to
Paragraph 5, be exercised following Optionee's death.
(b) This option may, in connection with the Optionee's
estate plan, be assigned in whole or in part during Optionee's lifetime to one
or more members of Optionee's immediate family or to a trust established for the
exclusive benefit of one or more such family members. The assigned portion shall
be exercisable only by the person or persons who acquire a proprietary interest
in the option pursuant to such assignment. The terms applicable to the assigned
portion shall be the same as those in effect for this option immediately prior
to such assignment.
<PAGE>
4. DATES OF EXERCISE. This option shall become exercisable for
the Option Shares in one or more installments as specified in the Grant Notice.
As the option becomes exercisable for such installments, those installments
shall accumulate, and the option shall remain exercisable for the accumulated
installments until the Expiration Date or sooner termination of the option term
under Paragraph 5 or 6.
5. CESSATION OF SERVICE. The option term specified in
Paragraph 2 shall terminate (and this option shall cease to be outstanding)
prior to the Expiration Date should any of the following provisions become
applicable:
(a) Should Optionee cease to remain in Service for any
reason (other than death, Permanent Disability or Misconduct) while holding this
option, then Optionee shall have a period of three (3) 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.
(b) Should Optionee die while holding this option, then
the personal representative of Optionee's estate or the person or persons to
whom the option is transferred pursuant to Optionee's will or in accordance with
the laws of inheritance shall have the right to exercise this option. However,
if Optionee has designated one or more beneficiaries of this option, then those
persons shall have the exclusive right to exercise this option following
Optionee's death. Any such right to exercise this option shall lapse, and this
option shall cease to be outstanding, upon the EARLIER of (i) the expiration of
the twelve (12)-month period measured from the date of Optionee's death or (ii)
the Expiration Date.
(c) Should Optionee cease Service by reason of
Permanent Disability while holding this option, then Optionee shall have a
period of twelve (12) months (commencing with the date of such cessation of
Service) during which to exercise this option. In no event shall this option be
exercisable at any time after the Expiration Date.
(d) During the limited period of post-Service
exercisability, this option may not be exercised in the aggregate for more than
the number of Option Shares for which the option is exercisable at the time of
Optionee's cessation of Service. Upon the expiration of such limited exercise
period or (if earlier) upon the Expiration Date, this option shall terminate and
cease to be outstanding for any exercisable Option Shares for which the option
has not been exercised. However, this option shall, immediately upon Optionee's
cessation of Service for any reason, terminate and cease to be outstanding with
respect to any Option Shares for which this option is not otherwise at that time
exercisable.
(e) Should Optionee's Service be terminated for
Misconduct or otherwise engage in Misconduct while this option is outstanding,
then this option shall terminate immediately and cease to remain outstanding.
2
<PAGE>
6. SPECIAL ACCELERATION OF OPTION.
(a) This option, to the extent outstanding at the time
of a Corporate Transaction but not otherwise fully exercisable, shall
automatically accelerate so that this option shall, immediately prior to the
effective date of such Corporate Transaction, become exercisable for all of the
Option Shares at the time subject to this option and may be exercised for any or
all of those Option Shares as fully vested shares of Common Stock. No such
acceleration of this option shall occur, however, if and to the extent: (i) this
option is, in connection with the Corporate Transaction, to be assumed by the
successor corporation (or parent thereof) or (ii) this option is to be replaced
with a cash incentive program of the successor corporation which preserves the
spread existing at the time of the Corporate Transaction on the Option Shares
for which this option is not otherwise at that time exercisable (the excess of
the Fair Market Value of those Option Shares over the aggregate Exercise Price
payable for such shares) and provides for subsequent payout in accordance with
the same option exercise/vesting schedule set forth in the Grant Notice.
(b) Immediately following the Corporate Transaction,
this option shall terminate and cease to be outstanding, except to the extent
assumed by the successor corporation (or parent thereof) in connection with the
Corporate Transaction.
(c) If this option is assumed in connection with a
Corporate Transaction, then this option shall be appropriately adjusted,
immediately after such Corporate Transaction, to apply to the number and class
of securities which would have been issuable to Optionee in 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
Exercise Price, PROVIDED the aggregate Exercise Price shall remain the same. To
the extent the actual holders of the Corporation's outstanding Common Stock
receive cash consideration for their Common Stock in consummation of the
Corporate Transaction, the successor corporation (if any) may, in connection
with the assumption of this option, substitute one or more shares of its own
common stock with a fair market value equivalent to the cash consideration paid
per share of Common Stock in such Corporate Transaction.
(d) This Agreement shall not in any 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.
7. ADJUSTMENT IN OPTION SHARES. Should any change be made to
the Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price in
order to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder.
3
<PAGE>
8. STOCKHOLDER RIGHTS. The holder of this option shall not
have any stockholder rights with respect to the Option Shares until such person
shall have exercised the option, paid the Exercise Price and become a holder of
record of the purchased shares.
9. 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 any other person or persons exercising the option) must take the
following actions:
(i) Execute and deliver to the Corporation a Notice of
Exercise for the Option Shares for which the option is exercised.
(ii) Pay the aggregate Exercise Price for the purchased
shares in one or more of the following forms:
(A) cash or check made payable to the Corporation;
(B) shares of Common Stock held by Optionee (or
any other person or persons exercising the option) 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
(C) through a special sale and remittance
procedure pursuant to which Optionee (or any other person or persons
exercising the option) shall concurrently provide irrevocable
instructions (i) to 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 (ii) to 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 the sale and remittance procedure is
utilized in connection with the option exercise, payment of the
Exercise Price must accompany the Notice of Exercise delivered to the
Corporation in connection with the option exercise.
4
<PAGE>
(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.
(iv) Make appropriate arrangements with the
Corporation (or Parent or Subsidiary employing or retaining Optionee)
for the satisfaction of all Federal, state and local income and
employment tax withholding requirements applicable to the option
exercise.
(b) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto.
(c) In no event may this option be exercised for any
fractional shares.
10. COMPLIANCE WITH LAWS AND REGULATIONS.
(a) The exercise of this option and the issuance of the
Option Shares upon such exercise shall be subject to compliance by the
Corporation and Optionee with all applicable requirements of law relating
thereto and with all applicable regulations of any stock exchange (or the Nasdaq
National Market, if applicable) on which the Common Stock may be listed for
trading at the time of such exercise and issuance.
(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.
11. SUCCESSORS AND ASSIGNS. Except to the extent otherwise
provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the Corporation and its successors and
assigns and Optionee, Optionee's assigns, the legal representatives, heirs and
legatees of Optionee's estate and any beneficiaries of this option designated by
Optionee.
12. 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 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 effective upon personal delivery or
upon deposit in the U.S. mail, postage prepaid and properly addressed to the
party to be notified.
13. 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.
5
<PAGE>
EXHIBIT I
NOTICE OF EXERCISE
I hereby notify Rhythms NetConnections Inc. (the
"Corporation") that I elect to purchase _______ shares of the Corporation's
Common Stock (the "Purchased Shares") at the option exercise price of $16.00 per
share (the "Exercise Price") pursuant to that certain option (the "Option")
granted to me on December ______, 1999.
Concurrently with the delivery of this Exercise Notice to the
Corporation, I shall hereby pay to the Corporation the Exercise Price for the
Purchased Shares in accordance with the provisions of my agreement with the
Corporation (or other documents) evidencing the Option and shall deliver
whatever additional documents may be required by such agreement as a condition
for exercise. Alternatively, I may utilize the special broker-dealer sale and
remittance procedure specified in my agreement to effect payment of the Exercise
Price.
,
- ------------------- --------
Date
-----------------------------------
Optionee
Address:
--------------------------
Print name in exact manner it is to -----------------------------------
appear on the stock certificate:
-----------------------------------
Address to which certificate is to
be sent, if different from address
above:
-----------------------------------
-----------------------------------
Social Security Number:
-----------------------------------
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this Stock Option Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. COMMON STOCK shall mean shares of the Corporation's common stock.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.
F. CORPORATION shall mean Rhythms NetConnections Inc., a Delaware
corporation, and any successor corporation to all or substantially all of the
assets or voting stock of Rhythms NetConnections Inc.
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 option shall have been
exercised in accordance with Paragraph 9 of the Agreement.
I. EXERCISE PRICE shall mean the exercise price per Option Share as
specified in the Grant Notice.
J. EXPIRATION DATE shall mean the date on which the option expires as
specified in the Grant Notice.
K. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:
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(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 the price is reported by the National Association
of Securities Dealers on the Nasdaq National Market. If there is no
closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists, or
(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 Board to be the
primary market for the Common Stock, as such price is officially
quoted in the composite tape of transactions on such exchange. If
there is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
L. GRANT DATE shall mean the date of grant of the option as specified in
the Grant Notice.
M. GRANT NOTICE shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.
N. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent or
Subsidiary), or any other intentional misconduct by Optionee 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 Optionee or any other
individual in the Service of the Corporation (or any Parent or Subsidiary).
O. NON-STATUTORY OPTION shall mean a stock option which does not qualify
as an incentive stock option under Section 422 of the Code.
P. NOTICE OF EXERCISE shall mean the notice of exercise in the form
attached hereto as Exhibit I.
Q. OPTION SHARES shall mean the number of shares of Common Stock subject
to the option as specified in the Grant Notice.
R. OPTIONEE shall mean the person to whom the option is granted as
specified in the Grant Notice.
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S. 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.
T. PERMANENT DISABILITY shall mean the inability of Optionee to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment which is expected to result in death or has lasted
or can be expected to last for a continuous period of twelve (12) months or
more.
U. SERVICE shall mean the Optionee's performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor.
V. STOCK EXCHANGE shall mean the American Stock Exchange or the New York
Stock Exchange.
W. 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.
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